diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/filing.txt b/raw/filings/0000742278/2014/0001571049-15-001479/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9e77889b409f2166be955206af734fea6328459 --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/filing.txt @@ -0,0 +1,3962 @@ +10-K +1 +t81553_10k.htm +FORM 10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +☐ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, 2014 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 520 +ATLANTA, GEORGIA 30329 +(404) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +☒ Yes ☐ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). +Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,436,608,678 based on the closing price on the New York Stock Exchange on June 30, 2014 of $23.49 per share. +RPC, Inc. had 217,090,722 shares of Common Stock outstanding as of February 13, 2015. +Documents Incorporated by Reference +Portions of the Proxy Statement for the 2015 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +1 +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain +statements made in this report that are not historical facts are “forward-looking statements” under the Private +Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that +relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our +products and services and other events and conditions that may influence the oilfield services market and our performance in +the future. Forward-looking statements made elsewhere in this report include without limitation statements regarding +our beliefs regarding natural gas prices, production levels and drilling activities; our belief that petroleum +prices carry significant negative implications for RPC’s customer activity levels for the next twelve months; our +belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity ; our +continued belief in the long-term growth opportunities for our business ; our expectation to continue to focus on +the development of international business opportunities in current and other international markets; the adequacy of our +insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our +expectation to continue to pay cash dividends to the common stockholders subject to the earnings and financial condition of +the Company and other relevant factors; our belief that the domestic rig count will continue to decline; our +belief that we will not enter into additional long-term contractual arrangements with +customers during 2015; our statement that most industry analysts believe that the rig count will continue to +decline during the remainder of the first quarter and into second quarter 2015; our statement that industry trends have +negative implications for our near-term activity levels; our belief that it is likely that our near-term +financial results will be negatively impacted by declining prices ; our belief that the overall rig +count will not increase during 2015 unless the price of oil increases from its current price; our cautious view +about the market for our services; our belief that any potential increase in the price of natural gas will not be enough to +encourage our customers to increase their natural gas-directed drilling activities; our belief that the steep decline in +oil-directed drilling in the U.S. domestic market will reduce U.S. domestic oil production and over the long term serve as a +catalyst for oil prices to increase; our belief that the majority of our customers have access to adequate capital to finance +their own ongoing operations; our statement that we do not plan additional increases in our fleet of +revenue-producing equipment during 2015 ; our ability to maintain sufficient +liquidity and a conservative capital structure; our belief about the amount of the contribution to the defined benefit +pension plan in 2015 ; our ability to fund capital requirements in the future; the estimated amount +of our capital expenditures and contractual obligations for future periods; our statement that indications at +the end fourth quarter 2014 and early in the first quarter of 2015 are that the prices of both skilled labor and many of the +raw materials used in providing our services has started to decline; our belief that declining oilfield activity during 2015 +will decrease both wage rates for skilled labor and the prices of raw materials; our belief that it will be difficult to +realize higher operating profits from these anticipated cost decreases; estimates made with respect to our +critical accounting policies; the effect of new accounting standards ; and the effect of the changes +in foreign exchange rates on our consolidated results of operation or financial condition . +The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include, among others, (1) pressure pumping services, (2) downhole tool services, (3) coiled tubing services, (4) snubbing services (also referred to as hydraulic workover services), (5) nitrogen services, (6) the rental of drill pipe and other specialized oilfield equipment, and (7) well control. RPC acts as a holding company for its operating units, Cudd Energy Services, Patterson Rental and Fishing Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and others. As of December 31, 2014, RPC had approximately 4,500 employees. +2 +Business Segments +RPC’s service lines have been aggregated into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities between the financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting their business activity levels. +During 2014, approximately one percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico and in the Gulf of Alaska. We also estimate that 60 percent of our 2014 revenues were related to drilling and production activities for oil, and 40 percent were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This business segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Support Services include RPC’s oil and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations in the last three years including primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Technical Services +The following is a description of the primary service lines conducted within the Technical Services business segment: +Pressure Pumping . Pressure pumping services, which accounted for approximately 57 percent of 2014 revenues, 55 percent of 2013 revenues and 53 percent of 2012 revenues are provided to customers throughout Texas, and the Appalachian, mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, bauxite or synthetic proppant, which is often suspended in gel, is pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and ultimately the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. +3 +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for approximately 15 percent of 2014 revenues, 16 percent of 2013 revenues and 14 percent of 2012 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for approximately nine percent of 2014 and 2013 revenues and 11 percent of 2012 revenues, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for approximately three percent of revenues in 2014 and four percent of revenues in 2013 and 2012, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing rig can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for approximately three percent of revenues in 2014 and four percent of revenues in 2013 and 2012. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service line. In addition, nitrogen can be complementary to our snubbing and coiled tubing service lines, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer’s well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Energy Services specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +4 +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process, near the end of the life cycle of a well. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +The following is a description of the primary service lines conducted within the Support Services business segment: +Rental Tools . Rental tools accounted for approximately four percent of 2014 and 2013 revenues and five percent of 2012 revenues. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +5 +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 66 percent from its peak in 1981. However, due to recently enhanced technology, more wells are being drilled, and these wells are increasingly productive. For these reasons, the domestic production of natural gas has risen to record levels, and we estimate that the domestic production of crude oil during 2014 was at its highest level since 1986. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including down cycle troughs in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the industry’s history), 2002 and again in 2009. The rig count during the peak of the most recent cycle occurred at the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014 and into the first quarter of 2015. Early in the first quarter of 2015, the U.S. domestic drilling rig count has declined by approximately 30 percent from the peak. +The +fluctuations in domestic drilling activity since 2008 are consistent with the changes in the prices of oil and natural +gas, the overall economic recovery following the recession in 2008 and 2009, and most recently, the large increase in global +oil production that became apparent during the third and fourth quarters of 2014. During 2014 the average price of +natural gas increased by approximately 15 percent, although it began to decline during the end of the first quarter of 2014, +and at the end of the year was approximately 35 percent lower than at the same time in 2013. During the first quarter +of 2015, the price of natural gas continued to decline slightly. The average price of oil decreased by +approximately five percent during 2014 compared to 2013. However, the price of oil decreased significantly during the +third and fourth quarters of 2014, falling by approximately 48 percent during that time. The price of oil has continued +to decline during 2015, and in the first quarter to date was approximately five percent lower than at the end of 2014. +RPC believes that the decrease in the price of oil during this period has been caused by increased supply from the domestic +U.S. market, weak global demand, the actions of the OPEC cartel, and the strength of the U.S. dollar on global +currency markets. The precipitous decline in the price of oil during the third and fourth quarters of 2014 and the +first quarter of 2015 has caused a significant decrease in oil-directed drilling activity. During this period the U.S. +domestic oil-directed drilling rig count has fallen by approximately 21 percent. The price of natural gas liquids has become +an increasingly important determinant of our customers’ activity levels, since it is produced in many of the +shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level +comparable to that of natural gas. During 2014 the average price of natural gas liquids increased by approximately five +percent compared to 2013, but early in the first quarter of 2015 had declined by approximately seven percent. The +declines in the prices of oil, natural gas, and natural gas liquids during 2014 and the first quarter of 2015 to date carry +significant negative implications for RPC’s customer activity levels for the next twelve months. +From +2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of +drilling rigs drilling for natural gas began to decline, and by early in the first quarter of 2015 had fallen to +approximately 21 percent of total drilling activity. Although the demand for natural gas has remained stable, the price +of natural gas has fallen in recent years due to increased domestic reserves, productivity of new wells, and high natural gas +production from oil-directed wells. The price of natural gas has declined following a colder than normal winter in +2014, and by early in the first quarter of 2015 had fallen below $3 per Mcf for the first time since the third quarter of +2012. Early in the first quarter of 2015, the amount of natural gas in storage in the United States was approximately +one percent lower than the five-year average at this time in the year. We believe that these natural gas market +dynamics discourage our customers from conducting natural gas-directed drilling activities. In spite of these +unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign +imports of natural gas do not compete with domestic production to a meaningful degree. This lack of foreign competition tends +to keep prices high enough to ensure that domestic drilling and production will continue at certain minimum levels. We +anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count, in spite of +the fact that the price of oil has declined tremendously during the third and fourth quarters of 2014 and the first quarter +of 2015 to date. Over the long term, we believe that natural gas-directed drilling will increase due to the lack of +natural gas production from oil-directed drilling and increased natural gas demand from U.S. exports of natural gas and +changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. We continue +to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons generally +and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides +to its customers, and during 2014 equipment and raw materials requirements of the services we perform for our customers +continued to increase. +There are certain types of wells being drilled in the U.S. domestic market for which there is a higher demand for RPC’s services. Known as either directional or horizontal wells, these wells are more difficult and costly to complete. They have become an increasingly large percentage of the U.S. domestic market, and since the third quarter of 2008, have consistently comprised the majority of U.S. domestic drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which in turn requires a great deal of pressure pumping horsepower to complete the well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +6 +International. RPC has historically operated in several countries outside of the United States, and international revenues presently account for approximately four percent of RPC’s consolidated revenues. RPC’s equipment investments over the last several years have emphasized domestic rather than international expansion because of higher expected financial returns. International revenues for 2014 increased compared to 2013 due to higher customer activity levels in Australia, Argentina and Gabon partially offset by lower customer activity in Canada. During 2014, RPC provided snubbing, well control and oilfield training services in several countries including Gabon and Australia. We also provided downhole motors and tools in Canada, Mexico and Oman, and rental tools in Bolivia and Equatorial Guinea. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than five percent of total revenues in 2015. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist. However, the favorable long-term outlook for our industry and the strong historical profitability of many potential acquisitions has encouraged potential sellers of businesses to expect high valuations for their businesses. Due to these high valuations and the potential difficulty of integrating acquired businesses into our existing operations, we believe we generate better returns on investments growing organically in service lines and geographic locations in which we have experience and presence. We will continue to be selective in pursuing growth through acquisitions of existing businesses. +RPC has a revolving credit facility to fund the purchase of revenue-producing equipment and other working capital requirements. In January 2014, this facility was extended for five years. We have pursued this capital source because of the high returns on investment that have been generated by many of our service lines during the previous several years, and because of the low cost and ready availability of debt capital. During 2014, we purchased additional revenue-producing equipment to support high industry activity levels. We began to take delivery of this equipment during the third and fourth quarters of 2014, and anticipate that the remainder of the equipment will be delivered during the first quarter of 2015. The outstanding balance on our credit facility at the end of 2014 was higher than at the end of the prior year due to an increase in capital expenditures and working capital, and our ratio of debt to total capitalization continues to be conservative compared to a number of our peers. +Customers +Demand for RPC’s services and products depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2014, RPC provided oilfield services to several hundred customers, none of which accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. Over the past three years we have from time to time entered into agreements, with terms beyond one year, to provide services to certain domestic customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our service lines. +7 +Competition +RPC operates in highly competitive areas of the oilfield services industry. Our products and services are sold in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. Strong oilfield activity during the past several years and the availability of capital have encouraged several new, smaller companies to seek debt and equity capital and accelerate their growth rates. The presence of these new competitors has increased competitive pricing pressures as domestic oilfield activity moderated during 2012, 2013 and 2014. Although the growth in the overall domestic fleet of revenue-producing equipment has moderated, pricing for our services remains competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes and Schlumberger Ltd., and a significant number of locally oriented businesses. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day as they are filed with the Securities and Exchange Commission. +8 +Item 1A. Risk Factors +Demand for our products and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our products and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of the Organization of the Petroleum Exporting Countries (OPEC), an oil cartel which controls slightly less than 40 percent of global oil production. OPEC’s actions have historically been unpredictable, and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry will adversely affect the demand for our products and services and our financial condition and results of operations. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The products and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers’ activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers’ activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, our capacity and profitability could be diminished, and our growth potential could be impaired. +Our concentration of customers in one industry and decreased demand for petroleum may impact our overall exposure to credit risk and cause us to experience increased losses for doubtful accounts . +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. Recent decreased demand for petroleum adversely affecting our customers may cause us to experience increased losses for doubtful accounts. +9 +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. In 2014, 2013 and 2012, none of our customers exceeded 10 percent of our total revenues. In addition, no customer accounted for more than ten percent of accounts receivable as of December 31, 2014 and 2013. Reliance on a large customer for a significant portion of our total revenues could expose us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +RPC’s subsidiaries have a number of agreements of various types in place with our customers. In general, these agreements indemnify RPC and its subsidiaries against damage or liabilities that arise from the actions of our employees or the operation of our equipment. The provisions in these agreements do not make a distinction among the types of services that RPC provides or the location of the work. These agreements also require that RPC maintain a certain level and type of insurance coverage against any claims that are determined to be our responsibility. RPC has insurance coverage in place with several well-capitalized insurance companies for accidental environmental claims. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +Compliance with federal and state regulations relating to hydraulic fracturing and designation of economic development zones related to natural gas-directed drilling from shale formations could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s +pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny +is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental +issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council +on Environmental Quality, which is coordinating a review of hydraulic fracturing practices. In addition, a committee +of the United States House of Representatives has investigated hydraulic fracturing practices and publicized +information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency has also +undertaken a study of the environmental impact of hydraulic fracturing practices. As of early in the first quarter of 2015, +the issuance of the report disclosing these findings is pending. One of the results of this scrutiny has been to +require disclosure of materials used in hydraulic fracturing on certain public lands. RPC participates in this +disclosure process and has cooperated fully with all governmental requests for information regarding our operations. In +addition, during the first quarter of 2014, the federal government proposed that specific geographic areas in which natural +gas-directed drilling and production from shale formations be set aside as economic development zones. Such +designations, if they arise in geographic areas in which RPC conducts its operations, may increase demand for our +customers’ natural gas production, thus increasing demand for RPC’s services. Such designations may also +increase our operating costs due to the cost of compliance with increased regulation as well as subsidies paid by firms +engaged in natural gas-directed drilling to other industries which establish operations in these economic development +zones. We are unable to predict whether the scrutiny of RPC’s pressure pumping business and any resulting +regulatory change will impact our business through increased operational costs, operational delays, or a reduction in demand +for hydraulic fracturing services. Also, we are unable to predict the magnitude and timing of the impact on our +operations and operational costs, if any, of the creation of economic development zones in geographic areas in which natural +gas-directed drilling and production from shale formations take place. +10 +Our international operations could have a material adverse effect on our business. +Our operations in various countries including, but not limited to, Africa, Canada, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Our management has a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 72 percent of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +Our management has a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC’s certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices can limit our ability to provide services, or increase the costs of providing services, thus reducing our revenues and profits. +We have used outside financing to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital in order to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our $350 million credit facility to fund our necessary working capital and equipment requirements. Most of our existing credit facility bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +11 +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +RPC owns or leases approximately 120 offices and operating facilities. The Company leases approximately 18,600 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” contained in Item 7. The lease agreement on the headquarters is effective through October 2020. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yards +Vilonia, Arkansas — Maintenance and rebuild facilities +Elk City, Oklahoma — Operations, sales and equipment storage yards +Houma, Louisiana — Administrative office +Houston, Texas — Pipe storage terminal and inspection sheds +Kilgore, Texas — Operations, sales and equipment storage yards +Odessa, Texas — Operations, sales and equipment storage yards +Rock Springs, Wyoming — Operations, sales and equipment storage yards +Vernal, Utah — Operations, sales and equipment storage yards +Williston, North Dakota — Operations, sales and equipment storage yards +Leased Locations +Canton, Pennsylvania — Pumping services facility +Hobbs, New Mexico — Pumping services facility +Oklahoma City, Oklahoma — Operations, sales and administrative office +San Antonio, Texas — Operations, sales and equipment storage yards +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Washington, Pennsylvania — Operations, sales and equipment storage yards +Williston, North Dakota — Operations, sales and equipment storage yards +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +12 +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K. +Item 4A. Executive Officers of the Registrant +Each of the executive officers of RPC was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting of stockholders or until his or her earlier removal by the Board of Directors or his or her resignation. The following table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +R. Randall Rollins (1) +83 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +70 +4/22/03 +President and +Chief Executive Officer +Linda H. Graham (3) +78 +1/27/87 +Vice President and +Secretary +Ben M. Palmer (4) +54 +7/8/96 +Vice President, +Chief Financial Officer and +Treasurer +(1) R. Randall Rollins began working for Rollins, Inc. (consumer services) in 1949. Mr. Rollins has served as Chairman of the Board of RPC since the spin-off of RPC from Rollins, Inc. in 1984. He has served as Chairman of the Board of Marine Products Corporation (boat manufacturing) since it was spun off from RPC in 2001 and Chairman of the Board of Rollins, Inc. since October 1991. He is also a director of Dover Downs Gaming and Entertainment, Inc. and Dover Motorsports, Inc. +(2) Richard A. Hubbell has been the President of RPC since 1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation since it was spun off from RPC in February 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +(3) Linda H. Graham has been the Vice President and Secretary of RPC since 1987. She has also been the Vice President and Secretary of Marine Products Corporation since it was spun off from RPC in 2001. Ms. Graham serves on the Board of Directors of both of these companies. +(4) Ben M. Palmer has been the Vice President, Chief Financial Officer and Treasurer of RPC since 1996. He has also been the Vice President, Chief Financial Officer and Treasurer of Marine Products Corporation since it was spun off from RPC in 2001. +13 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 13, 2015 there were 217,090,722 shares of common stock outstanding and approximately 40,300 beneficial holders of our common stock. The following table sets forth the high and low prices of RPC’s common stock and dividends paid for each quarter in the years ended December 31, 2014 and 2013: +2014 +2013 +Quarter +High +Low +Dividends +High +Low +Dividends +First +$ +21.09 +$ +16.16 +$ +0.105 +$ +17.40 +$ +12.46 +$ +0.10 +Second +23.75 +19.27 +0.105 +15.55 +12.41 +0.10 +Third +25.15 +20.67 +0.105 +15.94 +13.48 +0.10 +Fourth +22.15 +11.55 +0.105 +18.88 +15.34 +0.10 +On January 27, 2015 RPC’s Board of Directors approved a $0.105 per share cash dividend, payable March 10, 2015 to stockholders of record at the close of business on February 10, 2015. The Company expects to continue to pay cash dividends to the common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. +Issuer Purchases of Equity Securities +Shares repurchased in the fourth quarter of 2014 are outlined below. +Period +Total Number +of Shares (or +Units) +Purchased (1) +Average Price +Paid Per Share +(or Unit) +Total Number of +Shares (or Units) +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number (or +Approximate Dollar +Value) of Shares (or Units) +that May Yet Be +Purchased Under the Plans +or Programs (1) +October 1, 2014 to October 31, 2014 +780,000 +$ +16.08 +780,000 +3,323,138 +November 1, 2014 to November 30, 2014 +1,252,984 +15.36 +1,252,984 +2,070,154 +December 1, 2014 to December 31, 2014 +1,664,260 +(2 ) +12.15 +20,000 +2,050,154 +Totals +3,697,244 +$ +14.06 +2,052,984 +2,050,154 +(1) +The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 that authorizes the repurchase of up to 31,578,125 shares. There were 2,052,984 shares repurchased as part of this program during the fourth quarter of 2014. As of December 31, 2014, there are 2,050,154 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +(2) +Includes shares purchased by “affiliated purchasers” under Rule 10b - 18 of the Securities Exchange Act in open market transactions. These affiliated purchases were made by RFPS Investment II, L.P. and RFPS Management Co. II, L.P. of which LOR, Inc. is the manager. Mr. R. Randall Rollins and Mr. Gary W. Rollins have voting control of LOR, Inc. +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 1000 Index (“Russell 1000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index. +14 +The Company was a component of the Russell 1000 during 2014. The Russell 1000 is a stock index representing large capitalization U.S. stocks with high historical growth in revenues and earnings. The components of the index had a weighted average market capitalization in 2014 of $122.7 billion, and a median market capitalization of $8.1 billion. The Russell 1000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar products and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., Basic Energy Services, Inc., Superior Energy Services, Inc., and Halliburton Company. The companies included in the Peer Group have been weighted according to each respective issuer’s stock market capitalization at the beginning of each year. +15 +Item 6. Selected Financial Data +The following table summarizes certain selected financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere in this document. +STATEMENT OF OPERATIONS DATA: +Years Ended December 31, +2014 +2013 +2012 +2011 +2010 +(in thousands, except employee and per share amounts) +Revenues +$ +2,337,413 +$ +1,861,489 +$ +1,945,023 +$ +1,809,807 +$ +1,096,384 +Cost of revenues +1,493,082 +1,178,412 +1,105,886 +992,704 +606,098 +Selling, general and administrative expenses +198,076 +185,165 +175,749 +151,286 +121,839 +Depreciation and amortization +230,813 +213,128 +214,899 +179,905 +133,360 +Loss (gain) on disposition of assets, net +15,472 +9,371 +6,099 +3,831 +(3,758 +) +Operating profit +399,970 +275,413 +442,390 +482,081 +238,845 +Interest expense +(1,431 +) +(1,822 +) +(1,976 +) +(3,453 +) +(2,662 +) +Interest income +19 +419 +30 +18 +46 +Other income, net +828 +2,260 +2,175 +169 +1,303 +Income before income taxes +399,386 +276,270 +442,619 +478,815 +237,532 +Income tax provision +154,193 +109,375 +168,183 +182,434 +90,790 +Net income +$ +245,193 +$ +166,895 +$ +274,436 +$ +296,381 +$ +146,742 +Earnings per share: +Basic +$ +1.14 +$ +0.77 +$ +1.28 +$ +1.36 +$ +0.67 +Diluted +$ +1.14 +$ +0.77 +$ +1.27 +$ +1.35 +$ +0.67 +Dividends paid per share +$ +0.42 +$ +0.40 +$ +0.52 +$ +0.21 +$ +0.09 +OTHER DATA: +Operating margin percent +17.1 +% +14.8 +% +22.7 +% +26.6 +% +21.8 +% +Net cash provided by operating activities +$ +322,757 +$ +365,624 +$ +559,933 +$ +386,007 +$ +168,657 +Net cash used for investing activities +(355,349 +) +(207,654 +) +(315,838 +) +(391,637 +) +(171,769 +) +Net cash (used for) provided by financing activities +33,664 +(163,433 +) +(237,325 +) +3,988 +7,658 +Capital expenditures +$ +371,502 +$ +201,681 +$ +328,936 +$ +416,400 +$ +187,486 +Employees at end of period +4,500 +3,900 +3,600 +3,400 +2,500 +BALANCE SHEET DATA AT END OF YEAR: +Accounts receivable, net +$ +634,730 +$ +437,132 +$ +387,530 +$ +461,272 +$ +294,002 +Working capital +612,616 +436,873 +403,316 +447,089 +281,174 +Property, plant and equipment, net +849,383 +726,307 +756,326 +675,360 +453,017 +Total assets +1,759,358 +1,383,860 +1,367,163 +1,338,211 +887,871 +Long-term debt +224,500 +53,300 +107,000 +203,300 +121,250 +Total stockholders’ equity +$ +1,078,382 +$ +968,702 +$ +899,232 +$ +762,592 +$ +538,895 +16 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with “Selected Financial Data,” and the Consolidated Financial Statements included elsewhere in this document. See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- +To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- +To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- +To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- +To maintain high asset utilization which leads to increased revenues and leverage of direct and overhead costs, while also ensuring that increased maintenance resulting from high utilization does not interfere with customer performance requirements or jeopardize safety. +- +To deliver equipment and services to our customers safely. +- +To secure adequate sources of supplies of certain high-demand raw materials used in our operations, both in order to conduct our operations and to enhance our competitive position. +- +To maintain and selectively increase market share. +- +To maximize stockholder return by optimizing the balance between cash invested in the Company’s productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- +To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact the level of current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +Current +industry conditions are characterized by oil prices which have declined rapidly from more than $100 per barrel in the third +quarter of 2014 to approximately $50 per barrel early in the first quarter of 2015, a level not observed since the second +quarter of 2009. As a result, the U.S. domestic rig count is declining, and early in the first quarter of 2015 has +declined by almost 30 percent since the third quarter of 2014. The catalysts for the recent steep decline in the price +of oil include the perception that global oil supplies are higher than demand, the forecasted decline in oil demand growth, +and the strength of the U.S. dollar on global currency markets. The decline in both the price of oil and our +customers’ drilling and completion activities accelerated in the first quarter of 2015 following an announcement by +OPEC that the oil cartel would not limit its production in response to falling prices and excess supply. We anticipate +that the U.S. domestic rig count will continue to decline until world oil prices increase due to a combination of increased +global demand, declining production, or an increase in political instability in the world’s oil-producing regions +outside of the United States. RPC believes that the most predictable catalyst for an increase in world oil prices is +declining production in the United States. We believe this because the United States grew to be the world’s +largest producer of oil during the second quarter of 2014, and the increase in oil production was due to the growth of +oil-directed drilling in shale formations. These wells produce a large amount of oil immediately following their +completion, but typically experience large production declines within two years. Therefore, the declining production of +these wells, and the rapid decline in drilling of new wells of this type in 2015 are the most likely initial catalyst for +improving industry conditions. Customer activities directed towards natural gas drilling and production have been weak +for several years, with the U.S. domestic natural gas rig count remaining at its lowest level since the second quarter of +1995. We believe that customer activities directed towards drilling for natural gas have been weak because of the high +production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale +wells in the U.S. domestic market, relatively constant consumption of natural gas in the United States, and the fact that +natural gas presently cannot be exported from the United States to other markets in which demand and prices are higher. +The price of natural gas increased during the first quarter of 2014 due to winter weather that was colder than normal, but +has declined during the third and fourth quarters of 2014 and the first quarter of 2015. Early in the first quarter of +2015, the price of natural gas had fallen to its lowest level since the second quarter of 2012, due to the fact that winter +in 2015 has thus far not been as cold as the previous winter, and that natural gas in storage in the United States has +increased and is now approaching its average long-term storage level. +17 +RPC monitors the number of horizontal and directional wells drilled in the U.S. domestic market, because this type of well is more service-intensive than a vertical oil or gas well, thus requiring more of the Company’s services provided for a longer period of time. During 2014, the average number of horizontal and directional wells drilled in the United States increased by approximately 14 percent, and was 81 percent of total wells drilled during the year. During the first part of 2015, the percentage of horizontal and directional wells drilled as a percentage of total wells rose to approximately 84 percent. In addition, the percentage of wells drilled for oil increased to 82 percent during 2014 compared to 78 percent during 2013. During the beginning of the first quarter of 2015, the percentage of wells drilled for oil decreased slightly to 81 percent. We also monitor the U.S. domestic well count, which is a measure of wells drilled by the existing drilling rig fleet. We believe that the well count is an important measure of our potential activity levels because it reflects changes in rig efficiencies. During 2014, the total U.S. domestic well count increased by approximately five percent. In the markets in which RPC has operational locations, the well count increased by approximately seven percent. Pricing for our services did not change materially during 2014. While there was continued downward pricing pressure due to a larger fleet of revenue-producing equipment in the U.S. domestic market, this impact was offset by greater service intensity and moderately higher customer activity levels. During previous years, a number of our customers entered into contractual relationships with us to provide services to support their completion programs. Such arrangements were advantageous to our customers because of the repetitive nature of this type of activity and their need to have service providers dedicated exclusively to their drilling programs. These arrangements also positively impacted the Company’s financial results, because of increased utilization of our revenue-producing equipment and increased efficiency. All of these arrangements had expired by the third quarter of 2013. We do not expect to enter into additional contractual arrangements with such terms during 2015. +During 2014 the Company increased our purchases of revenue-producing equipment. Cash flows from operating activities as well as borrowings under our revolving credit facility have been sufficient to fund the Company’s higher capital expenditures which increased to $371.5 million in 2014 compared to $201.7 million in 2013. The Company has a syndicated revolving credit facility in order to maintain sufficient liquidity to fund its capital expenditure and other funding requirements. +Revenues during 2014 totaled $2.3 billion, an increase of 25.6 percent compared to 2013 due primarily to higher activity levels and service intensity in our major services lines and a larger fleet revenue-producing equipment in our pressure pumping service line. Cost of revenues increased $314.7 million in 2014 compared to the prior year due to higher materials and supplies expense and employment costs associated with higher activity levels and was approximately 64 percent of revenues in 2014 compared to 63 percent of revenues in 2013. Selling, general and administrative expenses as a percentage of revenues decreased approximately 1.4 percentage points in 2014 compared to 2013. +Income before income taxes increased to $399.4 million in 2014 compared to $276.3 million in the prior year. Diluted earnings per share were $1.14 in 2014 compared to $0.77 in the prior year. +Cash flows from operating activities decreased slightly to $322.8 million in 2014 compared to $365.6 million in 2013 primarily due to higher working capital requirements partially offset by higher earnings. As of December 31, 2014, there were $224.5 million in outstanding borrowings under our credit facility, an increase from $53.3 million at December 31, 2013. +Outlook +Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a recent cyclical peak of 1,931 during the third quarter of 2014. Between the third quarter of 2014 and early in the first quarter of 2015, the drilling rig count has fallen by approximately 30 percent. The principal catalyst for this steep rig count decline is the decline in the price of oil in the world markets, which began in the second quarter of 2014. The price of oil has fallen by approximately 50 percent during this period. The price of oil began to fall at the end of the second quarter of 2014 due to the perceived oversupply of oil, weak global demand, and the strength of the U.S. dollar on world currency markets. This decline accelerated during the fourth quarter of 2014 when OPEC stated that it would not curtail its production of oil in order to bring stability to oil prices. As of the first quarter of 2015, most industry analysts believe that the rig count will continue to decline during the remainder of the first quarter and into second quarter of 2015. +18 +The current and projected prices of oil and natural gas are important catalysts for U.S. domestic drilling activity. As discussed above, the price of oil began to decline during the second quarter of 2014, and early in the first quarter of 2015 had fallen to its lowest recorded level since the second quarter of 2009. The price of natural gas has also fallen during 2014 and early in 2015, and early in the first quarter of 2015 had reached its lowest recorded level since the second quarter of 2012. The price of natural gas liquids has become an increasingly important determinant of our customers’ activities, since its sales comprise a component of our customers’ revenues, and it is produced in many of the shale resource plays that also produce oil. During 2014, the average price of benchmark natural gas liquids increased by approximately five percent compared to the prior year, but early in the first quarter of 2015 decreased by approximately seven percent compared to the end of 2014. These trends have negative implications for our near-term activity levels. In particular, the low price of oil should continue to have a negative impact on our customers’ activity levels and our financial results, since the majority of the U.S. domestic drilling rig count is directed towards oil. RPC has operational locations and revenue-producing equipment in most of these locations, so it is likely that our near-term financial results will be negatively impacted by these declining prices. +The +majority of the U.S. domestic rig count remains directed towards oil, although this percentage will decline as oil-directed +drilling continues to fall in 2015. Early in the first quarter of 2015, approximately 79 percent of the U.S. domestic +rig count was directed towards oil, a slight decrease compared to approximately 82 percent at the end of 2014. We +believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will +remain a low percentage of U.S. domestic drilling in the near term. We believe that this relationship will continue due +to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of +limited increases in domestic natural gas demand during the near term. We do not believe that the overall rig count +will increase during 2015 unless the price of oil increases from its current price early in the first quarter of 2015. +We continue to monitor the market for our services and the competitive environment in 2015. We are cautious about the market for our services because of the recent steep decline in the U.S. domestic rig count and the highly competitive nature of pricing for our services in the current environment. The current low prices of oil and natural gas discourage us from believing that the U.S. domestic rig count will recover during the near term. We believe that the price of natural gas may increase during the short term because of cold weather during the first quarter of 2015, but we do not believe that any potential increase will be enough to encourage our customers to increase their natural gas-directed drilling activities. Over the long term, we believe that the steep decline in oil-directed drilling in the U.S. domestic market will reduce U.S. domestic oil production and serve as a catalyst for oil prices to increase. This belief is due to the fact that oil-directed wells drilled in shale resource plays typically exhibit high initial production soon after being completed followed by a decline in production in later years. We are also encouraged by the fact that the drilling activities that are taking place during 2015 continue to be highly service-intensive and require a large amount of equipment and raw materials. +As we monitor the competitive environment during 2015, we also note that many of our competitors are relatively new entrants into the oilfield services market, and may have higher cost structures and less-developed logistical capabilities than RPC. Also, many of these new entrants have financed their operations with a capital structure that includes a large amount of debt, so they may not have the ability to maintain their equipment in highly service intensive operating environments, and may not be able to operate for long periods of time in which they do not generate positive cash flow from operations. These characteristics of our competitors encourage us regarding the overall level of competition in our markets. In this environment RPC also monitors the financial capabilities of our customers, due to the fact that many of them have also financed their operations with a large amount of debt, and this type of financing is less available in 2015 than in previous years. At this time RPC believes that the majority of its customers have access to adequate capital to finance their ongoing operations. RPC initiated an expansion of its pressure pumping fleet in 2014, and during the fourth quarter of 2014 began to take delivery of this equipment. We continue to take delivery of this revenue-producing equipment during the first quarter of 2015, but we do not plan additional increases in our fleet of revenue-producing equipment during 2015. Our consistent response to the industry’s potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. Although we have used our bank credit facility to finance our current expansion, we will continue to maintain a conservative financial and capital structure by industry standards. +19 +Results of Operations +Years Ended December 31, +2014 +2013 +2012 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ +2,337,413 +$ +1,861,489 +$ +1,945,023 +Revenues by business segment: +Technical +$ +2,180,457 +$ +1,729,732 +$ +1,794,015 +Support +156,956 +131,757 +151,008 +Consolidated operating profit +$ +399,970 +$ +275,413 +$ +442,390 +Operating profit by business segment: +Technical +$ +390,004 +$ +276,246 +$ +420,231 +Support +42,510 +26,223 +45,912 +Corporate expenses +(17,072 +) +(17,685 +) +(17,654 +) +Loss on disposition of assets, net +(15,472 +) +(9,371 +) +(6,099 +) +Net income +$ +245,193 +$ +166,895 +$ +274,436 +Earnings per share — diluted +$ +1.14 +$ +0.77 +$ +1.27 +Percentage of cost of revenues to revenues +64 +% +63 +% +57 +% +Percentage of selling, general and administrative expenses to revenues +9 +% +10 +% +9 +% +Percentage of depreciation and amortization expenses to revenues +10 +% +11 +% +11 +% +Effective income tax rate +38.6 +% +39.6 +% +38.0 +% +Average U.S. domestic rig count +1,862 +1,762 +1,919 +Average natural gas price (per thousand cubic feet (mcf)) +$ +4.25 +$ +3.71 +$ +2.73 +Average oil price (per barrel) +$ +93.25 +$ +98.06 +$ +94.20 +Year Ended December 31, 2014 Compared To Year Ended December 31, 2013 +Revenues. Revenues in 2014 increased $475.9 million or 25.6 percent compared to 2013. The Technical Services segment revenues for 2014 increased 26.1 percent compared to the prior year due primarily to increased service intensity in the service lines within this segment and a larger fleet of pressure pumping equipment. The Support Services segment revenues for 2014 increased 19.1 percent compared to 2013 due principally to an improved job mix and higher activity levels in the rental tool service line, which is the largest service line within this segment, as well as higher activity levels in the other service lines which comprise this segment. Operating profit in both the Technical and Support Services segments increased due to higher revenues and greater utilization of personnel and equipment. +The +average price of oil decreased 4.9 percent while the average price of natural gas increased 14.6 percent during 2014 compared +to the prior year. The average domestic rig count during 2014 was 5.7 percent higher than 2013. We believe that +our activity levels are affected primarily by the price of oil, since oil-directed activity has become the majority of total +U.S. drilling activity. The prices of natural gas and natural gas liquids also impact our activity levels because of +the service-intensive nature of this type of drilling and completion. We also believe that the total number of +directional and horizontal wells more directly affect our activity levels, regardless of whether the wells are directed +towards oil or natural gas. This belief is based on the fact that directional and horizontal wells require more of the +services within our technical services segment. International revenues, which increased from $65.9 million in 2013 to +$88.2 million in 2014, were as a percentage of consolidated revenues, four percent in 2014 and 2013. +International revenues increased due primarily to higher customer activity levels in Australia, Gabon and Singapore in 2014 +partially offset by decreased activity in Mexico, Congo and Tunisia, compared to the prior year. Our international +revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2014 was $1.5 billion compared to $1.2 billion in 2013, an increase of $314.7 million or 26.7 percent. The increase in these costs was due to the variable nature of these expenses especially materials and supplies expenses and employment costs associated with higher activity levels. Cost of revenues, as a percent of revenues, increased slightly in 2014 compared to 2013 due primarily to competitive pricing for our services. +Selling, general and administrative expenses. Selling, general and administrative expenses increased 7.0 percent to $198.1 million in 2014 compared to $185.2 million in 2013. This increase was due primarily to increases in total employment costs partially offset by a decrease in bad debt expense. As a percentage of revenues, selling, general and administrative expenses decreased to 8.5 percent in 2014 compared to 9.9 percent in 2013 due to cost leverage achieved with higher revenues. +20 +Depreciation and amortization. Depreciation and amortization were $230.8 million in 2014, an increase of $17.7 million, compared to $213.1 million in 2013. As a percentage of revenues, depreciation and amortization decreased to 9.9 percent in 2014 compared to 11.4 percent in 2013. +Loss on disposition of assets, net. Loss on disposition of assets, net was $15.5 million in 2014 compared to $9.4 million in 2013. The loss on disposition of assets, net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing increased wear and tear which requires early dispositions, or sales to customers of lost or damaged rental equipment. +Other income, net. Other income, net was $0.8 million in 2014 compared to $2.3 million in 2013. Other income, net primarily includes mark to market gains and losses of investments in the non-qualified benefit plan. +Interest expense and interest income. Interest expense was $1.4 million in 2014 compared to $1.8 million in 2013. The decrease in 2014 is due to lower interest rates net of interest capitalized on equipment and facilities under construction partially offset by a higher average debt balance on our revolving credit facility. Interest income decreased to $19 thousand in 2014 compared to $419 thousand in 2013. +Income tax provision. The income tax provision was $154.2 million in 2014 compared to $109.4 million in 2013. This increase was due to higher income before taxes partially offset by a decrease in the effective tax rate to 38.6 percent in 2014 compared to 39.6 percent in 2013. +Net income and diluted earnings per share . Net income was $245.2 million in 2014, or $1.14 per diluted share, compared to net income of $166.9 million, or $0.77 per diluted share in 2013. This increase was due to higher profitability as average shares outstanding was essentially unchanged. +Year Ended December 31, 2013 Compared To Year Ended December 31, 2012 +Revenues. Revenues in 2013 decreased $83.5 million or 4.3 percent compared to 2012. The Technical Services segment revenues for 2013 decreased 3.6 percent from the prior year due primarily to lower pricing experienced in most of our service lines within this segment partially offset by higher service intensity and activity in our pressure pumping service line. The Support Services segment revenues for 2013 decreased 12.7 percent compared to 2012 due primarily to lower pricing in the rental tool service line, which is the largest service line within this segment. Operating profit in the both Technical Services and Support Services segment declined due to lower pricing. Operating profit in the Technical Services segment also declined due to higher materials and supplies expense consistent with increased service intensity. +Domestic revenues decreased 4.0 percent during 2013 compared to 2012 to $1.8 billion due primarily to competitive pricing for our services in most service lines. The average price of oil increased by four percent while the average price of natural gas increased by 36 percent during 2013 compared to the prior year. The average domestic rig count during 2013 was eight percent lower than in 2012. Increased competitive pricing for our services negatively impacted our operating income, income before income taxes, net income and earnings per share. International revenues, which decreased from $74.2 million in 2012 to $65.9 million in 2013, were four percent of consolidated revenues in 2013 and 2012. These international revenue decreases were due mainly to lower customer activity levels in New Zealand and Mexico in 2013 partially offset by an increase in activity in Equatorial Guinea, Gabon, Australia, Argentina and Bolivia, compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2013 was $1.2 billion compared to $1.1 billion in 2012, an increase of $72.5 million or 6.6 percent. The increase in these costs was due to the variable nature of these expenses especially materials and supplies expenses and employment costs associated with higher activity levels. Cost of revenues, as a percent of revenues, increased in 2013 compared to 2012 due primarily to competitive pricing for our services. +Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.4 percent to $185.2 million in 2013 compared to $175.7 million in 2012. This increase was due primarily to increases in total employment costs and bad debt expense. As a percentage of revenues, selling, general and administrative expenses increased to 9.9 percent in 2013 compared to 9.0 percent in 2012. +Depreciation and amortization. Depreciation and amortization were $213.1 million in 2013, a decrease of $1.8 million, compared to $214.9 million in 2012. As a percentage of revenues, depreciation and amortization remained relatively unchanged at 11.4 percent in 2013 compared to 11.0 percent in 2012. +Loss on disposition of assets, net. Loss on disposition of assets, net was $9.4 million in 2013 compared to $6.1 million in 2012. The loss on disposition of assets, net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing increased wear and tear which requires early dispositions, or sales to customers of lost or damaged rental equipment. +Other income, net. Other income, net was $2.3 million in 2013 compared to $2.2 million in 2012. Other income, net primarily includes mark to market gains and losses of investments in the non-qualified benefit plan. +21 +Interest expense and interest income. Interest expense was $1.8 million in 2013 compared to $2.0 million in 2012. The decrease in 2013 is due to a lower average debt balance on our revolving credit facility partially offset by slightly higher interest rates net of interest capitalized on equipment and facilities under construction. Interest income increased to $419 thousand in 2013 compared to $30 thousand in 2012. +Income tax provision. The income tax provision was $109.4 million in 2013 compared to $168.2 million in 2012. This decrease was due to lower income before taxes in 2013 compared to 2012 partially offset by an increase in the effective tax rate to 39.6 percent in 2013 compared to the effective tax rate of 38.0 percent in 2012. +Net income and diluted earnings per share . Net income was $166.9 million in 2013, or $0.77 per diluted share, compared to net income of $274.4 million, or $1.27 per diluted share in 2012. This decline was due to lower profitability. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $9.8 million as of December 31, 2014, $8.7 million as of December 31, 2013 and $14.2 million as of December 31, 2012. +The following table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2014 +2013 +2012 +Net cash provided by operating activities +$ +322,757 +$ +365,624 +$ +559,933 +Net cash used for investing activities +(355,349 +) +(207,654 +) +(315,838 +) +Net cash provided by (used for) financing activities +33,664 +(163,433 +) +(237,325 +) +2014 +Cash provided by operating activities decreased $42.9 million in 2014 compared to the prior year due primarily to an unfavorable change in working capital of $173.0 million partially offset by an increase in net income of $78.3 million, an increase in depreciation and amortization of $18.1 million, and a favorable change in deferred taxes of $25.4 million due to tax benefits resulting from higher capital expenditures. +The unfavorable change in working capital is primarily due to the following: an unfavorable change of $148.1 million in accounts receivable due to higher business activity levels in 2014 compared to prior year; an unfavorable change of $43.8 million in inventories due to an increase in materials and supplies that require longer lead times; an unfavorable change of $3.4 million in other current assets due to lower deposits for raw materials; and an unfavorable net change of $13.4 million in net current income taxes receivable/payable. These unfavorable changes were partially offset by a favorable change in accounts payable of $22.4 million; a favorable change in accrued payroll of $8.6 million; and a favorable change of $4.1 million in accrued state, local and other taxes due to higher business activity levels coupled with the timing of payments. +Cash used for investing activities in 2014 increased by $147.7 million compared to 2013, primarily as a result of higher capital expenditures primarily directed to expand or maintain our revenue-producing equipment. +Cash provided by financing activities in 2014 increased by $197.1 million primarily as a result of higher net loan borrowings coupled with lower open market share repurchases, partially offset by a 5 percent increase in the per share common stock dividend declared during 2014 compared to the prior year. +2013 +Cash provided by operating activities decreased $194.3 million in 2013 compared to the prior year due primarily to a decrease in net income of $107.5 million, an unfavorable change in deferred taxes of $17.9 million due to a decrease in tax depreciation benefits resulting from lower capital expenditures coupled with an unfavorable change in working capital of $83.2 million. +The unfavorable change in working capital was primarily due to the following: an unfavorable change of $123.8 million in accounts receivable due to slightly higher business activity levels at the end of 2013 compared to declining activity levels at the end of the prior year; an unfavorable change of $25.1 million in other current assets due to lower deposits for raw materials; an unfavorable net change of $9.8 million in net current income taxes receivable/payable; and an unfavorable change of $4.6 million in accrued state, local and other taxes due to the timing of payments. These unfavorable changes were partially offset by a favorable change of $54.4 million in inventories due to improved sourcing of critical materials and supplies that require longer lead times. +22 +Cash used for investing activities in 2013 decreased by $108.2 million compared to 2012, primarily as a result of lower capital expenditures in response to highly competitive pricing. +Cash used for financing activities in 2013 decreased by $73.9 million primarily as a result of lower net loan repayments coupled with lower open market share repurchases, partially offset by a 25 percent increase in the per share common stock dividend declared during 2013 compared to the prior year. +Financial Condition and Liquidity +The Company’s financial condition as of December 31, 2014, remains strong. We believe the liquidity provided by our existing cash and cash equivalents, our overall strong capitalization which includes a revolving credit facility and cash expected to be generated from operations will provide sufficient capital to meet our requirements for at least the next twelve months. On January 17, 2014, the Company amended the $350 million revolving credit facility which extended the maturity of the loan to January 2019. The facility contains customary terms and conditions, including certain financial covenants including covenants restricting RPC’s ability to incur liens, merge or consolidate with another entity. A total of $96.2 million was available under the facility as of December 31, 2014; $29.3 million of the facility supports outstanding letters of credit related to self-insurance programs or contract bids. For additional information with respect to RPC’s facility, see Note 6 of the Notes to Consolidated Financial Statements. +The Company’s decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings under our facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity levels. The Company’s decisions about the amount of cash to be used for investing and financing activities could be influenced by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities. The Company is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $371.5 million in 2014, and we currently expect capital expenditures to be approximately $200 million in 2015. We expect that a majority of these expenditures in 2015 will be directed towards maintenance of our revenue-producing equipment and refurbishment of our existing fleet of pressure pumping equipment. The remaining capital expenditures will be directed towards the purchase of revenue-producing equipment in several of our core service lines, including pressure pumping, coiled tubing and rental tools. The actual amount of expenditures will depend primarily on equipment maintenance requirements, customer opportunities, and equipment delivery schedules. +The Company’s Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. During 2014, the Company contributed $0.8 million to the pension plan. The Company expects that additional contributions to the defined benefit pension plan of approximately $0.9 million will be required in 2015 to achieve the Company’s funding objective. +The Company has a stock buyback program initially adopted in 1998 that authorizes the repurchase of up to 26,578,125 shares. On June 5, 2013, the Board of Directors authorized an additional 5,000,000 shares for repurchase under this program. There were 2,662,080 shares purchased on the open market during 2014 by the Company, and 2,050,154 shares remain available to be repurchased under the current authorization as of December 31, 2014. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +On January 27, 2015, the Board of Directors approved a $0.105 per share cash dividend, payable March 10, 2015 to stockholders of record at the close of business on February 10, 2015. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. +23 +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, 2014: +Contractual obligations +Payments due by period +(in thousands) +Total +Less than +1 year +1-3 +years +3-5 +years +More than +5 years +Long-term debt obligations +$ +224,500 +$ +— +$ +— +$ +224,500 +$ +— +Interest on long-term debt obligations +24,650 +4,850 +9,698 +9,698 +404 +Capital lease obligations +— +— +— +— +— +Operating leases (1) +41,458 +10,938 +12,669 +8,402 +9,449 +Purchase obligations (2) +218,577 +178,977 +39,600 +— +— +Other long-term liabilities (3) +2,554 +50 +2,404 +100 +— +Total contractual obligations +$ +511,739 +$ +194,815 +$ +64,371 +$ +242,700 +$ +9,853 +(1) +Operating leases include agreements for various office locations, office equipment, and certain operating equipment. +(2) +Includes agreements to purchase raw materials, goods or services that have been approved and that specify all significant terms (pricing, quantity, and timing). As part of the normal course of business the Company occasionally enters into purchase commitments to manage its various operating needs. +(3) +Includes expected cash payments for long-term liabilities reflected on the balance sheet where the timing of the payments are known. These amounts include incentive compensation. These amounts exclude pension obligations with uncertain funding requirements and deferred compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan assets classified as Level 3, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund or when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. Also, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees as well as increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. During 2013 and 2014, we experienced high employment costs due to the demand for skilled labor in our markets. In addition, we experienced continued high cost for certain raw materials the Company uses to provide its services, in spite of our efforts to secure raw materials from alternative sources. During the third and fourth quarter of 2014, there were indications that increased supplies of raw materials were becoming more readily available. At the end of the fourth quarter of 2014 and early in the first quarter of 2015, there were many indications that the prices of both skilled labor and many of the raw materials used in providing our services had started to decline due to lower demand caused by the sudden and steep decline in the price of oil and the resulting decline in oil-directed drilling and completion. We believe that declining oilfield activity during 2015 will decrease both wage rates for skilled labor and the prices of raw materials used in providing our services. Because customers are pressuring the prices we charge for our services, it will be difficult to realize higher operating profit from these anticipated costs decreases. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +24 +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $663,000 in 2014, $670,000 in 2013, and $544,000 in 2012. The Company’s receivable due from Marine Products for these services was $47,000 as of December 31, 2014 and $145,000 as of December 31, 2013. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1,092,000 in 2014, $1,039,000 in 2013 and $1,676,000 in 2012. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $84,000 in 2014 and $83,000 in 2013 and 2012. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +During the year ended December 31, 2014, RPC and Marine Products entered into a joint venture creating a limited liability company called 255 RC, LLC that is owned 50 percent each for the purchase and ownership of a corporate aircraft. 255 RC, LLC was funded with a contribution of approximately $2,554,000 each from RPC and Marine Products. The purchase of the aircraft was completed in January 2015 and each of RPC and Marine Products have entered into an operating lease agreement with 255 RC, LLC for a period of five years. +Critical Accounting Policies +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +Allowance for doubtful accounts — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period to period. Recoveries were insignificant in 2014, 2013 and 2012. We record specific provisions when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward. +25 +The estimated allowance for doubtful accounts is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues have ranged from .09 percent to 0.47 percent over the last three years. Increasing or decreasing the estimated general reserve percentages by 0.50 percentage points as of December 31, 2014 would have resulted in a change of approximately $3.3 million to the allowance for doubtful accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The effective income tax rates were 38.6 percent in 2014, 39.6 percent in 2013 and 38.0 percent in 2012. Our effective tax rates vary due to changes in estimates of our future taxable income, fluctuations in the tax jurisdictions in which our earnings and deductions are realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. We have considered future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. +We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the third quarter of the subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are determined based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the year the differences are expected to reverse. +The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +Insurance expenses – The Company self insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2014, the Company estimates the range of exposure to be from $13.7 million to $17.8 million. The Company has recorded liabilities at December 31, 2014 of approximately $15.7 million which represents management’s best estimate of probable loss. +Depreciable life of assets — RPC’s net property, plant and equipment at December 31, 2014 was $849.4 million representing 48.3 percent of the Company’s consolidated assets. Depreciation and amortization expenses for the year ended December 31, 2014 were $230.8 million. Management judgment is required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation and amortization expense. +Property, plant and equipment are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors including historical experience with similar assets. Assets are monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted accordingly. We have not made any changes to the estimated lives of assets resulting in a material impact in the last three years. +Defined benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit plan, although the Company remains obligated to provide employees benefits earned through March 2002. The Company accounts for the defined benefit plan in accordance with the provisions of FASB ASC 715, “Compensation – Retirement Benefits” and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary. +26 +The Company chooses an expected rate of return on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s assumption for the expected return on plan assets was seven percent for 2014, 2013 and 2012. +The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 4.15 percent as of December 31, 2014 compared to 5.20 percent as of December 31, 2013 and 4.16 percent in 2012. +As set forth in note 10 to the Company’s financial statements, included among the asset categories for the Plan’s investments are real estate and alternative/ opportunistic/ special fund investments comprised of real estate funds and private equity funds. These investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with ASU No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +As of December 31, 2014, the defined benefit plan was under-funded and the recorded change within accumulated other comprehensive loss decreased stockholders’ equity by approximately $6.8 million after tax. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of approximately $1.5 million to the net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense of $0.2 million in 2014, $0.5 million in 2013 and $0.7 million in 2012. Based on the under-funded status of the defined benefit plan as of December 31, 2014, the Company expects to recognize pension expense of $0.5 million in 2015. Holding all other factors constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase or decrease in pension expense of approximately $0.2 million in 2015. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of approximately $2 thousand in 2015. +Recent Accounting Pronouncements +During the year ended December 31, 2014, the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendments in this ASU require that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the parent should release the cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity; and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. The Company adopted these provisions in the first quarter of 2014 and adoption did not have a material impact on the Company’s consolidated financial statements. +Accounting Standards Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this ASU requires an unrecognized tax benefit, or a portion of thereof, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward. The only exception would be if the deferred taxes related to these items are not available to settle any additional income taxes that would result from the disallowance of a tax position either by statute or at the entity’s choosing. In such cases, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted these provisions in the first quarter of 2014 and adoption did not have a material impact on the Company’s consolidated financial statements. +27 +Recently Issued Accounting Pronouncements Not Yet Adopted: +Accounting Standards Update No. 2015-01, Income Statement —Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, then the extraordinary item needs to be segregated from the results of ordinary operations and disclosed separately in the income statement, net of tax, after income from continuing operations. Disclosure of all applicable income taxes and presentation or disclosure of earnings-per-share data applicable to the extraordinary item is required. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company plans to adopt the provisions for the year ending December 31, 2016 and currently does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update No. 2014-15, Presentation of Financial Statements —Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The provisions in this ASU are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Currently, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. This going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. This ASU provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern and the related footnote disclosures. The amendments are effective for the year ending December 31, 2016, and for interim periods beginning the first quarter of 2017, with early application permitted. The Company plans to adopt the provisions for the year ending December 31, 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about its ability to continue as a going concern. The Company currently does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply a five step process – (i) identifying the contract(s) with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. The Company plans to adopt these provisions in the first quarter of 2017 and is currently evaluating the impact of these provisions on its financial statements. Early adoption is not permitted. +Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU require that only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 with early adoption permitted. The Company plans to adopt these provisions in the first quarter of 2015 and does not expect the adoption to have a material impact on the Company’s consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its credit agreement. As of December 31, 2014, there are outstanding interest-bearing advances of $224.5 million on our credit facility which bear interest at a floating rate. A change in interest rates of one percent on the outstanding balance on the credit facility at December 31, 2014 would cause a change of approximately $2.2 million in total annual interest costs incurred. +28 +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +29 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2014 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2014. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2014, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 31. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Chief Financial Officer and Treasurer +Atlanta, Georgia +February 27, 2015 +30 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +Board of Directors and Stockholders +RPC, Inc. +We have +audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) +as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by +the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for +maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control +over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. +Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our +opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December +31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014, and our report dated February 27, 2015 expressed an unqualified opinion on those financial statements. +/S/ GRANT THORNTON LLP +Atlanta, Georgia +February 27, 2015 +31 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +Board of Directors and Stockholders +RPC, Inc. +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RPC, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal +control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February +27, 2015 expressed an unqualified opinion thereon. +/S/ GRANT THORNTON LLP +Atlanta, Georgia +February 27, 2015 +32 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2014 +2013 +ASSETS +Cash and cash equivalents +$ +9,772 +$ +8,700 +Accounts receivable, net +634,730 +437,132 +Inventories +155,611 +126,604 +Deferred income taxes +9,422 +14,185 +Income taxes receivable +29,115 +5,720 +Prepaid expenses +9,135 +9,143 +Other current assets +3,843 +3,441 +Current assets +851,628 +604,925 +Property, plant and equipment, net +849,383 +726,307 +Goodwill +32,150 +31,861 +Other assets +26,197 +20,767 +Total assets +$ +1,759,358 +$ +1,383,860 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +175,416 +$ +119,170 +Accrued payroll and related expenses +49,798 +36,638 +Accrued insurance expenses +5,632 +6,072 +Accrued state, local and other taxes +6,821 +5,002 +Income taxes payable +944 +— +Other accrued expenses +401 +1,170 +Current liabilities +239,012 +168,052 +Long-term accrued insurance expenses +10,099 +10,225 +Notes payable to banks +224,500 +53,300 +Long-term pension liabilities +34,399 +21,966 +Deferred income taxes +156,977 +153,176 +Other long-term liabilities +15,989 +8,439 +Total liabilities +680,976 +415,158 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $0.10 par value, 349,000,000 shares authorized, 216,539,015 and 218,985,816 shares issued and outstanding in 2014 and 2013, respectively +21,654 +21,899 +Capital in excess of par value +— +— +Retained earnings +1,074,561 +956,918 +Accumulated other comprehensive loss +(17,833 +) +(10,115 +) +Total stockholders’ equity +1,078,382 +968,702 +Total liabilities and stockholders’ equity +$ +1,759,358 +$ +1,383,860 +The accompanying notes are an integral part of these statements. +33 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2014 +2013 +2012 +REVENUES +$ +2,337,413 +$ +1,861,489 +$ +1,945,023 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +1,493,082 +1,178,412 +1,105,886 +Selling, general and administrative expenses +198,076 +185,165 +175,749 +Depreciation and amortization +230,813 +213,128 +214,899 +Loss on disposition of assets, net +15,472 +9,371 +6,099 +Operating profit +399,970 +275,413 +442,390 +Interest expense +(1,431 +) +(1,822 +) +(1,976 +) +Interest income +19 +419 +30 +Other income, net +828 +2,260 +2,175 +Income before income taxes +399,386 +276,270 +442,619 +Income tax provision +154,193 +109,375 +168,183 +Net income +$ +245,193 +$ +166,895 +$ +274,436 +EARNINGS PER SHARE +Basic +$ +1.14 +$ +0.77 +$ +1.28 +Diluted +$ +1.14 +$ +0.77 +$ +1.27 +Dividends paid per share +$ +0.42 +$ +0.40 +$ +0.52 +The accompanying notes are an integral part of these statements. +34 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2014 +2013 +2012 +NET INCOME +$ +245,193 +$ +166,895 +$ +274,436 +OTHER COMPREHENSIVE INCOME, NET OF TAXES: +Pension adjustment +(6,486 +) +4,928 +(1,707 +) +Foreign currency translation +(1,124 +) +(778 +) +265 +Unrealized loss on securities, +net of reclassification adjustments +(108 +) +(19 +) +(158 +) +COMPREHENSIVE INCOME +$ +237,475 +$ +171,026 +$ +272,836 +The accompanying notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Other +Comprehensive +Income (Loss) +Three Years Ended +December 31, 2014 +Common Stock +Capital in +Excess of +Par Value +Retained +Earnings +Total +Shares +Amount +Balance, December 31, 2011 +221,188 +$ +22,119 +$ +— +$ +753,119 +$ +(12,646 +) +$ +762,592 +Stock issued for stock incentive plans and other, net +1,530 +152 +11,105 +— +— +11,257 +Stock purchased and retired +(2,011 +) +(201 +) +(13,885 +) +(16,515 +) +— +(30,601 +) +Increased ownership interest in subsidiary, net of taxes +— +— +— +(5,507 +) +— +(5,507 +) +Net income +— +— +— +274,436 +— +274,436 +Pension adjustment, net of taxes +— +— +— +— +(1,707 +) +(1,707 +) +Foreign currency translation, net of taxes +— +— +— +— +265 +265 +Unrealized loss on securities, net of taxes +— +— +— +— +(158 +) +(158 +) +Dividends declared +— +— +— +(114,069 +) +— +(114,069 +) +Excess tax benefits for share-based payments +— +— +2,724 +— +— +2,724 +Three-for-two stock split +(563 +) +(56 +) +56 +— +— +— +Balance, December 31, 2012 +220,144 +22,014 +— +891,464 +(14,246 +) +899,232 +Stock issued for stock incentive plans, net +699 +70 +8,107 +— +— +8,177 +Stock purchased and retired +(1,857 +) +(185 +) +(11,285 +) +(13,652 +) +— +(25,122 +) +Net income +— +— +— +166,895 +— +166,895 +Pension adjustment, net of taxes +— +— +— +— +4,928 +4,928 +Foreign currency translation +— +— +— +— +(778 +) +(778 +) +Unrealized loss on securities, net of taxes +— +— +— +— +(19 +) +(19 +) +Dividends declared +— +— +— +(87,789 +) +— +(87,789 +) +Excess tax benefits for share-based payments +— +— +3,178 +— +— +3,178 +Balance, December 31, 2013 +218,986 +21,899 +— +956,918 +(10,115 +) +968,702 +Stock issued for stock incentive plans, net +569 +57 +9,017 +— +— +9,074 +Stock purchased and retired +(3,016 +) +(302 +) +(13,353 +) +(35,942 +) +— +(49,597 +) +Net income +— +— +— +245,193 +— +245,193 +Pension adjustment, net of taxes +— +— +— +— +(6,486 +) +(6,486 +) +Foreign currency translation +— +— +— +— +(1,124 +) +(1,124 +) +Unrealized loss on securities, net of taxes +— +— +— +— +(108 +) +(108 +) +Dividends declared +— +— +— +(91,608 +) +— +(91,608 +) +Excess tax benefits for share-based payments +— +— +4,336 +— +— +4,336 +Balance, December 31, 2014 +216,539 +$ +21,654 +$ +— +$ +1,074,561 +$ +(17,833 +) +$ +1,078,382 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2014 +2013 +2012 +OPERATING ACTIVITIES +Net income +$ +245,193 +$ +166,895 +$ +274,436 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +233,940 +215,812 +214,153 +Stock-based compensation expense +9,074 +8,177 +7,860 +Loss on disposition of assets, net +15,472 +9,371 +6,099 +Deferred income tax provision (benefit) +12,354 +(13,060 +) +4,821 +Excess tax benefits for share-based payments +(4,336 +) +(3,178 +) +(2,724 +) +(Increase) decrease in assets: +Accounts receivable +(198,021 +) +(49,959 +) +73,809 +Income taxes receivable +(19,059 +) +1,692 +9,295 +Inventories +(29,708 +) +14,078 +(40,354 +) +Prepaid expenses +2 +1,519 +(2,284 +) +Other current assets +(749 +) +1,114 +26,189 +Other non-current assets +(2,238 +) +(1,881 +) +(6,415 +) +Increase (decrease) in liabilities: +Accounts payable +36,421 +14,062 +(4,929 +) +Income taxes payable +944 +(6,428 +) +(4,277 +) +Accrued payroll and related expenses +13,221 +4,585 +(1,627 +) +Accrued insurance expenses +(440 +) +(80 +) +408 +Accrued state, local and other taxes +1,819 +(2,324 +) +2,260 +Other accrued expenses +(775 +) +(1,548 +) +1,412 +Pension liabilities +2,219 +3,183 +(589 +) +Long-term accrued insurance expenses +(126 +) +(175 +) +1,400 +Other long-term liabilities +7,550 +3,769 +990 +Net cash provided by operating activities +322,757 +365,624 +559,933 +INVESTING ACTIVITIES +Capital expenditures +(371,502 +) +(201,681 +) +(328,936 +) +Proceeds from sale of assets +18,707 +11,071 +19,309 +Purchase of business +— +(17,044 +) +— +Increased ownership interest in subsidiary +— +— +(6,211 +) +Investment in joint venture +(2,554 +) +— +— +Net cash used for investing activities +(355,349 +) +(207,654 +) +(315,838 +) +FINANCING ACTIVITIES +Payment of dividends +(91,608 +) +(87,789 +) +(114,069 +) +Borrowings from notes payable to banks +1,168,100 +686,700 +844,050 +Repayments of notes payable to banks +(996,900 +) +(740,400 +) +(940,350 +) +Debt issue costs for notes payable to banks +(667 +) +— +— +Excess tax benefits for share-based payments +4,336 +3,178 +2,724 +Cash paid for common stock purchased and retired +(49,597 +) +(25,122 +) +(30,224 +) +Proceeds received upon exercise of stock options +— +— +544 +Net cash provided by (used for) financing activities +33,664 +(163,433 +) +(237,325 +) +Net increase (decrease) in cash and cash equivalents +1,072 +(5,463 +) +6,770 +Cash and cash equivalents at beginning of year +8,700 +14,163 +7,393 +Cash and cash equivalents at end of year +$ +9,772 +$ +8,700 +$ +14,163 +The accompanying notes are an integral part of these statements. +37 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts and transactions have been eliminated. +Nature of Operations +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States of America, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include Technical Services such as pressure pumping services, coiled tubing services, snubbing services (also referred to as hydraulic workover services), nitrogen services, and firefighting and well control, and Support Services such as the rental of drill pipe and other specialized oilfield equipment and oilfield training. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $0.10 par value. As of December 31, 2014, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation. +Dividends +On January 27, 2015, the Board of Directors declared a $0.105 per share cash dividend payable March 10, 2015 to stockholders of record at the close of business on February 10, 2015. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC’s revenues are generated principally from providing services and the related equipment. Revenues are recognized when the services are rendered and collectibility is reasonably assured. Revenues from services and equipment are based on fixed or determinable priced purchase orders or contracts with the customer and do not include the right of return. Rates for services and equipment are priced on a per day, per unit of measure, per man hour or similar basis. Sales tax charged to customers is presented on a net basis within the consolidated statement of operations and excluded from revenues. +Concentration of Credit Risk +Substantially +all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact +overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in +economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last +three years. There were no customers that accounted for more than 10 percent of the Company’s revenues during 2014, +2013 and 2012. Additionally, no single customer accounted for more than 10 percent of accounts receivable as of December 31, 2014 +and 2013. +38 +NOTES +TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are included in interest income. The Company did not realize any gains or losses during 2014, 2013 or 2012 on its available-for-sale securities. Securities that are held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) are classified as trading. See Note 10 for further information regarding the SERP. The change in fair value of trading securities is presented in other income (expense) on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, +which consist principally of (i) raw materials and supplies that are consumed providing services to the +Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and +attachments for manufactured equipment used in providing services, are recorded at the lower of cost or market value. +Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Market +value is determined based on replacement cost for materials and supplies. The Company regularly reviews inventory quantities +on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product +demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, +plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which +is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and +amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years; buildings and +leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years; software, 5 years; and +vehicles, 3 to 5 years. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and +amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to +income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for +restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs +and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment and other assets, to determine if any impairments should be recognized. Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. +39 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Goodwill +Goodwill +represents the excess of the purchase price over the fair value of net assets of businesses acquired. The +carrying amount of goodwill was $32,150,000 at December 31, 2014 and $31,861,000 at December 31, 2013. During 2013, the +Company completed an acquisition of assets of a business totaling $17,044,000 that included goodwill of $7,768,000. +Goodwill is reviewed annually, or more frequently if events occur or circumstances change that would more likely than not +reduce the fair value of the reporting unit below its carrying amount, for impairment. The Company completes on an +annual basis a comprehensive qualitative assessment of the various factors that impact goodwill, and concluded it is more +likely than not that the fair value of its reporting units exceeds their carrying amounts as of the annual test date. +Therefore the Company did not proceed to Step 1 of the goodwill impairment test in 2014, 2013 and 2012. Based on the +qualitative assessment, the Company concluded that no impairment of its goodwill occurred for the years ended December 31, +2014, 2013 and 2012. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $3,959,000 in 2014, $3,458,000 in 2013, and $2,965,000 in 2012. +Insurance Expenses +RPC self insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to 2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the defined benefit pension plan. See Note 10 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. +Earnings per Share +FASB ASC Topic 260-10 “Earnings Per Share-Overall,” requires a basic earnings per share and diluted earnings per share presentation. The Company considers all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, to be participating securities. The Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends, and therefore are considered participating securities. See Note 10 for further information on restricted stock granted to employees. +The basic and diluted calculations differ as a result of the dilutive effect of stock options, time lapse restricted shares and performance restricted shares included in diluted earnings per share, but excluded from basic earnings per share. Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. +40 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +A reconciliation of weighted average shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities) is as follows: +(In thousands except per share data ) +2014 +2013 +2012 +Net income available for stockholders: +$ +245,193 +$ +166,895 +$ +274,436 +Less: Dividends paid +Common stock +(90,231 +) +(86,282 +) +(111,966 +) +Restricted shares of common stock +(1,377 +) +(1,507 +) +(2,103 +) +Undistributed earnings +$ +153,585 +$ +79,106 +$ +160,367 +Allocation of undistributed earnings: +Common stock +$ +151,049 +$ +77,620 +$ +157,093 +Restricted shares of common stock +2,536 +1,486 +3,274 +Basic shares outstanding : +Common stock +211,208 +211,305 +210,707 +Restricted shares of common stock +3,632 +4,199 +4,534 +214,840 +215,504 +215,241 +Diluted shares outstanding: +Common stock +211,208 +211,305 +210,707 +Dilutive effect of stock-based awards +1,049 +1,229 +1,555 +212,257 +212,534 +212,262 +Restricted shares of common stock +3,632 +4,199 +4,534 +215,889 +216,733 +216,796 +Basic earnings per share: +Common stock: +Distributed earnings +$ +0.43 +$ +0.40 +$ +0.53 +Undistributed earnings +0.71 +0.37 +0.75 +$ +1.14 +$ +0.77 +$ +1.28 +Restricted shares of common stock: +Distributed earnings +$ +0.38 +$ +0.36 +$ +0.46 +Undistributed earnings +0.70 +0.35 +0.72 +$ +1.08 +$ +0.71 +$ +1.18 +Diluted earnings per share: +Common Stock: +Distributed earnings +$ +0.43 +$ +0.40 +$ +0.53 +Undistributed earnings +0.71 +0.37 +0.74 +$ +1.14 +$ +0.77 +$ +1.27 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 8 for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of an estimated forfeiture rate. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See Note 10 for additional information. +Recent Accounting Pronouncements +During the year ended December 31, 2014, the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendments in this ASU require that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the parent should release the cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity; and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. The Company adopted these provisions in the first quarter of 2014 and adoption did not have a material impact on the Company’s consolidated financial statements. +41 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Accounting Standards Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this ASU requires an unrecognized tax benefit, or a portion of thereof, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward. The only exception would be if the deferred taxes related to these items are not available to settle any additional income taxes that would result from the disallowance of a tax position either by statute or at the entity’s choosing. In such cases, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted these provisions in the first quarter of 2014 and adoption did not have a material impact on the Company’s consolidated financial statements. +Recently Issued Accounting Pronouncements Not Yet Adopted: +Accounting Standards Update No. 2015-01, Income Statement —Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, then the extraordinary item needs to be segregated from the results of ordinary operations and disclosed separately in the income statement, net of tax, after income from continuing operations. Disclosure of all applicable income taxes and presentation or disclosure of earnings-per-share data applicable to the extraordinary item is required. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company plans to adopt the provisions for the year ending December 31, 2016 and currently does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update No. 2014-15, Presentation of Financial Statements —Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The provisions in this ASU are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Currently, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. This going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. This ASU provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern and the related footnote disclosures. The amendments are effective for the year ending December 31, 2016, and for interim periods beginning the first quarter of 2017, with early application permitted. The Company plans to adopt the provisions for the year ending December 31, 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about its ability to continue as a going concern. The Company currently does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply a five step process – (i) identifying the contract(s) with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. The Company plans to adopt these provisions in the first quarter of 2017 and is currently evaluating the impact of these provisions on its financial statements. Early adoption is not permitted. +Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU require that only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 with early adoption permitted. The Company plans to adopt these provisions in the first quarter of 2015 and does not expect the adoption to have a material impact on the Company’s consolidated financial statements. +42 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Note 2: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2014 +2013 +(in thousands) +Trade receivables: +Billed +$ +521,693 +$ +368,583 +Unbilled +125,363 +80,806 +Other receivables +3,025 +1,240 +Total +650,081 +450,629 +Less: allowance for doubtful accounts +(15,351 +) +(13,497 +) +Accounts receivable, net +$ +634,730 +$ +437,132 +Trade receivables relate to sale of our services and products, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consist primarily of amounts due from purchasers of Company property and rebates from suppliers. +Changes in the Company’s allowance for doubtful accounts are as follows: +Years Ended December 31, +2014 +2013 +(in thousands) +Beginning balance +$ +13,497 +$ +9,110 +Bad debt expense +2,280 +8,815 +Accounts written-off +(1,225 +) +(5,421 +) +Recoveries +799 +993 +Ending balance +$ +15,351 +$ +13,497 +Note 3: Inventories +Inventories are $155,611,000 at December 31, 2014 and $126,604,000 at December 31, 2013 and consist of raw materials, parts and supplies. +Note 4: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2014 +2013 +(in thousands) +Land +$ +18,563 +$ +19,264 +Buildings and leasehold improvements +134,994 +130,072 +Operating equipment +1,425,846 +1,231,504 +Computer software +19,005 +17,121 +Furniture and fixtures +7,835 +7,737 +Vehicles +479,628 +387,854 +Construction in progress +2,675 +2,076 +Gross property, plant and equipment +2,088,546 +1,795,628 +Less: accumulated depreciation +(1,239,163 +) +(1,069,321 +) +Net property, plant and equipment +$ +849,383 +$ +726,307 +Depreciation expense was $233.4 million in 2014, $215.4 million in 2013, and $214.9 million in 2012, and includes amounts recorded as costs of sales and inventory. There were no capital leases outstanding as of December 31, 2014 and December 31, 2013. The Company had accounts payable for purchases of property and equipment of $38.5 million as of December 31, 2014, $19.7 million as of December 31, 2013, and $24.4 million as of December 31, 2012. +43 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Note 5: Income Taxes +The following table lists the components of the provision for income taxes: +Years ended December 31, +2014 +2013 +2012 +(in thousands) +Current provision: +Federal +$ +119,074 +$ +104,890 +$ +147,580 +State +19,858 +15,627 +14,673 +Foreign +2,907 +1,918 +1,109 +Deferred provision (benefit): +Federal +11,514 +(12,025 +) +5,027 +State +840 +(1,035 +) +(206 +) +Total income tax provision +$ +154,193 +$ +109,375 +$ +168,183 +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2014 +2013 +2012 +Federal statutory rate +35.0 +% +35.0 +% +35.0 +% +State income taxes, net of federal benefit +3.3 +3.8 +3.2 +Tax credits +(0.7 +) +(0.3 +) +(0.3 +) +Non-deductible expenses +0.4 +0.5 +0.5 +Other +0.6 +0.6 +(0.4 +) +Effective tax rate +38.6 +% +39.6 +% +38.0 +% +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2014 +2013 +(in thousands) +Deferred tax assets: +Self-insurance +$ +7,675 +$ +7,247 +Pension +12,555 +8,018 +State net operating loss carryforwards +451 +484 +Bad debts +5,755 +4,748 +Accrued payroll +2,833 +2,019 +Stock-based compensation +5,583 +5,183 +Tangible property regulations 481(a) +— +7,665 +All others +2,121 +1,541 +Valuation allowance +(2 +) +(83 +) +Gross deferred tax assets +36,971 +36,822 +Deferred tax liabilities: +Depreciation +(172,813 +) +(165,960 +) +Goodwill amortization +(7,974 +) +(7,094 +) +All Others +(3,739 +) +(2,759 +) +Gross deferred tax liabilities +(184,526 +) +(175,813 +) +Net deferred tax liabilities +$ +(147,555 +) +$ +(138,991 +) +As of December 31, 2014, undistributed earnings of the Company’s foreign subsidiaries totaled $12.9 million. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries. The Company’s current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +44 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +As of December 31, 2014, the Company has net operating loss carry forwards related to state income taxes of approximately $11.3 million that will expire between 2015 and 2034. As of December 31, 2014, the Company has a negligible valuation allowance against the corresponding deferred tax asset. +Total net income tax payments were $152.2 million in 2014, $122.9 million in 2013, and $158.7 million in 2012. +The Company and its subsidiaries are subject to U.S. federal and state income taxes in multiple jurisdictions. In many cases our uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. The Company’s 2011 through 2014 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. The Internal Revenue Service (IRS) commenced an examination of the Company’s US federal income tax return for the 2011 tax year during the fourth quarter of 2013 that is anticipated to be completed by the middle of 2015. As of December 31, 2014, the IRS has not proposed any adjustments in connection with the examination. +During 2014 and 2013, the Company recognized an increase in its liability for unrecognized tax benefits in the current year related primarily to refund claims filed for state income taxes. If recognized, the liability would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2014 +2013 +Balance at January 1 +$ +16,345,000 +$ +38,000 +Additions based on tax positions related to the current year +5,193,000 +3,430,000 +Additions for tax positions of prior years +1,729,000 +12,877,000 +Balance at December 31 +$ +23,267,000 +$ +16,345,000 +The Company’s policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of December 31, 2014 and 2013. +It is reasonably possible that the amount of the unrecognized tax benefits with respect to our unrecognized tax positions will significantly decrease in the next 12 months. These changes may result from, among other things, state tax settlements under or conclusions of ongoing examinations or reviews, however, quantification of an estimated range cannot be made at this time. +The Tax Increase Prevention Act of 2014 was signed into law on December 19, 2014 and included an extension for one year of the 50 percent bonus depreciation allowance. The provision specifically applied to qualifying property placed in service before January 1, 2015. The acceleration of deductions on 2014 qualifying capital expenditures resulting from the bonus depreciation provision had no impact on our 2014 effective tax rate. +In +September 2013, the U.S. Department of the Treasury issued final regulations under Internal Revenue Code Sections +162(a), 263(a), and 168 that provide guidance on the deduction and capitalization of expenditures related to tangible +property. Adoption of these regulations requires certain mandatory and elective accounting methods with respect to +property and equipment, inventory and supplies. RPC adopted these regulations as of January 1, 2014 and estimated +favorable IRC Section 481(a) adjustments of approximately $21.7 million (gross). Additionally, for assets placed in +service after December 31, 2013, estimated accelerated deductions total approximately $16.9 million (gross). This +amount is subject to change as the analysis is finalized and method changes are filed under the new regulations during +2015. +Note 6: Long-Term Debt +The Company has a $350 million revolving credit facility with Banc of America Securities, LLC, SunTrust Robinson Humphrey, Inc, and Regions Capital Markets as Joint Lead Arrangers and Joint Book Managers, and a syndicate of other lenders. The facility includes a full and unconditional guarantee by the Company’s 100% owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of RPC and its subsidiaries. The subsidiaries of the Company that are not guarantors are considered minor. +The facility has a general term of five years and provides for an unsecured line of credit of up to $350 million, which includes a $50 million letter of credit subfacility, and a $25 million swingline subfacility. On January 17, 2014, the Company amended the revolving credit facility which extended the maturity date of all the revolving loans from August 31, 2015 to January 17, 2019. RPC incurred commitment fees and other debt related costs associated with the amendment of approximately $0.7 million. Interest rates on the amended loans were reduced by 0.125% at all pricing levels under the amended revolving credit facility. The amount of the swing line sub-facility as a result of the amendment was increased from $25 million to $35 million. +The Company incurred loan origination fees and other debt related costs associated with the facility in the aggregate of approximately $3.0 million. These costs are being amortized to interest expense over the remaining term of the five year loan, and the net amount of $1.2 million at December 31, 2014 is classified as non-current other assets. +45 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Revolving loans under the Revolving Credit Agreement bear interest at one of the following two rates, at the Company’s election: +● +the Base Rate, which is the highest of Bank of America’s “prime rate” for the day of the borrowing, a fluctuating rate per annum equal to the Federal Funds Rate plus 0.50%, and a rate per annum equal to the one (1) month LIBOR rate plus 1.00%; in each case plus a margin that ranges from 0.125% to 1.125% based on a quarterly debt covenant calculation; or +● +with respect to any Eurodollar borrowings, Adjusted LIBOR (which equals LIBOR as increased to account for the maximum reserve percentages established by the U.S. Federal Reserve) plus a margin ranging from 1.125% to 2.125%, based upon a quarterly debt covenant calculation. +In addition, the Company pays an annual fee ranging from 0.225% to 0.325%, based on a quarterly debt covenant calculation, of the unused portion of the credit facility. +The +facility contains customary terms and conditions, including certain financial covenants and restrictions on indebtedness, +dividend payments, business combinations and other related items. Further, the facility contains financial covenants +limiting the ratio of the Company’s consolidated debt-to-EBITDA to no more than 2.5 to 1, and limiting the ratio of the +Company’s consolidated EBITDA to interest expense to no less than 2 to 1. The Company was in compliance with +these covenants for the year ended December 31, 2014. +As +of December 31, 2014, RPC had outstanding borrowings of $224.5 million under the facility and letters +of credit outstanding relating to self-insurance programs and contract bids totaling $29.3 million; therefore, a total of +$96.2 million was available under the facility. Interest incurred and paid on the credit +facility, interest capitalized related to facilities and equipment under construction, and the related weighted average +interest rates were as follows for the periods indicated: +Years Ended December 31, +2014 +2013 +2012 +(in thousands except interest rate data) +Interest incurred +$ +2,295 +$ +2,090 +$ +2,936 +Capitalized interest +$ +563 +$ +935 +$ +1,026 +Interest paid (net of capitalized interest) +$ +1,314 +$ +618 +$ +1,498 +Weighted average interest rate +2.2 +% +3.7 +% +2.3 +% +Note 7: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income consists of the following (in thousands): +Pension +Adjustment +Unrealized +Gain (Loss) On +Securities +Foreign +Currency +Translation +Total +Balance at December 31, 2012 +$ +(14,688 +) +$ +29 +$ +413 +$ +(14,246 +) +Change during 2013: +Before-tax amount +6,976 +(30 +) +(778 +) +6,168 +Tax (expense) +benefit +(2,546 +) +11 +— +(2,535 +) +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +498 +— +— +498 +Total activity in 2013 +4,928 +(19 +) +(778 +) +4,131 +Balance at December 31, 2013 +$ +(9,760 +) +$ +10 +$ +(365 +) +$ +(10,115 +) +Change during 2014: +Before-tax amount +(10,745 +) +(170 +) +(1,124 +) +(12,039 +) +Tax benefit +3,922 +62 +— +3,984 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +337 +— +— +337 +Total activity in 2014 +(6,486 +) +(108 +) +(1,124 +) +(7,718 +) +Balance at December 31, 2014 +$ +(16,246 +) +$ +(98 +) +$ +(1,489 +) +$ +(17,833 +) +(1) +Reported as part of selling, general and administrative expenses. +46 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Note 8: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. +Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. +Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. +Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2014 and 2013: +Fair Value Measurements at December 31, 2014 with: +(in thousands ) +Quoted prices in +active markets for +identical assets +Significant other +observable inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Trading securities +$ +— +$ +16,491 +$ +— +Available-for-sale securities – equity securities +$ +275 +$ +— +$ +— +Fair Value Measurements at December 31, 2013 with: +(in thousands ) +Quoted prices in +active markets for +identical assets +Significant other +observable inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Trading securities +$ +— +$ +13,963 +$ +— +Available-for-sale securities – equity securities +$ +445 +$ +— +$ +— +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 10, and are recorded primarily at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. As a result, the Company measured the fair value of these investments using level 2 inputs. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2014 there were no significant transfers in or out of levels 1, 2 or 3. +At December 31, 2014 and 2013, amounts outstanding under the Company’s credit facility were $224,500,000 and $53,300,000 and based on quotes from the lender (level 2 inputs) are similar to the fair values of these amounts at the respective dates. The borrowings under our revolving credit facility bear variable interest rates as described in Note 6. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +47 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Note 9: Commitments and Contingencies +Lease Commitments - Minimum annual rentals, principally for noncancelable real estate and equipment leases with terms in excess of one year, in effect at December 31, 2014, are summarized in the following table: +(in thousands) +2015 +$ +8,857 +2016 +7,291 +2017 +5,379 +2018 +4,515 +2019 +3,887 +Thereafter +9,449 +Total rental commitments +$ +39,378 +Total rental expense, including short-term rentals, charged to operations was $22,968,000 in 2014, $20,582,000 in 2013, and $18,224,000 in 2012. +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other taxes. +Litigation +- RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ +compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its +management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify +RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the +outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation +with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined +adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 10: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer. +The +Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by +$14.8 million and thus the plan was under-funded as of December 31, 2014. The increase in the projected benefit obligation +resulted from the adoption of new mortality tables reflecting longer life expectancies, and lower discount rates. +48 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2014 +2013 +(in thousands) +Accumulated Benefit Obligation at end of year +$ +47,410 +$ +37,528 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ +37,528 +$ +42,699 +Service cost +— +— +Interest cost +1,946 +1,741 +Amendments +— +— +Actuarial loss (gain) +9,725 +(5,199 +) +Benefits paid +(1,789 +) +(1,713 +) +Projected benefit obligation at end of year +$ +47,410 +$ +37,528 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ +32,426 +$ +29,519 +Actual return on plan assets +1,220 +3,820 +Employer contribution +765 +800 +Benefits paid +(1,789 +) +(1,713 +) +Fair value of plan assets at end of year +32,622 +32,426 +Funded status at end of year +$ +(14,788 +) +$ +(5,102 +) +December 31, +2014 +2013 +(in thousands) +AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: +Noncurrent assets +$ +— +$ +— +Current liabilities +— +— +Noncurrent liabilities +(14,788 +) +(5,102 +) +$ +(14,788 +) +$ +(5,102 +) +December 31, +2014 +2013 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss (gain) +$ +25,583 +$ +15,369 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +25,583 +$ +15,369 +The accumulated benefit obligation for the Retirement Income Plan at December 31, 2014 and 2013 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan. +Amounts recognized in the consolidated balance sheets consist of: +December 31, +2014 +2013 +(in thousands) +Funded status +$ +(14,788 +) +$ +(5,102 +) +SERP liability +(19,611 +) +(16,864 +) +Long-term pension liability +$ +(34,399 +) +$ +(21,966 +) +49 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +RPC’s funding policy is to contribute to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. Amounts contributed to the plan totaled $765,000 in 2014 and $800,000 in 2013. +The components of net periodic benefit cost are summarized as follows: +Years ended December 31, +2014 +2013 +2012 +(in thousands) +Service cost for benefits earned during the period +$ +— +$ +— +$ +— +Interest cost on projected benefit obligation +1,946 +1,741 +1,869 +Expected return on plan assets +(2,240 +) +(2,043 +) +(1,846 +) +Amortization of net loss +531 +784 +667 +Net periodic benefit plan cost +$ +237 +$ +482 +$ +690 +The Company recognized pre-tax decreases (increases) to the funded status in accumulated other comprehensive loss of $10,214,000 in 2014, $(7,760,000) in 2013 and $2,688,000 in 2012. There were no previously unrecognized prior service costs as of December 31, 2014, 2013 and 2012. The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2014, 2013 and 2012 are summarized as follows: +(in thousands) +2014 +2013 +2012 +Net loss (gain) +$ +10,745 +$ +(6,976 +) +$ +3,355 +Amortization of net loss +(531 +) +(784 +) +(667 +) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ +10,214 +$ +(7,760 +) +$ +2,688 +The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in 2015 are as follows: +(in thousands) +2015 +Amortization of net loss +$ +804 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ +804 +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2014 +2013 +2012 +Projected Benefit Obligation : +Discount rate +4.15 +% +5.20 +% +4.16 +% +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +5.20 +% +4.16 +% +5.00 +% +Expected return on plan assets +7.00 +% +7.00 +% +7.00 +% +Rate of compensation increase +N/A +N/A +N/A +The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +50 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +The plan’s +weighted average asset allocation at December 31, 2014 and 2013 by asset category along with the target allocation for 2015 are +as follows: +Asset Category +Target +Allocation +for 2015 +Percentage of +Plan Assets as of +December 31, +2014 +Percentage of +Plan Assets as of +December 31, +2013 +Cash and Cash Equivalents +0% - 5 +% +1.0 +% +0.6 +% +Debt Securities – Core Fixed Income +15% - 50 +% +24.3 +% +25.3 +% +Domestic Equity Securities +0% - 40 +% +37.0 +% +26.6 +% +International Equity Securities +0% - 30 +% +22.8 +% +31.4 +% +Real Estate +0% - 20 +% +10.5 +% +8.3 +% +Real Return +0% - 20 +% +1.6 +% +7.8 +% +Alternative/Opportunistic/Special funds +0% - 20 +% +2.8 +% +— +% +Total +100 +% +100.0 +% +100.0 +% +The Company’s overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. Company management expects to make a contribution to the pension plan of approximately $850,000 during fiscal year 2015. +Some of our assets, primarily our private equity and real estate funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For the December 31, 2014 plan asset reporting, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with ASU No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +The following tables present our plan assets using the fair value hierarchy as of December 31, 2014 and 2013. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2014: +Investments ( in thousands ) +Total +Level 1 +Level 2 +Level 3 +Cash and Cash Equivalents +(1 +) +$ +329 +$ +329 +$ +— +$ +— +Fixed Income Securities +(2 +) +7,915 +3,194 +4,721 +— +Domestic Equity Securities +(3 +) +12,076 +4,324 +7,752 +— +International Equity Securities +(4 +) +7,442 +— +7,442 +— +Real Estate +(5 +) +3,420 +— +— +3,420 +Real Return +(6 +) +515 +— +515 +— +Alternative/Opportunistic/Special funds +(7 +) +925 +— +— +925 +$ +32,622 +$ +7,847 +$ +20,430 +$ +4,345 +51 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Fair Value Hierarchy as of December 31, 2013: +Investments ( in thousands ) +Total +Level 1 +Level 2 +Level 3 +Cash and Cash Equivalents +(1 +) +$ +210 +$ +210 +$ +— +$ +— +Fixed Income Securities +(2 +) +8,201 +— +8,201 +— +Domestic Equity Securities +(3 +) +8,590 +8,590 +— +— +International Equity Securities +(4 +) +10,192 +— +10,192 +— +Real Estate +(5 +) +2,705 +— +— +2,705 +Real Return +(6 +) +2,528 +— +2,528 +— +$ +32,426 +$ +8,800 +$ +20,921 +$ +2,705 +(1) +Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) +Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. +(3) +Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. +(4) +International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. +(5) +Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data. +(6) +Real return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets. +(7) +Alternative/Opportunistic/Special funds can invest across the capital structure in both liquid and illiquid securities that are valued using a market approach based on the quoted market prices of identical instruments, or if no market price is available, instruments will be held at their fair market value (which may be cost) as reasonably determined by the investment manager, independent dealers, or pricing services. +The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2014: +Investments (in thousands) +Balance at +December 31, +2013 +Net Realized +and +Unrealized +Gains/(Losses) +Net +Purchases, +Issuances +and +Settlements +Net +Transfers In +to (Out of) +Level 3 +Balance at +December 31, +2014 +Real Estate +$ +2,705 +$ +133 +$ +582 +$ +— +$ +3,420 +Alternative/Opportunistic/Special funds +— +21 +904 +— +925 +$ +2,705 +$ +154 +$ +1,486 +$ +— +$ +4,345 +The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2013: +Investments ( in thousands ) +Balance at December +31, 2012 +Net Realized +and +Unrealized +Gains/(Losses) +Net Purchases, +Issuances and +Settlements +Net +Transfers In +to (Out of) +Level 3 +Balance at +December 31, +2013 +Real Estate +$ +2,730 +$ +217 +$ +(242 +) +$ +— +$ +2,705 +The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2015 +$ +2,074 +2016 +2,288 +2017 +2,360 +2018 +2,461 +2019 +2,522 +2020-2024 +13,669 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of $48.0 million in variable life insurance policies as of December 31, 2014 and $47.4 million as of December 31, 2013. In the COLI policies, the Company is able to allocate investment of the assets across a set of choices provided by the insurance company, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +52 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $16,491,000 as of December 31, 2014 and $13,963,000 as of December 31, 2013. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as part of other income (expense), net. Trading gains related to the SERP assets totaled $959,000 in 2014, $2,026,000 in 2013, and $1,352,000 in 2012. The SERP liability is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the statement of operations. +401(k) Plan +RPC sponsors a defined contribution 401(k) plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. RPC matches 50 percent of each employee’s contributions that do not exceed six percent of the employee’s compensation, as defined by the plan. Employees vest in the RPC contributions after three years of service. The charges to expense for the Company’s contributions to the 401(k) plan were $6,970,000 in 2014, $5,451,000 in 2013, and $5,088,000 in 2012. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under three 10 year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2014, 8,000,000 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as a financing activity in the accompanying consolidated statements of cash flows. +Pre-tax stock-based employee compensation expense was $9,074,000 in 2014 ($5,762,000 after tax), $8,177,000 in 2013 ($5,192,000 after tax), and $7,860,000 in 2012 ($4,991,000 after tax). +Stock Options +Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years, except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire in five years. +The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003. +There were no stock options exercised during 2014 and 2013 and there have been no stock options outstanding since December 31, 2012. The total intrinsic value of stock options exercised was $7,467,000 during 2012. Tax benefits associated with the exercise of stock options exercised totaled $431,000 during 2012 and were credited to capital in excess of par value and classified as financing cash flows. +Restricted Stock +The Company has granted employees time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse restricted shares issued vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC (other than due to death, disability or retirement on or after age 65), shares with restrictions must be returned to the Company. +53 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +The +following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2014: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2014 +4,114,800 +$ +9.67 +Granted +657,375 +18.84 +Vested +(1,108,790 +) +7.20 +Forfeited +(88,235 +) +12.83 +Non-vested shares at December 31, 2014 +3,575,150 +$ +12.04 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2013: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2013 +4,494,191 +$ +8.12 +Granted +850,500 +13.68 +Vested +(1,078,534 +) +6.36 +Forfeited +(151,357 +) +9.72 +Non-vested shares at December 31, 2013 +4,114,800 +$ +9.67 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $18.84 for 2014, $13.68 for 2013 and $11.69 for 2012. The total fair value of shares vested was $20,664,000 during 2014, $15,471,000 during 2013 and $10,695,000 during 2012. The tax benefit for compensation tax deductions in excess of compensation expense was credited to capital in excess of par value aggregating $4,336,000 for 2014, $3,178,000 for 2013 and $2,293,000 for 2012. The excess tax deductions are classified as a financing activity in the accompanying consolidated statements of cash flows. +Other Information +As of December 31, 2014, total unrecognized compensation cost related to non-vested restricted shares was $37,925,000 which is expected to be recognized over a weighted-average period of 3.0 years. As of December 31, 2014, there was no unrecognized compensation cost related to non-vested stock options. +The Company received cash from options exercised of $544,000 during 2012. These cash receipts are classified as a financing activity in the accompanying consolidated statements of cash flows. The fair value of shares tendered to exercise employee stock options totaled $377,000 during 2012 and have been excluded from the consolidated statements of cash flows. +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $663,000 in 2014, $670,000 in 2013, and $544,000 in 2012. The Company’s receivable due from Marine Products for these services was $47,000 as of December 31, 2014 and $145,000 as of December 31, 2013. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1,092,000 in 2014, $1,039,000 in 2013 and $1,676,000 in 2012. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $84,000 in 2014 and $83,000 in 2013 and 2012. +54 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +During the year ended December 31, 2014, RPC and Marine Products entered into a joint venture creating a limited liability company called 255 RC, LLC that is owned 50 percent each for the purchase and ownership of a corporate aircraft. 255 RC, LLC was funded with a contribution of approximately $2,554,000 each from RPC and Marine Products. The purchase of the aircraft was completed in January 2015 and each of RPC and Marine Products have entered into an operating lease agreement with 255 RC, LLC for a period of five years. +Note 12: Business Segment Information +RPC’s service lines have been aggregated into two reportable oil and gas services segments — Technical Services and Support Services — because of the similarities between the financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting their business activity levels. Corporate includes selected administrative costs incurred by the Company. +Technical Services include RPC’s oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. These services include pressure pumping services, coiled tubing, snubbing, nitrogen pumping, well control consulting and firefighting, downhole tools, wireline, and fluid pumping services. These Technical Services are primarily used in the completion, production and maintenance of oil and gas wells. The principal markets for this segment include the United States, including the Gulf of Mexico, the mid-continent, southwest, Rocky Mountain and Appalachian regions, and international locations including primarily Africa, Canada, China, Latin America, the Middle East and New Zealand. Customers include major multi-national and independent oil and gas producers, and selected nationally-owned oil companies. +Support Services include RPC’s oil and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include drill pipe and related tools, pipe handling, inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, the mid-continent and Appalachian regions, and international locations, including primarily Canada, Latin America, and the Middle East. Customers include domestic operations of major multi-national and independent oil and gas producers, and selected nationally-owned oil companies. +The accounting policies of the reportable segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the Company’s chief decision maker on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +55 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2014, 2013 and 2012 are shown in the following table: +(in thousands) +Technical +Services +Support +Services +Corporate +Loss on disposition of assets, net +Total +2014 +Revenues +$ +2,180,457 +$ +156,956 +$ +— +$ +— +$ +2,337,413 +Operating profit (loss) +390,004 +42,510 +(17,072 +) +(15,472 +) +399,970 +Capital expenditures +342,932 +27,148 +1,422 +— +371,502 +Depreciation and amortization +198, 636 +31,578 +599 +— +230,813 +Identifiable assets +1,514,084 +157,688 +87,586 +1,759,358 +2013 +Revenues +$ +1,729,732 +$ +131,757 +$ +— +$ +— +$ +1,861,489 +Operating profit (loss) +276,246 +26,223 +(17,685 +) +(9,371 +) +275,413 +Capital expenditures +167,586 +32,250 +1,845 +— +201,681 +Depreciation and amortization +181,026 +31,417 +685 +— +213,128 +Identifiable assets +1,113,877 +202,243 +67,740 +— +1,383,860 +2012 +Revenues +$ +1,794,015 +$ +151,008 +$ +— +$ +— +$ +1,945,023 +Operating profit (loss) +420,231 +45,912 +(17,654 +) +(6,099 +) +442,390 +Capital expenditures +277,686 +46,053 +5,197 +— +328,936 +Depreciation and amortization +183,762 +30,707 +430 +— +214,899 +Identifiable assets +1,128,124 +175,611 +63,428 +— +1,367,163 +The following summarizes selected information between the United States and all international locations combined for the years ended December 31, 2014, 2013 and 2012. The revenues are presented based on the location of the use of the product or service. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2014 +2013 +2012 +(in thousands) +United States Revenues +$ +2,249,260 +$ +1,795,592 +$ +1,870,815 +International Revenues +88,153 +65,897 +74,208 +$ +2,337,413 +$ +1,861,489 +$ +1,945,023 +56 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2014 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 30 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2014 and issued a report thereon which is included on page 31 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive officers will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the section titled “Election of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on page 13 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s Web site at www.rpc.net . Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 520, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders, which is incorporated herein by reference. +57 +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the sections titled “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the sections “Capital Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2014. +Plan Category +(A) +Number of Securities To +Be Issued Upon Exercise of +Outstanding Options, +Warrants and Rights +(B) +Weighted Average Exercise Price of +Outstanding Options, Warrants and +Rights +(C) +Number of Securities Remaining +Available for Future Issuance +Under Equity Compensation +Plans (Excluding Securities +Reflected in Column (A)) +Equity compensation plans approved by securityholders +— +$ +— +8,000,000 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +8,000,000 +(1) +All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 10 to the Consolidated Financial Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders. This information is incorporated herein by reference. +58 +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. +Consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this report. +2. +The financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this report. +3. +Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1   +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.6   +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7   +Form of Performance Restricted Stock Grant agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors. +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy +Statement filed on March 17, 2014). +59 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated herein by reference to Exhibit 3.2 to the Form 10-Q filed on November 3, 2014). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Form 10-K filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Form 10-K filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Form 10-K filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Form 10-K filed on February 13, 2001). +10.6 +Form of time lapse restricted stock grant agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of performance restricted stock grant agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors. +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive +Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014) . +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +60 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 27, 2015 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 27, 2015 +/s/ Ben M. Palmer +Ben M. Palmer +Chief Financial Officer +(Principal Financial and Accounting Officer) +February 27, 2015 +The Directors of RPC (listed below) executed a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +James A. Lane, Jr., Director +Gary W. Rollins, Director +Linda H. Graham, Director +Henry B. Tippie, Director +Bill J. Dismuke, Director +James B. Williams, Director +Larry L. Prince, Director +/s/ Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 27, 2015 +61 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +30 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +31 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +32 +Consolidated Balance Sheets as of December 31, 2014 and 2013 +33 +Consolidated Statements of Operations for the three years ended December 31, 2014 +34 +Consolidated Statements of Comprehensive Income for the three years ended December 31, 2014 +35 +Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2014 +36 +Consolidated Statements of Cash Flows for the three years ended December 31, 2014 +37 +Notes to Consolidated Financial Statements +38 - 56 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +62 +Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2014, 2013 and 2012 +(in thousands) +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Net (Deductions) +Recoveries +Balance +at End of +Period +Year ended December 31, 2014 +Allowance for doubtful accounts +$ +13,497 +$ +2,280 +$ +(426 +) +(1) +$ +15,351 +Deferred tax asset valuation allowance +$ +83 +$ +— +$ +(81 +) +(2) +$ +2 +Year ended December 31, 2013 +Allowance for doubtful accounts +$ +9,110 +$ +8,815 +$ +(4,428 +) +(1) +$ +13,497 +Deferred tax asset valuation allowance +$ +1,003 +$ +— +$ +(920 +) +(2) +$ +83 +Year ended December 31, 2012 +Allowance for doubtful accounts +$ +8,093 +$ +1,784 +$ +(767 +) +(1) +$ +9,110 +Deferred tax asset valuation allowance +$ +1,295 +$ +— +$ +(292 +) +(2) +$ +1,003 +(1) +Net (deductions) recoveries in the allowance for doubtful accounts principally reflect the write-off of previously reserved accounts net of recoveries. +(2) +The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state net operating losses that management believes will not be utilized before they expire. +62 +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2014 +Revenues +$ +501,692 +$ +582,831 +$ +620,684 +$ +632,206 +Operating profit +$ +65,232 +$ +103,031 +$ +106,661 +$ +125,046 +Net income +$ +39,388 +$ +63,283 +$ +64,885 +$ +77,637 +Net income per share — basic (a) +$ +0.18 +$ +0.29 +$ +0.30 +$ +0.36 +Net income per share — diluted (a) +$ +0.18 +$ +0.29 +$ +0.30 +$ +0.36 +2013 +Revenues +$ +425,821 +$ +457,566 +$ +491,121 +$ +486,981 +Operating profit +$ +57,219 +$ +67,853 +$ +85,839 +$ +64,502 +Net income +$ +35,076 +$ +40,416 +$ +53,760 +$ +37,643 +Net income per share — basic (a) +$ +0.16 +$ +0.19 +$ +0.25 +$ +0.18 +Net income per share — diluted (a) +$ +0.16 +$ +0.19 +$ +0.25 +$ +0.17 +(a) +The sum of the income per share for the four quarters may differ from annual amounts due to the required method of computing the weighted average shares for the respective periods. +63 \ No newline at end of file diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/filing_metadata.csv b/raw/filings/0000742278/2014/0001571049-15-001479/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..a63774a75c51050debe431dd4d70017cad7c963c --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2015-02-27,2014-12-31,2015-02-27T18:49:09.000Z,0001571049-15-001479,t81553_10k.htm,FORM 10-K,12719064,1,0,https://www.sec.gov/Archives/edgar/data/742278/000157104915001479/t81553_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000157104915001479/,2014,2014,1 diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/item1.txt b/raw/filings/0000742278/2014/0001571049-15-001479/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..47823c770abd9097c9edb35d4c3d687881ac49d4 --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/item1.txt @@ -0,0 +1,120 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include, among others, (1) pressure pumping services, (2) downhole tool services, (3) coiled tubing services, (4) snubbing services (also referred to as hydraulic workover services), (5) nitrogen services, (6) the rental of drill pipe and other specialized oilfield equipment, and (7) well control. RPC acts as a holding company for its operating units, Cudd Energy Services, Patterson Rental and Fishing Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and others. As of December 31, 2014, RPC had approximately 4,500 employees. +2 +Business Segments +RPC’s service lines have been aggregated into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities between the financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting their business activity levels. +During 2014, approximately one percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico and in the Gulf of Alaska. We also estimate that 60 percent of our 2014 revenues were related to drilling and production activities for oil, and 40 percent were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This business segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Support Services include RPC’s oil and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations in the last three years including primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Technical Services +The following is a description of the primary service lines conducted within the Technical Services business segment: +Pressure Pumping . Pressure pumping services, which accounted for approximately 57 percent of 2014 revenues, 55 percent of 2013 revenues and 53 percent of 2012 revenues are provided to customers throughout Texas, and the Appalachian, mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, bauxite or synthetic proppant, which is often suspended in gel, is pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and ultimately the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. +3 +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for approximately 15 percent of 2014 revenues, 16 percent of 2013 revenues and 14 percent of 2012 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for approximately nine percent of 2014 and 2013 revenues and 11 percent of 2012 revenues, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for approximately three percent of revenues in 2014 and four percent of revenues in 2013 and 2012, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing rig can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for approximately three percent of revenues in 2014 and four percent of revenues in 2013 and 2012. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service line. In addition, nitrogen can be complementary to our snubbing and coiled tubing service lines, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer’s well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Energy Services specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +4 +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process, near the end of the life cycle of a well. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +The following is a description of the primary service lines conducted within the Support Services business segment: +Rental Tools . Rental tools accounted for approximately four percent of 2014 and 2013 revenues and five percent of 2012 revenues. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +5 +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 66 percent from its peak in 1981. However, due to recently enhanced technology, more wells are being drilled, and these wells are increasingly productive. For these reasons, the domestic production of natural gas has risen to record levels, and we estimate that the domestic production of crude oil during 2014 was at its highest level since 1986. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including down cycle troughs in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the industry’s history), 2002 and again in 2009. The rig count during the peak of the most recent cycle occurred at the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014 and into the first quarter of 2015. Early in the first quarter of 2015, the U.S. domestic drilling rig count has declined by approximately 30 percent from the peak. +The +fluctuations in domestic drilling activity since 2008 are consistent with the changes in the prices of oil and natural +gas, the overall economic recovery following the recession in 2008 and 2009, and most recently, the large increase in global +oil production that became apparent during the third and fourth quarters of 2014. During 2014 the average price of +natural gas increased by approximately 15 percent, although it began to decline during the end of the first quarter of 2014, +and at the end of the year was approximately 35 percent lower than at the same time in 2013. During the first quarter +of 2015, the price of natural gas continued to decline slightly. The average price of oil decreased by +approximately five percent during 2014 compared to 2013. However, the price of oil decreased significantly during the +third and fourth quarters of 2014, falling by approximately 48 percent during that time. The price of oil has continued +to decline during 2015, and in the first quarter to date was approximately five percent lower than at the end of 2014. +RPC believes that the decrease in the price of oil during this period has been caused by increased supply from the domestic +U.S. market, weak global demand, the actions of the OPEC cartel, and the strength of the U.S. dollar on global +currency markets. The precipitous decline in the price of oil during the third and fourth quarters of 2014 and the +first quarter of 2015 has caused a significant decrease in oil-directed drilling activity. During this period the U.S. +domestic oil-directed drilling rig count has fallen by approximately 21 percent. The price of natural gas liquids has become +an increasingly important determinant of our customers’ activity levels, since it is produced in many of the +shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level +comparable to that of natural gas. During 2014 the average price of natural gas liquids increased by approximately five +percent compared to 2013, but early in the first quarter of 2015 had declined by approximately seven percent. The +declines in the prices of oil, natural gas, and natural gas liquids during 2014 and the first quarter of 2015 to date carry +significant negative implications for RPC’s customer activity levels for the next twelve months. +From +2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of +drilling rigs drilling for natural gas began to decline, and by early in the first quarter of 2015 had fallen to +approximately 21 percent of total drilling activity. Although the demand for natural gas has remained stable, the price +of natural gas has fallen in recent years due to increased domestic reserves, productivity of new wells, and high natural gas +production from oil-directed wells. The price of natural gas has declined following a colder than normal winter in +2014, and by early in the first quarter of 2015 had fallen below $3 per Mcf for the first time since the third quarter of +2012. Early in the first quarter of 2015, the amount of natural gas in storage in the United States was approximately +one percent lower than the five-year average at this time in the year. We believe that these natural gas market +dynamics discourage our customers from conducting natural gas-directed drilling activities. In spite of these +unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign +imports of natural gas do not compete with domestic production to a meaningful degree. This lack of foreign competition tends +to keep prices high enough to ensure that domestic drilling and production will continue at certain minimum levels. We +anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count, in spite of +the fact that the price of oil has declined tremendously during the third and fourth quarters of 2014 and the first quarter +of 2015 to date. Over the long term, we believe that natural gas-directed drilling will increase due to the lack of +natural gas production from oil-directed drilling and increased natural gas demand from U.S. exports of natural gas and +changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. We continue +to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons generally +and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides +to its customers, and during 2014 equipment and raw materials requirements of the services we perform for our customers +continued to increase. +There are certain types of wells being drilled in the U.S. domestic market for which there is a higher demand for RPC’s services. Known as either directional or horizontal wells, these wells are more difficult and costly to complete. They have become an increasingly large percentage of the U.S. domestic market, and since the third quarter of 2008, have consistently comprised the majority of U.S. domestic drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which in turn requires a great deal of pressure pumping horsepower to complete the well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +6 +International. RPC has historically operated in several countries outside of the United States, and international revenues presently account for approximately four percent of RPC’s consolidated revenues. RPC’s equipment investments over the last several years have emphasized domestic rather than international expansion because of higher expected financial returns. International revenues for 2014 increased compared to 2013 due to higher customer activity levels in Australia, Argentina and Gabon partially offset by lower customer activity in Canada. During 2014, RPC provided snubbing, well control and oilfield training services in several countries including Gabon and Australia. We also provided downhole motors and tools in Canada, Mexico and Oman, and rental tools in Bolivia and Equatorial Guinea. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than five percent of total revenues in 2015. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist. However, the favorable long-term outlook for our industry and the strong historical profitability of many potential acquisitions has encouraged potential sellers of businesses to expect high valuations for their businesses. Due to these high valuations and the potential difficulty of integrating acquired businesses into our existing operations, we believe we generate better returns on investments growing organically in service lines and geographic locations in which we have experience and presence. We will continue to be selective in pursuing growth through acquisitions of existing businesses. +RPC has a revolving credit facility to fund the purchase of revenue-producing equipment and other working capital requirements. In January 2014, this facility was extended for five years. We have pursued this capital source because of the high returns on investment that have been generated by many of our service lines during the previous several years, and because of the low cost and ready availability of debt capital. During 2014, we purchased additional revenue-producing equipment to support high industry activity levels. We began to take delivery of this equipment during the third and fourth quarters of 2014, and anticipate that the remainder of the equipment will be delivered during the first quarter of 2015. The outstanding balance on our credit facility at the end of 2014 was higher than at the end of the prior year due to an increase in capital expenditures and working capital, and our ratio of debt to total capitalization continues to be conservative compared to a number of our peers. +Customers +Demand for RPC’s services and products depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2014, RPC provided oilfield services to several hundred customers, none of which accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. Over the past three years we have from time to time entered into agreements, with terms beyond one year, to provide services to certain domestic customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our service lines. +7 +Competition +RPC operates in highly competitive areas of the oilfield services industry. Our products and services are sold in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. Strong oilfield activity during the past several years and the availability of capital have encouraged several new, smaller companies to seek debt and equity capital and accelerate their growth rates. The presence of these new competitors has increased competitive pricing pressures as domestic oilfield activity moderated during 2012, 2013 and 2014. Although the growth in the overall domestic fleet of revenue-producing equipment has moderated, pricing for our services remains competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes and Schlumberger Ltd., and a significant number of locally oriented businesses. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day as they are filed with the Securities and Exchange Commission. +8 \ No newline at end of file diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/item13.txt b/raw/filings/0000742278/2014/0001571049-15-001479/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..63180c04cb6275d2333e66c70ba839185858acdd --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2015 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/item9a.txt b/raw/filings/0000742278/2014/0001571049-15-001479/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9f67581c900c6e52d091c46cf1777e65c9d018c5 --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2014 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 30 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2014 and issued a report thereon which is included on page 31 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/rp_note.txt b/raw/filings/0000742278/2014/0001571049-15-001479/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..c511429f2175d6178bb9cfe2cb9d76ae474124d8 --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/rp_note.txt @@ -0,0 +1,14 @@ +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $663,000 in 2014, $670,000 in 2013, and $544,000 in 2012. The Company’s receivable due from Marine Products for these services was $47,000 as of December 31, 2014 and $145,000 as of December 31, 2013. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1,092,000 in 2014, $1,039,000 in 2013 and $1,676,000 in 2012. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $84,000 in 2014 and $83,000 in 2013 and 2012. +54 +NOTES TO CONSOLIDATED FINANCIAL +STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2014, 2013 and 2012 +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +During the year ended December 31, 2014, RPC and Marine Products entered into a joint venture creating a limited liability company called 255 RC, LLC that is owned 50 percent each for the purchase and ownership of a corporate aircraft. 255 RC, LLC was funded with a contribution of approximately $2,554,000 each from RPC and Marine Products. The purchase of the aircraft was completed in January 2015 and each of RPC and Marine Products have entered into an operating lease agreement with 255 RC, LLC for a period of five years. \ No newline at end of file diff --git a/raw/filings/0000742278/2014/0001571049-15-001479/rpt_disclosure.txt b/raw/filings/0000742278/2014/0001571049-15-001479/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..07ddefda0157d65f9a31860dd229ba6f9b493ef1 --- /dev/null +++ b/raw/filings/0000742278/2014/0001571049-15-001479/rpt_disclosure.txt @@ -0,0 +1,8 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $753,000 in 2015. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2015, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $186,000 for the corporate aircraft. +During 2015, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2015, payments totaling approximately $1,127,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $100,000 in 2015. +27 +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2015 were reviewed, approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Code. \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/filing.txt b/raw/filings/0000742278/2015/0001571049-16-012371/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..7458dbe1a07d925e70319aa35fa409ff45c57376 --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/filing.txt @@ -0,0 +1,4794 @@ +10-K +1 +t1600094_10k.htm +FORM 10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, +2015 +Commission File No. 1-8726 +RPC, INC. +Delaware +58-1550825 +(State of Incorporation) +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 520 +ATLANTA, GEORGIA 30329 +(404) 321-2140 +Securities registered pursuant to Section +12(b) of the Act: +Title of each class +Name of each exchange on which registered +COMMON STOCK, $0.10 PAR VALUE +NEW YORK STOCK EXCHANGE +Securities registered +pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant +is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +x +Yes ¨ No +Indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ +Yes x No +Indicate by check mark whether the registrant +(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding +12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such +filing requirements for the past 90 days. Yes x No ¨ +Indicate by check mark whether the registrant +has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted +and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such +shorter period that the registrant was required to submit and post such files). Yes x +No ¨ +Indicate by check mark if disclosure of +delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s +knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment +to this Form 10-K. x +Indicate by check mark whether the registrant +is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of +“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 +of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer ¨ Non-accelerated filer ¨ +Smaller reporting company ¨ +Indicate by check mark whether the registrant +is a shell company (as defined in Rule 12b-2 of the Exchange Act). +Yes ¨ +No x +The aggregate market value of RPC, Inc. +Common Stock held by non-affiliates on June 30, 2015, the last business day of the registrant’s most recently completed second +fiscal quarter, was $793,711,327 based on the closing price on the New York Stock Exchange on June 30, 2015 of $13.83 per share. +RPC, Inc. had 217,616,291 shares of Common +Stock outstanding as of February 18, 2016. +Documents Incorporated by Reference +Portions of the Proxy Statement for the +2015 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, +Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report +that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of +1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and +objectives, and our beliefs and expectations regarding future demand for our products and services and other events and conditions +that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in +this report include without limitation statements regarding our beliefs regarding natural gas prices, production levels and drilling +activities; our belief that petroleum prices carry significant negative implications for RPC’s customer activity levels over +the near term; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity; +our continued belief in the long-term growth opportunities for our business; our expectation to continue to focus on the development +of international business opportunities in current and other international markets; our expectations regarding acquisition targets +in our industry and our ability to consummate certain transactions; the adequacy of our insurance coverage; the impact of lawsuits, +legal proceedings and claims on our business and financial condition; our expectations regarding payment of cash dividends to common +stockholders; our belief that the domestic rig count will continue to decline; our belief that we will not enter into additional +long-term contractual arrangements with customers during 2016; our statement that most industry analysts believe that the U.S. +domestic rig count will continue to decline during the first half of 2016 before stabilizing in the second half of the year; our +statement that industry trends have negative implications for our near-term activity levels; our belief that low commodity prices +will continue to depress our financial results in the near term; our cautious view about the market for our services; our belief +that the steep decline in oil-directed drilling in the U.S. domestic market will reduce U.S. domestic oil production and over the +long term serve as a catalyst for oil prices to increase; our belief regarding potential revenue related to uncompleted wells; +our expectations regarding competition in our market; our expectations regarding the return of assets to service when markets improve; +our statement that we do not plan additional increases in our fleet of revenue-producing equipment during 2016; our ability to +maintain sufficient liquidity and a conservative capital structure; our belief about the amount of the contribution to the defined +benefit pension plan in 2016; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures +and contractual obligations for future periods; our expectations regarding the prices of skilled labor and many of the raw materials +used in providing our services; our belief that it will be difficult to realize higher operating profits from anticipated cost +decreases; estimates made with respect to our critical accounting policies; the effect of new accounting standards; and the effect +of the changes in foreign exchange rates on our consolidated results of operation or financial condition. +The words “may,” “will,” +“expect,” “believe,” “anticipate,” “project,” “estimate,” and similar +expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by +our management in light of its experience and its perception of historical trends, current conditions, expected future developments +and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of +future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking +statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ +from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include, among +others, (1) pressure pumping services, (2) downhole tool services, (3) coiled tubing services, (4) snubbing services (also referred +to as hydraulic workover services), (5) nitrogen services, (6) the rental of drill pipe and other specialized oilfield equipment, +and (7) well control. RPC acts as a holding company for its operating units, Cudd Energy Services, Patterson Rental and Fishing +Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and others. As of December 31, 2015, RPC had approximately +3,100 employees. +2 +Business Segments +RPC’s service lines have been aggregated +into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities +between the financial performance and approach to managing the service lines within each of the segments, as well as the economic +and business conditions impacting their business activity levels. +During 2015, less than one percent of RPC’s +consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico and in the Gulf of Alaska. We also +estimate that 70 percent of our 2015 revenues were related to drilling and production activities for oil, and 30 percent were related +to drilling and production activities for natural gas. +Technical Services include RPC’s oil +and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services +directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest +capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or +to address well control issues. This business segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, +nitrogen, well control, wireline and fishing. The principal markets for this business segment include the United States, including +the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. Customers +include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Support Services include RPC’s oil +and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment +and services include drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and +consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and +Appalachian regions and project work in selected international locations in the last three years including primarily Canada, Latin +America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas +producers, and selected nationally owned oil companies. +Technical Services +The following is a description of the primary +service lines conducted within the Technical Services business segment: +Pressure Pumping . Pressure pumping +services, which accounted for approximately 54 percent of 2015 revenues, 57 percent of 2014 revenues and 55 percent of 2013 revenues +are provided to customers throughout Texas, and the Appalachian, mid-continent and Rocky Mountain regions of the United States. +We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that +have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed +for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in +varying geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and +bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier +for each item. Pressure pumping services offered include: +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +bauxite or synthetic proppant, which is often suspended in gel, is pumped into the fracture. When the pressure is released at the +surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil +and natural gas can flow through the fracture into the production tubing and ultimately the well surface. In some cases, fracturing +is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or +with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 18 percent of 2015 revenues, 15 percent of 2014 revenues and 16 percent of 2013 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation at the completion stage +of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +3 +Coiled Tubing . Coiled tubing services, +which accounted for approximately nine percent of revenues in 2015, 2014 and 2013, involve the injection of coiled tubing into +wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion +of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous +lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and +used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing coiled tubing in +a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel +continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into +a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a +coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities +in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete +multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility +allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the +strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses +for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter +coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in +more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible +steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for approximately three percent of revenues in 2015 and 2014 and four percent +of revenues in 2013, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing +and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole +equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing +the pressure from the well, which stops production and can damage the formation, and because a snubbing rig can perform many applications +at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing +segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required +to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer +reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe +conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for approximately +four percent of revenues in 2015, three percent of revenues in 2014 and four percent of revenues in 2013. There are a number of +uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside +of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in +various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which +production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing +medium for our fracturing service line. In addition, nitrogen can be complementary to our snubbing and coiled tubing service lines, +because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our +pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in +which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +4 +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process, near the end of the life cycle of a well. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +The following is a description of the primary +service lines conducted within the Support Services business segment: +Rental Tools . Rental tools accounted +for approximately four percent of revenues in 2015, 2014 and 2013. The Company rents specialized equipment for use with onshore +and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas +wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of +the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical +to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities +are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent +region, Appalachian region and the Rocky Mountains. +Patterson Rental Tools offers a broad range +of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +5 +Due to aging oilfields and lower-cost sources +of oil internationally, the drilling rig count in the U.S. has declined by approximately 89 percent from its peak in 1981. However, +due to continuously enhanced technology, more wells are drilled during periods of strong industry activity, and these wells are +increasingly productive. For these reasons, the domestic production of natural gas rose to record levels in the third quarter of +2015, and domestic production of crude oil in the third quarter of 2015 reached its highest level since the third quarter of 1971. +Domestic production of both natural gas and oil began to decline during the third and fourth quarters of 2015, however, due to +the decline in domestic drilling and completion activities. Oil and gas industry activity levels have historically been volatile, +experiencing multiple cycles, including down cycle troughs in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling +rig count in the industry’s history), 2002 and again in 2009. The rig count during the peak of the most recent cycle occurred +at the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014. The rig count continued +to decline in 2015 and 2016. Early in 2016, the U.S. domestic drilling rig count had declined by approximately 73 percent from +its most recent peak in 2014 and was only five percent higher than the April 1999 record low drilling rig count. +The fluctuations in domestic drilling activity +since the most recent peak in the third quarter of 2014 are consistent with global supply of and demand for oil, the domestic supply +of and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar +on world currency markets, and projected near-term economic growth. During 2015 the average price of natural gas decreased by approximately +39 percent compared to the prior year, but during the first quarter of 2016 stabilized at a price approximately equal to the average +price in the fourth quarter of 2015. The average price of oil decreased by approximately 48 percent during 2015 compared to 2014. +Early in the first quarter of 2016, the price of oil decreased by approximately 26 percent compared to the fourth quarter of 2015. +RPC believes that the decrease in the price of oil during this period has been caused by the actions of the OPEC cartel, increased +supply from the domestic U.S. market, weak global demand, the strength of the U.S. dollar on global currency markets and high storage +levels of oil. The precipitous decline in the price of oil that has taken place since the third quarter of 2014 has caused a significant +decrease in oil-directed drilling activity. During this period the U.S. domestic oil-directed drilling rig count has fallen by +approximately 70 percent. In addition to oil and natural gas, the price of natural gas liquids has become a determinant of our +customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production +of various natural gas liquids has increased to a level comparable to that of natural gas. During 2015 the average price of natural +gas liquids decreased by approximately 56 percent compared to 2014, and early in the first quarter of 2016 had declined by approximately +26 percent compared to the average price in 2015. The declines in the prices of oil, natural gas, and natural gas liquids during +2015 and the first quarter of 2016 to date carry significant negative implications for RPC’s customer activity levels over +the near term. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count early in the first quarter of 2016 was the lowest natural gas drilling rig count ever recorded. +Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent years due to increased domestic +reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. The price of natural gas +has declined in 2015 and early in the first quarter of 2016, and has fallen to a level not observed since the fourth quarter of +1998. We have observed that these natural gas market dynamics discourage our customers from conducting natural gas-directed drilling +activities. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and in the fourth quarter +of 2015, the United States began to export natural gas for the first time. We anticipate that oil-directed drilling will continue +to represent the majority of the total drilling rig count, in spite of the fact that the price of oil has declined tremendously +from the third quarter of 2014 through the first quarter of 2016 to date. Over the long term, we believe that natural gas-directed +drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural gas demand from +U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. +We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons +generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides to +its customers. +There are certain types of wells being drilled +in the U.S. domestic market for which there is a higher demand for RPC’s services. Known as either directional or horizontal +wells, these wells are more difficult and costly to complete. They have become an increasingly large percentage of the U.S. domestic +market, and since the third quarter of 2008, have consistently comprised the majority of U.S. domestic drilling. Because they are +drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when +they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which +in turn require a great deal of pressure pumping horsepower on location to complete the well. Furthermore, since they are not drilled +in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, +rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping +and coiled tubing services, as well as our downhole tools and services. +6 +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately six percent +of RPC’s consolidated revenues in 2015 and four percent in 2014 and 2013. RPC’s equipment investments over the last +several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected +financial returns. International revenues decreased primarily due to lower customer activity levels in Canada, Australia, Bolivia +and Mexico in 2015 partially offset by increased activity in Argentina compared to the prior year. During 2015, RPC provided snubbing, +well control and oilfield training services in several countries including Gabon and Australia. We also provided downhole motors +and tools in Argentina, Canada, China and Oman, and rental tools in Equatorial Guinea. We continue to focus on the selected development +of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent +of total revenues in 2016. +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth in service lines and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. As the current industry downturn continues, +we believe that many financial investors who have provided capital to smaller oilfield service companies in the past several years +are seeking to liquidate their investments. This development, along with continued depressed financial results in our industry, +may make valuations for acquisition targets more attractive. We will continue to consider the acquisitions of existing businesses +but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility to fund +the purchase of revenue-producing equipment and other working capital requirements. In January 2014, this facility was extended +for five years, and in November of 2015, RPC voluntarily reduced the borrowing capacity of the facility. We have pursued this capital +source because of the high returns on investment that have been generated by many of our service lines during the previous several +years, and because of the low cost and ready availability of debt capital. During 2014, we purchased additional revenue-producing +equipment to support high industry activity levels. We took delivery of this equipment during the third and fourth quarters of +2014 and the first and second quarters of 2015. We had no outstanding balance on our credit facility at the end of 2015 due to +a decrease in capital expenditures and working capital. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and products +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2015, RPC provided oilfield services to several hundred +customers. Of these customers, only one, Anadarko Petroleum Corporation (Anadarko) at approximately 23 percent of revenues, accounted +for more than 10 percent of revenues. RPC believes that the relationship with this customer is good, but the loss of this customer +could have a material adverse effect on Company revenues in the near term. +7 +Sales are generated by RPC’s sales +force and through referrals from existing customers. Over the past three years we have from time to time entered into agreements, +with terms beyond one year, to provide services to certain domestic customers. We monitor closely the financial condition of these +customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short +lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales +backlog in most of our service lines. +Competition +RPC operates in highly competitive areas +of the oilfield services industry. Our products and services are sold in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. Strong oilfield activity during the past several years and the availability +of capital have encouraged several new, smaller companies to seek debt and equity capital and accelerate their growth rates. The +presence of these new competitors has increased competitive pricing pressures as domestic oilfield activity moderated during 2013, +2014 and 2015. Although the growth in the overall domestic fleet of revenue-producing equipment has moderated, pricing for our +services remains competitive. RPC believes that the principal competitive factors in the market areas that it serves are product +availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety +and technical proficiency, and price. +The oil and gas services industry includes +a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton +Company, Baker Hughes and Schlumberger Ltd., and a significant number of locally oriented businesses. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high +demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, Texas +that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana +that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional +information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently +operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, +the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, +which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day as they are filed with the Securities and Exchange Commission. +8 +Item 1A. Risk Factors +Demand for our products and services is affected by the +volatility of oil and natural gas prices. +Oil and natural gas prices affect demand +throughout the oil and gas industry, including the demand for our products and services. Our business depends in large part on +the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration +and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil is affected by, among other +things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of the Organization +of the Petroleum Exporting Countries (OPEC), an oil cartel which controls slightly less than 40 percent of global oil production. +OPEC’s actions have historically been unpredictable, and can contribute to the volatility of the price of oil on the world +market. +Although the production sector of the +oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, +producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged +low level of customer activity in the oil and gas industry has adversely affected the demand for our products and services and +our financial condition and results of operations. +Reliance +upon a large customer may adversely affect our revenues and operating results. +At +times our business has had a concentration of one or more major customers. One of our largest customers, Anadarko, +accounted for approximately 23 percent of revenues in 2015, and there were no other customers during 2015 and no customers in 2014 +and 2013 that accounted for more than 10 percent of the Company’s revenues. In addition, Anadarko +accounted for approximately 14 percent of accounts receivable as of December 31, 2015, and there were no other customers as of +December 31, 2015 and no customers as of December 31, 2014 that accounted for more than 10 percent of accounts receivable. This +reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material +and disproportionate adverse impact upon our revenues and operating results. +Our +concentration of customers in one industry and decreased demand for petroleum may impact our overall exposure to credit risk and +cause us to experience increased losses for doubtful accounts. +Substantially +all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure +to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry +conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade +receivables. Recent decreased demand for petroleum adversely affecting our customers may cause us to experience increased losses +for doubtful accounts. +We may be unable to compete in the highly competitive oil +and gas industry in the future. +We operate in highly competitive areas of +the oilfield services industry. The products and services in our industry segments are sold in highly competitive markets, and +our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity +in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry +competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in +the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and +price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able +to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to +be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition +candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions +and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result +in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations +and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired +businesses could have a material adverse effect on our results of operations and financial condition. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the +weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains +and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain +times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several +years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms +can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and +natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged +by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching +customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. +Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +9 +Our ability to attract and retain skilled workers may impact +growth potential and profitability. +Our ability to be productive and profitable +will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, +impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result +in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, +our capacity and profitability could be diminished, and our growth potential could be impaired. +Our business has potential liability for litigation, personal +injury and property damage claims assessments. +RPC’s subsidiaries have a number of +agreements of various types in place with our customers. In general, these agreements indemnify RPC and its subsidiaries against +damage or liabilities that arise from the actions of our employees or the operation of our equipment. The provisions in these agreements +do not make a distinction among the types of services that RPC provides or the location of the work. These agreements also require +that RPC maintain a certain level and type of insurance coverage against any claims that are determined to be our responsibility. +RPC has insurance coverage in place with several well-capitalized insurance companies for accidental environmental claims. +Our operations involve the use of heavy equipment +and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result +in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation +may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result +in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships +with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe +is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates +we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable +to comply with regulations and environmental laws. +Our business is significantly affected by +stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level +of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws +and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be +adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations +for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. +We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup +costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled +to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances +in connection with our operations. We believe that our present operations substantially comply with applicable federal and state +pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no +material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict +whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for +noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively +affect our future financial results. +Compliance with federal and state regulations relating to +hydraulic fracturing and designation of economic development zones related to natural gas-directed drilling from shale formations +could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping +services. +RPC’s pressure pumping services +are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern +regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic +fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which is coordinating a review +of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives has investigated hydraulic +fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection +Agency (EPA) has also undertaken a study of the environmental impact of hydraulic fracturing practices. In the second quarter of +2015, the EPA issued a report which concluded that hydraulic fracturing had not caused a measureable impact on drinking water sources +in the U.S. While this conclusion and other conclusions from similar efforts are favorable for our industry, we are unable to predict +whether future scrutiny of RPC’s pressure pumping business and any resulting regulatory change will impact our business through +increased operational costs, operational delays, or a reduction in demand for hydraulic fracturing services. +10 +Our international operations could have a material adverse +effect on our business. +Our operations in various countries including, +but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to +risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency +exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse +effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common +stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common +stock has varied significantly in the past. +Our management has a substantial ownership interest, and +public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled +Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The +Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall +Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls +in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not +comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors +and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 74 percent of RPC’s +outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election +of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. +This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over +the Company at a premium. +Our management has a substantial ownership interest, and +the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock +to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which +could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. +Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect +the trading price of our common stock. +Provisions in RPC's +certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, +bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms +for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by +RPC’s Board of Directors more difficult or expensive. +Some of our equipment and several types +of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited +number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not +be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. +There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While +these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed +deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could +reduce our revenues and profits. +We have used outside financing to accomplish +our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital +in order to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our $125 +million credit facility to fund our necessary working capital and equipment requirements. Most of our existing credit facility +bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become +unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds +through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources +may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance +of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities +or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet +of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues +and profits. +11 +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +RPC owns or leases approximately 120 offices +and operating facilities. The Company leases approximately 18,600 square feet of office space in Atlanta, Georgia that serves as +its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” +contained in Item 7. The lease agreement on the headquarters is effective through October 2020. RPC believes its current operating +facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities +used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, +sales and equipment storage yards +Vilonia, Arkansas — Maintenance and +rebuild facilities +Elk City, Oklahoma — Operations, sales +and equipment storage yards +Houma, Louisiana — Administrative office +Houston, Texas — Pipe storage terminal +and inspection sheds +Kilgore, Texas — Operations, sales +and equipment storage yards +Odessa, Texas — Operations, sales and +equipment storage yards +Rock Springs, Wyoming — Operations, +sales and equipment storage yards +Vernal, Utah — Operations, sales and +equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Leased Locations +Canton, Pennsylvania — Operations, +sales and equipment storage yards +Hobbs, New Mexico — Pumping services +facility +Oklahoma City, Oklahoma — Operations, +sales and administrative office +San Antonio, Texas — Operations, sales +and equipment storage yards +Seminole, Oklahoma — Pumping services +facility +The Woodlands, Texas — Operations, +sales and administrative office +Washington, Pennsylvania — Operations, +sales and equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings +primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these +risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance +will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its +business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management +believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s +business or financial condition. +12 +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) +of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 +to this Form 10-K. +Item 4A. Executive Officers of the Registrant +Each of the executive officers of RPC was +elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting +of stockholders or until his or her earlier removal by the Board of Directors or his or her resignation. The following table lists +the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +R. Randall Rollins (1) +84 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +71 +4/22/03 +President and +Chief Executive Officer +Linda H. Graham (3) +79 +1/27/87 +Vice President and +Secretary +Ben M. Palmer (4) +55 +7/8/96 +Vice President, +Chief Financial Officer and +Treasurer +(1) R. Randall Rollins began working for Rollins, Inc. (consumer services) in 1949. Mr. Rollins has served as Chairman of the Board +of RPC since the spin-off of RPC from Rollins, Inc. in 1984. He has served as Chairman of the Board of Marine Products Corporation +(boat manufacturing) since it was spun off from RPC in 2001 and Chairman of the Board of Rollins, Inc. since October 1991. He is +also a director of Dover Downs Gaming and Entertainment, Inc. and Dover Motorsports, Inc. +(2) Richard A. Hubbell has been the President of RPC since 1987 and Chief Executive Officer since 2003. He has also been the President +and Chief Executive Officer of Marine Products Corporation since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board +of Directors of both of these companies. +(3) Linda H. Graham has been the Vice President and Secretary of RPC since 1987. She has also been the Vice President and Secretary +of Marine Products Corporation since it was spun off from RPC in 2001. Ms. Graham serves on the Board of Directors of both of these +companies. +(4) Ben M. Palmer has been the Vice President, Chief Financial Officer and Treasurer of RPC since 1996. He has also been the Vice +President, Chief Financial Officer and Treasurer of Marine Products Corporation since it was spun off from RPC in 2001. +13 +PART II +Item 5. Market for Registrant’s Common Equity, Related +Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for +trading on the New York Stock Exchange under the symbol RES. As of February 18, 2016 there were 217,616,291 shares of common stock +outstanding and approximately 19,400 beneficial holders of our common stock. The following table sets forth the high and low prices +of RPC’s common stock and dividends paid for each quarter in the years ended December 31, 2015 and 2014: +2015 +2014 +Quarter +High +Low +Dividends +High +Low +Dividends +First +$ 14.15 +$ 10.58 +$ 0.105 +$ 21.09 +$ 16.16 +$ 0.105 +Second +16.66 +12.81 +0.050 +23.75 +19.27 +0.105 +Third +13.85 +8.54 +- +25.15 +20.67 +0.105 +Fourth +13.69 +8.45 +- +22.15 +11.55 +0.105 +On July 28, 2015, RPC’s Board of Directors +voted to temporarily suspend RPC’s quarterly dividend to common stockholders. The Company expects to resume cash dividends +to common stockholders in the future, subject to the earnings and financial condition of the Company and other relevant factors. +Issuer Purchases of Equity Securities +The Company has a stock buyback program initially +adopted in 1998 and subsequently amended in 2014 that authorizes the repurchase of up to 31,578,125 shares. There were no shares +repurchased as part of this program during 2015. As of December 31, 2015, there are 2,050,154 shares available to be repurchased +under the current authorization. Currently the program does not have a predetermined expiration date. +Performance Graph +The following graph shows a five-year +comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, +as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph +are the Russell 1000 Index (“Russell 1000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), +and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company +has voluntarily chosen to provide both an industry and a peer group index. +The Company was a component of the Russell +1000 during 2015. The Russell 1000 is a stock index representing large capitalization U.S. stocks with high historical growth in +revenues and earnings. The components of the index had a weighted average market capitalization in 2015 of $125 billion, and a +median market capitalization of $7.7 billion. The Russell 1000 was chosen because it represents companies with comparable market +capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that +provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company +is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same +or similar products and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., +Basic Energy Services, Inc., Superior Energy Services, Inc., and Halliburton Company. The companies included in the Peer Group +have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. +14 +15 +Item 6. Selected Financial Data +The following table summarizes certain selected +financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. +The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial +Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere in +this document. +STATEMENT OF OPERATIONS DATA: +Years Ended December 31, +2015 +2014 +2013 +2012 +2011 +(in thousands, except employee and per share amounts) +Revenues +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +$ 1,945,023 +$ 1,809,807 +Cost of revenues +986,144 +1,493,082 +1,178,412 +1,105,886 +992,704 +Selling, general and administrative expenses +156,579 +197,117 +183,139 +174,397 +151,480 +Depreciation and amortization +270,977 +230,813 +213,128 +214,899 +179,905 +Loss on disposition of assets, net +6,417 +15,472 +9,371 +6,099 +3,831 +Operating (loss) profit +(156,277 ) +400,929 +277,439 +443,742 +481,887 +Interest expense +(2,032 ) +(1,431 ) +(1,822 ) +(1,976 ) +(3,453 ) +Interest income +83 +19 +408 +28 +16 +Other income (expense), net +5,185 +(131 ) +245 +825 +365 +(Loss) income before income taxes +(153,041 ) +399,386 +276,270 +442,619 +478,815 +Income tax (benefit) provision +(53,480 ) +154,193 +109,375 +168,183 +182,434 +Net (loss) income +$ (99,561 ) +$ 245,193 +$ 166,895 +$ 274,436 +$ 296,381 +(Loss) earnings per share : +Basic +$ (0.47 ) +$ 1.14 +$ 0.77 +$ 1.28 +$ 1.36 +Diluted +$ (0.47 ) +$ 1.14 +$ 0.77 +$ 1.27 +$ 1.35 +Dividends paid per share +$ 0.155 +$ 0.420 +$ 0.400 +$ 0.520 +$ 0.210 +OTHER DATA: +Operating margin percent +(12.4 )% +17.2 % +14.9 % +22.8 % +26.6 % +Net cash provided by operating activities +$ 473,792 +$ 322,757 +$ 365,624 +$ 559,933 +$ 386,007 +Net cash used for investing activities +(157,583 ) +(355,349 ) +(207,654 ) +(315,838 ) +(391,637 ) +Net cash (used for) provided by financing activities +(260,785 ) +33,664 +(163,433 ) +(237,325 ) +3,988 +Capital expenditures +$ 167,426 +$ 371,502 +$ 201,681 +$ 328,936 +$ 416,400 +Employees at end of period +3,100 +4,500 +3,900 +3,600 +3,400 +BALANCE SHEET DATA AT END OF YEAR: +Accounts receivable, net +$ 232,187 +$ 634,730 +$ 437,132 +$ 387,530 +$ 461,272 +Working capital +384,744 +612,616 +436,873 +403,316 +447,089 +Property, plant and equipment, net +688,335 +849,383 +726,307 +756,326 +675,360 +Total assets +1,237,094 +1,759,358 +1,383,860 +1,367,163 +1,338,211 +Long-term debt +- +224,500 +53,300 +107,000 +203,300 +Total stockholders’ equity +$ 952,281 +$ 1,078,382 +$ 968,702 +$ 899,232 +$ 762,592 +16 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +The following discussion should be read in +conjunction with “Selected Financial Data,” and the Consolidated Financial Statements included elsewhere in this document. +See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) provides a +broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated +by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance +production or perform maintenance on existing wells. +Our key business and financial strategies +are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high +returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain an efficient, low-cost capital structure which +includes an appropriate use of debt financing. +- To maintain high asset utilization which leads to increased revenues and leverage of direct and overhead costs, while also +ensuring that increased maintenance resulting from high utilization does not interfere with customer performance requirements or +jeopardize safety. +- To deliver equipment and services to our customers safely. +- To secure adequate sources of supplies of certain high-demand raw materials used in our operations, both in order to conduct +our operations and to enhance our competitive position. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment +of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies +and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual +results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization +of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, +general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to +those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price +of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial +results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall +economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and +production activities. +Current industry conditions are characterized +by oil prices which have declined rapidly from more than $100 per barrel in the third quarter of 2014 to approximately $30 per +barrel early in the first quarter of 2016, a level not observed since the fourth quarter of 2008. As a result, the U.S. domestic +rig count has declined, and early in the first quarter of 2016 had declined by approximately 73 percent since the third quarter +of 2014. The catalysts for the recent steep decline in the price of oil include the industry estimates that global oil supplies +are higher than demand, the forecasted decline in oil demand growth rates, and the strength of the U.S. dollar on global currency +markets. The decline in both the price of oil and our customers’ drilling and completion activities began during the third +quarter of 2014 and accelerated following an announcement by OPEC during the fourth quarter of 2014 that the oil cartel would not +limit its production in response to falling prices and excess supply. We anticipate that the U.S. domestic rig count will continue +to decline until world oil prices increase due to a combination of increased global demand, declining production, or an increase +in political instability in the world’s oil-producing regions outside of the United States. RPC believes that the most predictable +catalyst for an increase in world oil prices is declining production in the United States. We believe this because the United States +grew to be the world’s largest producer of oil during the second quarter of 2015, and the increase in oil production was +due to the growth of oil-directed drilling in shale formations. These wells produce a large amount of oil immediately following +their completion, but typically experience large production declines within two years. Therefore, the declining production of these +wells, and the rapid decline in drilling of new wells of this type beginning in 2015 are the most likely initial catalysts for improving +industry conditions. Customer activities directed towards natural gas drilling and production have been weak for several years, +with the U.S. domestic natural gas rig count during the first quarter of 2016 falling to the lowest level ever recorded. We believe +that customer activities directed towards drilling for natural gas have been weak because of the high production of shale-directed +natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, +relatively constant consumption of natural gas in the United States, and the fact that natural gas has not historically been exported +from the United States to other markets in which demand and prices are higher. The price of natural gas continued its decline during +2015 and the first quarter of 2016. Early in the first quarter of 2016, the price of natural gas had fallen to approximately $2.00 +per Mcf, its lowest level since the second quarter of 1998. +17 +RPC monitors the number of horizontal and +directional wells drilled in the U.S. domestic market, because this type of well is more service-intensive than a vertical oil +or gas well, thus requiring more of the Company’s services provided for a longer period of time. During 2015, the average +number of horizontal and directional wells drilled in the United States decreased by approximately 43 percent, and was 86 percent +of total wells drilled during the year. During the first part of 2016, the percentage of horizontal and directional wells drilled +as a percentage of total wells rose to approximately 88 percent. While the increase in horizontal and directional drilling as a +percentage of total drilling is favorable, the absolute declines in drilling directed towards all types of wells makes this trend +significantly less meaningful. We also monitor the U.S. domestic well count, which is a measure of wells drilled by the existing +drilling rig fleet. We believe that the well count is an important measure of our potential activity levels because it reflects +changes in rig efficiencies. During 2015, the total U.S. domestic well count decreased by approximately 50 percent. In the markets +in which RPC has operational locations, the well count decreased by approximately 47 percent. Pricing for our services declined +significantly during 2015, as drilling and completion activities declined, creating a significant oversupply of service capacity. +This impact was partially offset by greater service intensity within many of the services provided by RPC’s pressure pumping +and downhole motors and tools service lines, among others. During previous years, a number of our customers entered into contractual +relationships with us to provide services to support their completion programs. All of these arrangements expired during 2014. +We did not enter into any new contractual arrangements during 2015, nor do we expect to enter into any such contractual arrangements +in 2016. +During 2015 the Company decreased our purchases +of revenue-producing equipment and temporarily suspended the quarterly dividend to common stockholders. Cash flows from operating +activities as well as borrowings under our revolving credit facility have been sufficient to fund the Company’s lower capital +expenditures which decreased to $167.4 million in 2015 compared to $371.5 million in 2014. The Company has a syndicated revolving +credit facility in order to maintain sufficient liquidity to fund its capital expenditure and other funding requirements. +Revenues during 2015 totaled $1.3 billion, +a decrease of 45.9 percent compared to 2014 due primarily to lower activity levels and pricing for our services. Cost of revenues +decreased $506.9 million in 2015 compared to the prior year due to lower costs resulting from lower activity levels, reduced personnel +headcount and incentive compensation, and price reductions from suppliers, partially offset by the impact of increasing service +intensity. As a percentage of revenue, cost of revenues increased due to competitive pricing for our services and inefficiencies +resulting from lower activity levels. Selling, general and administrative expenses as a percentage of revenues increased to 12.4 +percent of revenues in 2015 compared to 8.4 percent of revenues in 2014. +(Loss) income before income taxes decreased +to a loss of $153.0 million in 2015 compared to income of $399.4 million in the prior year. Diluted (loss) earnings per share were +$(0.47) in 2015 compared to $1.14 in the prior year. +Cash flows from operating activities increased +to $473.8 million in 2015 compared to $322.8 million in 2014 primarily due to reductions in working capital requirements coupled +with lower earnings. As of December 31, 2015, there were no outstanding borrowings under our credit facility, a decrease from $224.5 +million at December 31, 2014. +Outlook +Drilling activity in the U.S. domestic +oilfields, as measured by the rotary drilling rig count, reached a recent cyclical peak of 1,931 during the third quarter of 2014. +Between the third quarter of 2014 and early in the first quarter of 2016, the drilling rig count has fallen by approximately 73 +percent. The principal catalyst for this steep rig count decline is the decline in the price of oil in the world markets, which +began in the second quarter of 2014. The price of oil began to fall at this time due to the perceived oversupply of oil, weak global +demand growth, and the strength of the U.S. dollar on world currency markets. The price of oil fell by approximately 73 percent +from its peak during the second quarter of 2014 until early in the first quarter of 2016. Early in the first quarter of 2016, most +industry analysts believe that the U.S. domestic rig count will decrease further during the first two quarters of 2016 before stabilizing +in the last two quarters of the year. +The current and projected prices of oil, +natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. As of the first quarter of 2016, +the price of oil has fallen to levels that discourage our customers from undertaking most of their potential exploration and production +activities. The price of natural gas also fell during 2015. Although the price of natural gas has stabilized during the first quarter +of 2016, it remains at levels that discourage exploration and production activities directed towards natural gas. Early in the +first quarter of 2016 the natural gas-directed rig count fell to its lowest level during the time that this statistic has been +recorded. The average price of natural gas liquids during 2015 declined by approximately 56 percent compared to the prior year, +and by an additional approximately 25 percent early in the first quarter of 2016 compared to the average price in 2015. These trends +have negative implications for our near-term activity levels. The low price of oil should continue to have a negative impact on +our customers’ activity levels and our financial results, since the majority of the U.S. domestic drilling rig count is directed +towards oil. It is likely that these low commodity prices will continue to depress our financial results during the near term. +18 +The majority of the U.S. domestic rig +count remains directed towards oil. At the end of 2015, approximately 77 percent of the U.S. domestic rig count was directed towards +oil, a decrease compared to approximately 82 percent at the end of 2014. We believe that oil-directed drilling will remain the +majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in +the near term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from +existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +During the first quarter of 2016, the rig count continued to decline, and approached the historic low for U.S. domestic drilling +activity set in the second quarter of 1999. +We continue to monitor the market for +our services and the competitive environment in 2016. We are cautious about the market for our services because of the decline +in the U.S. domestic rig count and the prices of oil and natural gas during 2016, and the highly competitive nature of pricing +for our services in the current environment. The current low prices of oil and natural gas discourage us from believing that the +U.S. domestic rig count will recover during the near term. Over the long term, we believe that the steep decline in oil-directed +drilling in the U.S. domestic market will reduce U.S. domestic oil production and serve as a catalyst for oil prices to increase. +This belief is due to the fact that oil-directed wells drilled in shale resource plays typically exhibit high initial production +soon after being completed followed by a decline in production in later years. We note that both U.S. domestic oil and natural +gas production peaked in the third quarter of 2015, and have declined through the first quarter of 2016. We are also encouraged +by the fact that the drilling and completion activities that took place during 2015 and continue in 2016 are highly service-intensive +and require a large amount of equipment and raw materials. Furthermore, we note that a large number of wells in the U.S. domestic +market have been drilled but not completed. These uncompleted wells represent potential revenue for RPC’s completion-directed +service lines, which comprise the majority of RPC’s revenues. Finally, we are encouraged by our belief that our competitors +are not increasing the size of their revenue-producing fleets of equipment during this period, and furthermore, that some of our +competitors are not maintaining their equipment to a level that allows them to provide services to their customers. During the +first three quarters of 2015, we responded to the significant declines in industry activity levels and pricing for our services +by reducing costs by seeking price concessions from our suppliers. In addition, we have reduced employee headcount, closed selected +operational locations and revised our variable compensation programs. +As we monitor the competitive environment +during 2016, we note that many of our smaller competitors have high levels of debt, higher cost structures, and less-developed +logistical capabilities than RPC. These characteristics have forced these competitors to cease operations because current pricing +and activity levels do not allow them to generate enough cash to service their debt and fund their working capital and capital +expenditure requirements. During 2015 several smaller competitors ceased operations and initiated the process of selling their +equipment, and this trend has accelerated early in the first quarter of 2016. These observations encourage us to believe that our +markets will eventually become less competitive. In the fourth quarter of 2015 we initiated a process whereby we more closely scrutinize +the maintenance status of our currently idled revenue-producing assets. Through this process, we are attempting to ensure that +our idle equipment is prepared to return to service as soon as market conditions encourage us to do so. We believe that this process +will provide an advantage to RPC, in contrast to many competitors who do not have the liquidity to maintain their fleets, and thus +will not be able to return their assets to service in a timely manner when market conditions improve. In this environment RPC also +monitors the financial stability of our customers, due to the fact that many of them have also financed their operations with a +large amount of debt, and this type of financing is less available in 2016 than in previous years. RPC expanded its pressure pumping +fleet during 2014 and the first two quarters of 2015, but we do not plan additional increases in our fleet of revenue-producing +equipment during 2016. Our consistent response to the industry's potential uncertainty is to maintain sufficient liquidity and +a conservative capital structure and monitor our discretionary spending. Although we have used our bank credit facility to finance +our current expansion, we will continue to maintain a conservative financial and capital structure by industry standards. +19 +Results of Operations +Years Ended December 31, +2015 +2014 +2013 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +Revenues by business segment: +Technical +$ 1,175,293 +$ 2,180,457 +$ 1,729,732 +Support +88,547 +156,956 +131,757 +Consolidated operating (loss) profit +$ (156,277 ) +$ 400,929 +$ 277,439 +Operating (loss) profit by business segment: +Technical +$ (132,982 ) +$ 390,004 +$ 276,246 +Support +(2,363 ) +42,510 +26,223 +Corporate expenses +(14,515 ) +(16,113 ) +(15,659 ) +Loss on disposition of assets, net +(6,417 ) +(15,472 ) +(9,371 ) +Net (loss) income +$ (99,561 ) +$ 245,193 +$ 166,895 +(Loss) earnings per share — diluted +$ (0.47 ) +$ 1.14 +$ 0.77 +Percentage of cost of revenues to revenues +78 % +64 % +63 % +Percentage of selling, general and administrative expenses to revenues +12 % +8 % +10 % +Percentage of depreciation and amortization expenses to revenues +21 % +10 % +11 % +Effective income tax rate +34.9 % +38.6 % +39.6 % +Average U.S. domestic rig count +982 +1,862 +1,762 +Average natural gas price (per thousand cubic feet (mcf)) +$ 2.58 +$ 4.25 +$ 3.71 +Average oil price (per barrel) +$ 48.77 +$ 93.25 +$ 98.06 +Year Ended December 31, 2015 Compared To Year Ended December +31, 2014 +Revenues. Revenues in 2015 decreased +$1.1 billion or 45.9 percent compared to 2014. The Technical Services segment revenues for 2015 decreased 46.1 percent compared +to the prior year due primarily to lower activity levels and pricing as compared to prior year, partially offset by increasing +service intensity in our pressure pumping service line, which is the largest service line within this segment. The Support Services +segment revenues for 2015 decreased 43.6 percent compared to 2014 due principally to lower pricing and activity levels in the rental +tool service line, which is the largest service line within this segment. Both the Technical and Support Services reported operating +losses due to lower revenues, partially offset by cost control efforts undertaken throughout the Company. The average price of +oil decreased 47.7 percent while the average price of natural gas decreased 39.3 percent during 2015 compared to the prior year. +The average domestic rig count during 2015 was 47.3 percent lower than 2014. We believe that our activity levels are affected primarily +by the price of oil, since oil-directed activity has become the majority of total U.S. drilling activity. The prices of natural +gas and natural gas liquids also impact our activity levels because of the service-intensive nature of this type of drilling and +completion. We also believe that the total number of directional and horizontal wells more directly affect our activity levels, +regardless of whether the wells are directed towards oil or natural gas. This belief is based on the fact that directional and +horizontal wells require more of the services within our technical services segment. International revenues, which decreased from +$88.2 million in 2014 to $72.1 million in 2015, were as a percentage of consolidated revenues, six percent in 2015 and four percent +in 2014. International revenues decreased primarily due to lower customer activity levels in Canada, Australia, Bolivia and Mexico +in 2015 partially offset by increased activity in Argentina compared to the prior year. Our international revenues are impacted +by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues +in 2015 was $1.0 billion compared to $1.5 billion in 2014, a decrease of $506.9 million or 34.0 percent. The decrease in these +costs was due to lower costs resulting from lower activity levels, reduced personnel headcount and incentive compensation, and +price reductions from suppliers, partially offset by the impact of increasing service intensity. Also during 2015, replacement +parts totaling approximately $41.9 million were charged to cost of revenues rather than capitalized as a result of a change in +accounting estimate. As a percentage of revenues, cost of revenues increased in 2015 compared to 2014 due to competitive pricing +for our services and inefficiencies resulting from lower activity levels. +20 +Selling, general and administrative +expenses. Selling, general and administrative expenses decreased 20.6 percent to $156.6 million in 2015 compared +to $197.1 million in 2014. This decrease was due to lower total employment costs and other cost reduction efforts as well +as decreases in expenses which vary with activity and profitability. As a percentage of revenues, selling, general and administrative +expenses increased to 12.4 percent in 2015 compared to 8.4 percent in 2014 due to the relatively fixed nature of some of these +costs during the short term. +Depreciation and amortization. Depreciation +and amortization were $271.0 million in 2015, an increase of $40.2 million, compared to $230.8 million in 2014 due to assets placed +in service during late 2014 and the first six months of 2015. As a percentage of revenues, depreciation and amortization increased +to 21.4 percent in 2015 compared to 9.9 percent in 2014. +Loss on disposition of assets, net. Loss +on disposition of assets, net was $6.4 million in 2015 compared to $15.5 million in 2014. The loss on disposition of assets, net +is comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged +rental equipment. The decrease in losses compared to the prior year resulted from a change in accounting estimate beginning in +2015 whereby the cost of replacing certain pressure pumping unit components was recorded as cost of revenues upon installation +rather than being capitalized. During 2014, the remaining net book value of these components damaged beyond repair was recorded +as a loss on disposition. +Other income (expense), net. Other +income, net was $5.2 million in 2015 compared to other expense, net of $131 thousand in 2014. Proceeds from a legal +settlement totaling $6.3 million was recorded during 2015. +Interest expense and interest income. +Interest expense was $2.0 million in 2015 compared to $1.4 million in 2014. Interest expense in 2015 included the accelerated +amortization of loan fees totaling $0.6 million associated with RPC’s voluntary reduction of the borrowing capacity under +its syndicated credit facility from $350 million to $125 million. This cost was partially offset by lower interest expense due +to a lower average debt balance on our revolving credit facility. Interest income increased to $83 thousand in 2015 compared to +$19 thousand in 2014. +Income tax (benefit) provision. The +income tax benefit was $53.5 million in 2015 compared to an income tax provision of $154.2 million in 2014. The benefit in 2015 +resulted from the pretax loss. The effective rate was 34.9 percent in 2015 compared to 38.6 percent in 2014; the decrease is due +primarily to state tax calculations based on revenues. +Net (loss) income and diluted (loss) earnings +per share . Net loss was $99.6 million in 2015, or $(0.47) per diluted share, compared to net income of $245.2 million, or $1.14 +per diluted share in 2014. This decrease was due to lower profitability as average shares outstanding was essentially unchanged. +Year Ended December 31, 2014 Compared To Year Ended December +31, 2013 +Revenues. Revenues in 2014 increased +$475.9 million or 25.6 percent compared to 2013. The Technical Services segment revenues for 2014 increased 26.1 percent compared +to the prior year due primarily to increased service intensity in the service lines within this segment and a larger fleet of pressure +pumping equipment. The Support Services segment revenues for 2014 increased 19.1 percent compared to 2013 due principally to an +improved job mix and higher activity levels in the rental tool service line, which is the largest service line within this segment, +as well as higher activity levels in the other service lines which comprise this segment. Operating profit in both the Technical +and Support Services segments increased due to higher revenues and greater utilization of personnel and equipment. +The average price of oil decreased 4.9 percent +while the average price of natural gas increased 14.6 percent during 2014 compared to the prior year. The average domestic rig +count during 2014 was 5.7 percent higher than 2013. International revenues, which increased from $65.9 million in 2013 to $88.2 +million in 2014, were as a percentage of consolidated revenues, four percent in 2014 and 2013. International revenues in 2014 increased +due primarily to higher customer activity levels in Australia, Gabon and Singapore in 2014 partially offset by decreased activity +in Mexico, Congo and Tunisia, compared to the prior year. Our international revenues are impacted by the timing of project initiation +and their ultimate duration. +Cost of revenues. Cost of revenues +in 2014 was $1.5 billion compared to $1.2 billion in 2013, an increase of $314.7 million or 26.7 percent. The increase in these +costs was due to the variable nature of these expenses especially materials and supplies expenses and employment costs associated +with higher activity levels. Cost of revenues, as a percent of revenues, increased slightly in 2014 compared to 2013 due primarily +to competitive pricing for our services. +Selling, general and administrative +expenses. Selling, general and administrative expenses increased 7.6 percent to $197.1 million in 2014 compared +to $183.1 million in 2013. This increase was due primarily to increases in total employment costs partially offset by a decrease +in bad debt expense. As a percentage of revenues, selling, general and administrative expenses decreased to 8.4 percent in +2014 compared to 9.8 percent in 2013 due to cost leverage achieved with higher revenues. +Depreciation and amortization. Depreciation +and amortization were $230.8 million in 2014, an increase of $17.7 million, compared to $213.1 million in 2013. As a percentage +of revenues, depreciation and amortization decreased to 9.9 percent in 2014 compared to 11.4 percent in 2013. +Loss on disposition of assets, net. +Loss on disposition of assets, net was $15.5 million in 2014 compared to $9.4 million in 2013. The loss on disposition of assets, +net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing +increased wear and tear which requires early dispositions, or sales to customers of lost or damaged rental equipment. +21 +Other income (expense), net. Other +(expense), net was $131 thousand in 2014 compared to other income, net of $245 thousand in 2013. +Interest expense and interest income. +Interest expense was $1.4 million in 2014 compared to $1.8 million in 2013. The decrease in 2014 is due to lower interest rates +net of interest capitalized on equipment and facilities under construction partially offset by a higher average debt balance on +our revolving credit facility. Interest income decreased to $19 thousand in 2014 compared to $408 thousand in 2013. +Income tax provision. The income tax +provision was $154.2 million in 2014 compared to $109.4 million in 2013. This increase was due to higher income before taxes partially +offset by a decrease in the effective tax rate to 38.6 percent in 2014 compared to 39.6 percent in 2013. +Net income and diluted earnings per share . +Net income was $245.2 million in 2014, or $1.14 per diluted share, compared to net income of $166.9 million, or $0.77 per diluted +share in 2013. This increase was due to higher profitability as average shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents +were $65.2 million as of December 31, 2015, $9.8 million as of December 31, 2014 and $8.7 million as of December 31, 2013. +The following +table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2015 +2014 +2013 +Net cash provided by operating activities +$ 473,792 +$ 322,757 +$ 365,624 +Net cash used for investing activities +(157,583 ) +(355,349 ) +(207,654 ) +Net cash (used for) provided by financing activities +(260,785 ) +33,664 +(163,433 ) +2015 +Cash provided by operating activities +increased $151.0 million in 2015 compared to the prior year due primarily to a favorable change in working capital of $506.8 million +partially offset by a decrease in net income (loss) of $344.8 million, an increase in depreciation and amortization of $41.3 million, +and an unfavorable change in deferred taxes of $45.4 million due to a decrease in tax benefits resulting from lower capital expenditures. +The favorable change in working capital +was primarily due to favorable changes of $599.8 million in accounts receivable and $56.4 million in inventory as a result of lower +business activity levels in 2015 compared to the prior year. Also, there was a favorable change in income taxes receivable/payable +of $3.9 million due to the timing of payments. These favorable changes were partially offset by unfavorable changes in accounts +payable of $98.9 million, accrued payroll of $46.4 million and accrued state, local and other taxes of $5.8 million due to lower +business activity levels coupled with the timing of payments. +Cash used for investing activities in +2015 decreased by $197.8 million compared to 2014, primarily as a result of lower capital expenditures in response to weaker industry +conditions. +Cash provided by financing activities +in 2015 increased by $294.4 million primarily as a result of higher net loan payments funded primarily by the favorable changes +in working capital, partially offset by lower open market share repurchases and common stock dividends during 2015 compared to +the prior year. The Company reduced and then suspended its common stock dividend during 2015. +2014 +Cash provided by operating activities +decreased $42.9 million in 2014 compared to the prior year due primarily to an unfavorable change in working capital of $173.0 +million partially offset by an increase in net income of $78.3 million, an increase in depreciation and amortization of $18.1 million, +and a favorable change in deferred taxes of $25.4 million due to tax benefits resulting from higher capital expenditures. +22 +The unfavorable change in working capital +was primarily due to unfavorable changes of $148.1 million in accounts receivable due to higher business activity levels in 2014 +compared to prior year, $43.8 million in inventories due to an increase in materials and supplies that require longer lead times, +and $3.4 million in other current assets due to lower deposits for raw materials. Also, there was an unfavorable net change of +$13.4 million in net current income taxes receivable/payable due to the timing of payments. These unfavorable changes were partially +offset by favorable changes in accounts payable of $22.4 million, accrued payroll of $8.6 million and accrued state, local and +other taxes of $4.1 million due to higher business activity levels coupled with the timing of payments. +Cash used for investing activities in +2014 increased by $147.7 million compared to 2013, primarily as a result of higher capital expenditures primarily directed to expand +or maintain our revenue-producing equipment. +Cash provided by financing activities +in 2014 increased by $197.1 million primarily as a result of higher net loan borrowings coupled with lower open market share repurchases, +partially offset by a 5 percent increase in the per share common stock dividend declared during 2014 compared to the prior year. +Financial Condition and +Liquidity +The Company’s financial +condition as of December 31, 2015, remains strong. We believe the liquidity provided by our existing cash and cash +equivalents, our overall strong capitalization which includes a revolving credit facility and cash expected to be generated +from operations will provide sufficient capital to meet our requirements for at least the next twelve months. On January 17, +2014, the Company amended the $350 million revolving credit facility which extended the maturity of the loan to January 2019. +On November 3, 2015, RPC reduced the revolving credit facility by $225 million to $125 million. The facility +contains customary terms and conditions, including certain financial covenants including covenants restricting RPC's ability +to incur liens, merge or consolidate with another entity. A total of $95.7 million was available under the revolving credit +facility as of December 31, 2015; $29.3 million of the facility supports outstanding letters of credit related to +self-insurance programs or contract bids. Subsequent to year end, the Company obtained a separate letter of credit facility +totaling $35 million; accordingly, $125 million is now available under the revolving credit facility. For additional +information with respect to RPC’s facility, see Note 6 of the Notes to Consolidated Financial Statements. +The Company’s decisions about the amount +of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings +under our facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide +the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity +levels. The Company's decisions about the amount of cash to be used for investing and financing activities could be influenced +by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities. The Company +is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $167.4 million +in 2015, and we currently expect capital expenditures to be approximately $60 million in 2016. We expect that a majority of these +expenditures in 2016 will be directed towards capitalized equipment maintenance. The remaining capital expenditures will +be directed towards the purchase of revenue-producing equipment. The actual amount of expenditures will depend primarily on equipment +maintenance requirements, expansion opportunities, and equipment delivery schedules. +The Company’s Retirement Income +Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible +employees. During 2015, the Company contributed $0.9 million to the pension plan. The Company expects that additional contributions +to the defined benefit pension plan of approximately $0.9 million will be required in 2016 to achieve the Company’s funding +objective. +The Company has a stock buyback program +initially adopted in 1998 that authorizes the repurchase of up to 26,578,125 shares. On June 5, 2013, the Board of Directors authorized +an additional 5,000,000 shares for repurchase under this program. There were no shares purchased on the open market by the Company +during 2015, and 2,050,154 shares remain available to be repurchased under the current authorization as of December 31, 2015. The +Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies +considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +On July 28, 2015, the Board of Directors +voted to temporarily suspend RPC’s quarterly dividend to common stockholders. The Company expects to resume cash dividends +to common stockholders in the future, subject to the earnings and financial condition of the Company and other relevant factors. +23 +Contractual Obligations +The Company’s obligations and commitments +that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other +long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, +2015: +Contractual obligations +Payments due by period +(in thousands) +Total +Less than +1 year +1-3 +years +3-5 +years +More than +5 years +Long-term debt obligations +$ — +$ — +$ — +$ — +$ — +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +54,305 +13,873 +20,797 +12,229 +7,406 +Purchase obligations (2) +26,968 +10,525 +10,962 +5,481 +— +Other long-term liabilities (3) +1,164 +100 +1,026 +38 +— +Total contractual obligations +$ 82,437 +$ 24,498 +$ 32,785 +$ 17,748 +$ 7,406 +(1) Operating leases include agreements for various office locations, office equipment, and certain +operating equipment. +(2) Includes agreements to purchase raw materials, goods or services that have been approved and +that specify all significant terms (pricing, quantity, and timing). As part of the normal course of business the Company occasionally +enters into purchase commitments to manage its various operating needs. +(3) Includes expected cash payments for long-term liabilities reflected on the balance sheet where +the timing of the payments are known. These amounts include incentive compensation. These amounts exclude pension obligations with +uncertain funding requirements and deferred compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities +measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets +and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued +using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no +assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities +measured on a recurring basis are classified as Level 3. For defined benefit plan assets classified as Level 3, the values are +computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on +net asset values calculated by the fund or when not publicly available. +Inflation +The Company purchases its equipment and +materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation +in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. Also, increases +in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees as well +as increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. +During 2014, we experienced high employment costs due to the demand for skilled labor in our markets. In addition, we experienced +continued high cost for certain raw materials the Company uses to provide its services, in spite of our efforts to secure raw materials +from alternative sources. During 2015, however, supplies of raw materials became more readily available as domestic oilfield activity +decreased. In addition, skilled labor became more available, and the upward wage pressures that the Company experienced in 2014 +subsided. By way of illustration, during this time the price index of one of the most critical raw materials the Company uses to +provide its services declined by more than 20 percent. The Company also uses a large amount of diesel fuel to operate its fleet +of revenue-producing equipment, and the cost of diesel fuel has declined significantly in 2015 and early in 2016. In fact, during +this period, the overall retail price of diesel fuel in the U.S. declined by approximately 36 percent. At the end of the fourth +quarter of 2015 and early in the first quarter of 2016, there were many indications that the prices of both skilled labor and many +of the raw materials used in providing our services would continue to decline during the near term. Because customers are pressuring +the prices we charge for our services, we have not gained any benefit from these declining prices. On the contrary, because competitive +market pressures have forced us to decrease our prices to customers, the Company expects that it will be difficult to realize higher +operating profit from these anticipated cost decreases. +24 +Off Balance Sheet Arrangements +The Company does not have any material off +balance sheet arrangements. +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $753,000 in 2015, $663,000 in 2014, and $670,000 in 2013. The Company’s +(payable) receivable due (to) from Marine Products for these services was $(11,000) as of December 31, 2015 and $47,000 as of December +31, 2014. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,127,000 in +2015, $1,092,000 in 2014 and $1,039,000 in 2013. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $100,000 in 2015, $84,000 in 2014 and $83,000 in 2013. +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 +percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a +corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily +by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating +lease agreement with 255 RC, LLC for a period of five years. During 2015, RPC recorded certain net operating costs comprised +of rent and an allocable share of fixed costs of approximately $186,000 for the corporate aircraft. The Company accounts for this investment using the equity method and its proportionate share of income or +loss is recorded in selling, general and administrative expenses. As of December 31, 2015, the investment closely approximates +the underlying equity in the net assets of 255 RC, LLC. +Critical Accounting Policies +The consolidated financial statements are +prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by +management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical +experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. +Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee +of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher +degree of judgment and complexity: +25 +Allowance for doubtful accounts — +Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United +States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined +using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit +evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability +to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility +in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. +Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible +and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the +required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period +to period. Recoveries were $1.0 million in 2015 and insignificant in 2014 and 2013. We record specific provisions when we become +aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration +in the customer's operating results or financial position. If circumstances related to customers change, our estimates of the realizability +of receivables would be further adjusted, either upward or downward. +The estimated allowance for doubtful accounts +is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical +write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic +and political environment of the related country and region. In addition to reserves established for specific customers, we establish +general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management +judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues have +ranged from (0.2) percent to 0.5 percent over the last three years. Increasing or decreasing the estimated general reserve percentages +by 0.50 percentage points as of December 31, 2015 would have resulted in a change of approximately $1.2 million to the allowance +for doubtful accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The effective +income tax rates were 34.9 percent in 2015, 38.6 percent in 2014 and 39.6 percent in 2013. Our effective tax rates vary due to +changes in estimates of our future taxable income, fluctuations in the tax jurisdictions in which our earnings and deductions are +realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. +As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +We establish a valuation allowance against +the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized +through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, +if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the +applicable portion of the previously provided valuation allowance. We have considered future market growth, forecasted earnings, +future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies +in determining the need for a valuation allowance. +We calculate our current and deferred tax +provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during +the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the third quarter of +the subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are determined based on the differences +between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the year the differences are +expected to reverse. +The amount of income taxes we pay is subject +to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the +potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable +outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated +tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. +Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +Insurance expenses – The Company +self insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle +and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based +valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of +these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments +occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range +of exposure for these claims. As of December 31, 2015, the Company estimates the range of exposure to be from $13.8 million to +$17.6 million. The Company has recorded liabilities at December 31, 2015 of approximately $15.6 million which represents management’s +best estimate of probable loss. +Depreciable life of assets — +RPC’s net property, plant and equipment at December 31, 2015 was $688.3 million representing 55.6 percent of the Company’s +consolidated assets. Depreciation and amortization expenses for the year ended December 31, 2015 were $271.0 million. Management +judgment is required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation +and amortization expense. +26 +Property, plant and equipment are reported +at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives +of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed by +the Company and is determined by management based on many factors including historical experience with similar assets. Assets are +monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted accordingly. +During 2015 the Company reassessed the useful life of a specific component of its pressure pumping equipment that prior to 2015 +had an expected useful life of 18 months. As a result of this reassessment, the Company concluded that this component is no longer +a long-lived asset, but instead a consumable supply inventory item. Accordingly, effective January 1, 2015, the cost of this component +is being expensed as repairs and maintenance as part of cost of revenues at the time of installation. Management deemed the change +preferable because it more closely reflects the pattern of consumption of this component as a result of continual increases in +wear and tear resulting from harsher geological environments. We did not make any changes to the estimated lives of assets resulting +in a material impact in 2014 and 2013. +Defined +benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit +plan, although the Company remains obligated to provide employees benefits earned through March 2002. The Company accounts for +the defined benefit plan in accordance with the provisions of FASB ASC 715, “Compensation – Retirement Benefits” +and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates +the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, +and other factors, and makes adjustments to these liabilities as necessary. +The Company chooses an expected rate of return +on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views +of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized +over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s +assumption for the expected return on plan assets was seven percent for 2015, 2014 and 2013. +The discount rate reflects the current rate +at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes +a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the +life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same +time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to +all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate +bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 4.70 percent as of December +31, 2015 compared to 4.15 percent as of December 31, 2014 and 5.20 percent in 2013. +As set forth in Note 10 to the Company’s +financial statements, included among the asset categories for the Plan’s investments are real estate and alternative/ opportunistic/ +special fund investments comprised of real estate funds and private equity funds. These investments are categorized as Level 3 +investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance +with ASU No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” +these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These +valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect +valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ +judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +As of December 31, 2015, the defined benefit +plan was under-funded and the recorded change within accumulated other comprehensive loss increased stockholders’ equity +by approximately $1.0 million after tax. Holding all other factors constant, a change in the discount rate used to +measure plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of approximately $1.2 million +to the net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense +of $0.4 million in 2015, $0.2 million in 2014 and $0.5 million in 2013. Based on the under-funded status of the defined benefit +plan as of December 31, 2015, the Company expects to recognize pension expense of $0.6 million in 2016. Holding all other factors +constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase +or decrease in pension expense of approximately $0.2 million in 2016. Holding all other factors constant, a change in the discount +rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of an +immaterial amount in 2016. +27 +Recent Accounting Pronouncements +During the year ended December 31, 2015, +the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update 2014-08, +Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations +and Disclosures of Disposals of Components of an Entity. The amendments in the ASU require that only disposals representing +a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect +on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line +of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued +operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses +of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant +part of an organization that does not qualify for discontinued operations reporting. The Company adopted these provisions in the +first quarter of 2015 and the adoption did not have a material impact on the Company’s consolidated financial statements. +Accounting Standards Update No. +2015-15, Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs +Associated with Line-of-Credit Arrangements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of +Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the presentation of debt issuance +costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 +does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the +absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff +has approved deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs +ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit +arrangement. The Company currently reports its debt issuance costs as part of non-current other assets and therefore is in compliance +with this guidance. +Accounting Standards Updates No. +2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this ASU eliminates +the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet +and now requires that all deferred tax assets and liabilities be classified as noncurrent. +The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, with +early application permitted. The Company elected to early adopt the provisions of this ASU and classified its deferred tax balances +as a non-current liability as of December 31, 2015. Deferred tax balances for prior periods have not been retrospectively adjusted. +Recently Issued Accounting Pronouncements Not Yet Adopted: +Accounting Standards Update No. +2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. To simplify +the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this ASU eliminate +the requirement to retrospectively account for those adjustments. Instead, +an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the +reporting period in which the adjustment amounts are determined. All of the changes are to be recorded in the reporting period +and calculated as if the accounting had been completed at the acquisition date and either disclosed on the face of the income statement +or in the notes by each category. These amendments are effective for fiscal years beginning after December 15, 2015, including +interim periods within those fiscal years. The amendments are to be applied prospectively to adjustments to provisional amounts +that occur after the effective date with earlier application permitted for financial statements that have not been issued. The +Company plans to adopt the provisions in the first quarter of 2016 for all business combinations completed thereafter and currently +does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update No. +2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Current guidance requires an entity to measure +inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less +an approximately normal profit margin. The amendments in this ASU simplify the measurement process and allows inventory to be measured +at lower of cost or net realizable value and eliminates the market requirement. Net realizable value is the estimated selling prices +in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments +do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments are effective +for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to +be applied prospectively with earlier application permitted. The Company plans to adopt the provisions in the first quarter of +2017 and currently does not expect the adoption to have a material impact on its consolidated financial statements. +28 +Accounting Standards Update No. +2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per +Share (or Its Equivalent). The amendments apply to the fair value of an investment that is measured using the net asset +value per share (or its equivalent) practical expedient. The amendments remove the requirement to categorize within the fair value +hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments +also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using +the net asset value per share practical expedient. The amendments are effective for public business entities for fiscal years beginning +after December 15, 2015, and interim periods within those fiscal years and are required to be applied retrospectively to all periods +presented, with earlier application permitted. The Company plans to adopt the provisions in the first quarter of 2016 and currently +does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards +Update No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance +Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be +presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt +discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. +The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented +should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is +required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the +nature of and reason for the change in accounting principle, the transition method, a description of the prior-period +information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., +debt issuance cost asset and the debt liability). The amendments in this ASU are effective for financial statements issued +for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the +amendments is permitted for financial statements that have not been previously issued. The Company plans to adopt the +provisions in the first quarter of 2016 and currently does not expect the adoption to have a material impact on its +consolidated financial statements. +Accounting Standards Update +No. 2014-15, Presentation of Financial Statements —Going Concern (Subtopic 205-40): Disclosure of Uncertainties about +an Entity’s Ability to Continue as a Going Concern. The provisions in this ASU are intended to define +management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to +continue as a going concern and to provide related footnote disclosures. Currently, financial statements are prepared under +the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. +This going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for +measuring and classifying assets and liabilities. This ASU provides guidance regarding management’s responsibility to +evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern and the +related footnote disclosures. The amendments are effective for the year ending December 31, 2016, and for interim periods +beginning the first quarter of 2017, with early application permitted. The Company plans to adopt these provisions in the +first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial +doubt about its ability to continue as a going concern. The Company currently does not expect the adoption to have a material +impact on its consolidated financial statements. +Accounting Standards Update 2014-09, +Revenue from Contracts with Customers (Topic 606). This ASU affects any entity using U.S. GAAP that either enters into +contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless +those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the +guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount +that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve +that core principle, an entity should apply a five step process – (i) identifying the contract(s) with a customer, (ii) identifying +the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to +the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. +The Company plans to adopt these provisions in the first quarter of 2018 in accordance with ASU 2015-14 that deferred the effective +date of ASU 2014-09 for all entities by one year. The Company is currently evaluating the impact of these provisions on its consolidated +financial statements. +Item 7A. Quantitative and Qualitative Disclosures about +Market Risk +The Company is subject to interest rate +risk exposure through borrowings on its credit agreement. As of December 31, 2015, there are no outstanding interest-bearing advances +on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market +risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in +U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +29 +MANAGEMENT’S REPORT ON INTERNAL +CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of +RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, +Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets +are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce +financial statements in accordance with accounting principles generally accepted in the United States of America. The internal +control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified +personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable +laws and regulations. +There are inherent +limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide +only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can +provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, +the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be +considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the +supervision and with the participation of our management, including our principal executive officer and principal financial +officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial +reporting as of December 31, 2015 based on criteria established in the 2013 Internal Control—Integrated Framework +issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, +management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December +31, 2015. +The independent registered +public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December +31, 2015, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, +included in this report on page 31. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +Ben M. Palmer +President and Chief Executive Officer +Vice President, Chief Financial Officer and Treasurer +Atlanta, Georgia +February 29, 2016 +30 +Report of Independent Registered Public +Accounting Firm +Board of Directors and Stockholders +RPC, Inc. +We have audited the internal control +over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December +31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for +maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal +control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial +Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based +on our audit. +We conducted our audit in accordance with +the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform +the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all +material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk +that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the +assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit +provides a reasonable basis for our opinion. +A company’s internal control over +financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s +internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records +that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide +reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with +authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention, or timely +detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +Because of its inherent limitations, internal +control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness +to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree +of compliance with the policies or procedures may deteriorate. +In our opinion, the Company maintained, +in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established +in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with +the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company +as of and for the year ended December 31, 2015, and our report dated February 29, 2016 expressed an unqualified opinion +on those financial statements. +/s/ GRANT THORNTON LLP +Atlanta, Georgia +February 29, 2016 +31 +Report of Independent Registered Public +Accounting Firm +Board of Directors and Stockholders +RPC, Inc. +We have audited the accompanying consolidated +balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, +and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each +of the three years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the +financial statement schedule listed in the index appearing under Item 15(2). These financial statements and financial statement +schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial +statements and financial statement schedule based on our audits. +We conducted our audits in accordance with +the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform +the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes +examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes +assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial +statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the consolidated financial +statements referred to above present fairly, in all material respects, the financial position of RPC, Inc. and subsidiaries as +of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period +ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our +opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken +as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, in accordance +with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control +over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and +our report dated February 29, 2016 expressed an unqualified opinion thereon. +/s/ GRANT THORNTON LLP +Atlanta, Georgia +February 29, 2016 +32 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2015 +2014 +ASSETS +Cash and cash equivalents +$ 65,196 +$ 9,772 +Accounts receivable, net +232,187 +634,730 +Inventories +128,441 +155,611 +Deferred income taxes +— +9,422 +Income taxes receivable +51,392 +29,115 +Prepaid expenses +8,961 +9,135 +Other current assets +6,031 +3,843 +Current assets +492,208 +851,628 +Property, plant and equipment, net +688,335 +849,383 +Goodwill +32,150 +32,150 +Other assets +24,401 +26,197 +Total assets +$ 1,237,094 +$ 1,759,358 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ 75,811 +$ 175,416 +Accrued payroll and related expenses +16,654 +49,798 +Accrued insurance expenses +4,296 +5,632 +Accrued state, local and other taxes +2,838 +6,821 +Income taxes payable +7,639 +944 +Other accrued expenses +226 +401 +Current liabilities +107,464 +239,012 +Long-term accrued insurance expenses +11,348 +10,099 +Notes payable to banks +— +224,500 +Long-term pension liabilities +33,009 +34,399 +Deferred income taxes +115,495 +156,977 +Other long-term liabilities +17,497 +15,989 +Total liabilities +284,813 +680,976 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $0.10 par value, 349,000,000 shares authorized, 216,991,357 and 216,539,015 shares issued and outstanding in 2015 and 2014, respectively +21,699 +21,654 +Capital in excess of par value +— +— +Retained earnings +948,551 +1,074,561 +Accumulated other comprehensive loss +(17,969 ) +(17,833 ) +Total stockholders’ equity +952,281 +1,078,382 +Total liabilities and stockholders’ equity +$ 1,237,094 +$ 1,759,358 +The accompanying notes are an integral part of these +statements. +33 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2015 +2014 +2013 +REVENUES +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +986,144 +1,493,082 +1,178,412 +Selling, general and administrative expenses +156,579 +197,117 +183,139 +Depreciation and amortization +270,977 +230,813 +213,128 +Loss on disposition of assets, net +6,417 +15,472 +9,371 +Operating (loss) profit +(156,277 ) +400,929 +277,439 +Interest expense +(2,032 ) +(1,431 ) +(1,822 ) +Interest income +83 +19 +408 +Other income (expense), net +5,185 +(131 ) +245 +(Loss) income before income taxes +(153,041 ) +399,386 +276,270 +Income tax (benefit) provision +(53,480 ) +154,193 +109,375 +Net (loss) income +$ (99,561 ) +$ 245,193 +$ 166,895 +(LOSS) EARNINGS PER SHARE +Basic +$ (0.47 ) +$ 1.14 +$ 0.77 +Diluted +$ (0.47 ) +$ 1.14 +$ 0.77 +Dividends paid per share +$ 0.155 +$ 0.420 +$ 0.400 +The accompanying notes are an integral part of these +statements. +34 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE +INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2015 +2014 +2013 +NET (LOSS) INCOME +$ (99,561 ) +$ 245,193 +$ 166,895 +OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES: +Pension adjustment +1,531 +(6,486 ) +4,928 +Foreign currency translation +(1,801 ) +(1,124 ) +(778 ) +Unrealized gain (loss) on securities, net reclassification adjustments +134 +(108 ) +(19 ) +COMPREHENSIVE (LOSS) INCOME +$ (99,697 ) +$ 237,475 +$ 171,026 +The accompanying notes are an integral part of these +statements. +35 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ +EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Three Years Ended +Common Stock +Capital in +Excess of +Retained +Accumulated +Other +Comprehensive +December 31, 2015 +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2012 +220,144 +$ 22,014 +$ — +$ 891,464 +$ (14,246 ) +$ 899,232 +Stock issued for stock incentive plans, net +699 +70 +8,107 +— +— +8,177 +Stock purchased and retired +(1,857 ) +(185 ) +(11,285 ) +(13,652 ) +— +(25,122 ) +Net income +— +— +— +166,895 +— +166,895 +Pension adjustment, net of taxes +— +— +— +— +4,928 +4,928 +Foreign currency translation +— +— +— +— +(778 ) +(778 ) +Unrealized loss on securities, net of taxes +— +— +— +— +(19 ) +(19 ) +Dividends declared +— +— +— +(87,789 ) +— +(87,789 ) +Excess tax benefits for share-based payments +— +— +3,178 +— +— +3,178 +Balance, December 31, 2013 +218,986 +21,899 +— +956,918 +(10,115 ) +968,702 +Stock issued for stock incentive plans, net +569 +57 +9,017 +— +— +9,074 +Stock purchased and retired +(3,016 ) +(302 ) +(13,353 ) +(35,942 ) +— +(49,597 ) +Net income +— +— +— +245,193 +— +245,193 +Pension adjustment, net of taxes +— +— +— +— +(6,486 ) +(6,486 ) +Foreign currency translation +— +— +— +— +(1,124 ) +(1,124 ) +Unrealized loss on securities, net of taxes +— +— +— +— +(108 ) +(108 ) +Dividends declared +— +— +— +(91,608 ) +— +(91,608 ) +Excess tax benefits for share-based payments +— +— +4,336 +— +— +4,336 +Balance, December 31, 2014 +216,539 +21,654 +— +1,074,561 +(17,833 ) +1,078,382 +Stock issued for stock incentive plans, net +791 +79 +9,802 +— +— +9,881 +Stock purchased and retired +(339 ) +(34 ) +(11,212 ) +7,153 +— +(4,093 ) +Net (loss) +— +— +— +(99,561 ) +— +(99,561 ) +Pension adjustment, net of taxes +— +— +— +— +1,531 +1,531 +Foreign currency translation +— +— +— +— +(1,801 ) +(1,801 ) +Unrealized gain on securities, net of taxes and reclassification adjustment +— +— +— +— +134 +134 +Dividends declared +— +— +— +(33,602 ) +— +(33,602 ) +Excess tax benefits for share-based payments +— +— +1,410 +— +— +1,410 +Balance, December 31, 2015 +216,991 +$ 21,699 +$ — +$ 948,551 +$ (17,969 ) +$ 952,281 +The accompanying notes are an integral part of these +statements. +36 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2015 +2014 +2013 +OPERATING ACTIVITIES +Net (loss) income +$ (99,561 ) +$ 245,193 +$ 166,895 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +275,413 +233,940 +215,812 +Stock-based compensation expense +9,960 +9,074 +8,177 +Loss on disposition of assets, net +6,417 +15,472 +9,371 +Deferred income tax (benefit) provision +(33,013 ) +12,354 +(13,060 ) +Excess tax benefits for share-based payments +(1,410 ) +(4,336 ) +(3,178 ) +(Increase) decrease in assets: +Accounts receivable +401,753 +(198,021 ) +(49,959 ) +Income taxes receivable +(20,867 ) +(19,059 ) +1,692 +Inventories +26,667 +(29,708 ) +14,078 +Prepaid expenses +161 +2 +1,519 +Other current assets +(2,881 ) +(749 ) +1,114 +Other non-current assets +1,768 +(2,238 ) +(1,881 ) +Increase (decrease) in liabilities: +Accounts payable +(62,446 ) +36,421 +14,062 +Income taxes payable +6,695 +944 +(6,428 ) +Accrued payroll and related expenses +(33,143 ) +13,221 +4,585 +Accrued insurance expenses +(1,336 ) +(440 ) +(80 ) +Accrued state, local and other taxes +(3,983 ) +1,819 +(2,324 ) +Other accrued expenses +(180 ) +(775 ) +(1,548 ) +Pension liabilities +1,021 +2,219 +3,183 +Long-term accrued insurance expenses +1,249 +(126 ) +(175 ) +Other long-term liabilities +1,508 +7,550 +3,769 +Net cash provided by operating activities +473,792 +322,757 +365,624 +INVESTING ACTIVITIES +Capital expenditures +(167,426 ) +(371,502 ) +(201,681 ) +Proceeds from sale of assets +9,843 +18,707 +11,071 +Purchase of business +— +— +(17,044 ) +Investment in joint venture +— +(2,554 ) +— +Net cash used for investing activities +(157,583 ) +(355,349 ) +(207,654 ) +FINANCING ACTIVITIES +Payment of dividends +(33,602 ) +(91,608 ) +(87,789 ) +Borrowings from notes payable to banks +613,300 +1,168,100 +686,700 +Repayments of notes payable to banks +(837,800 ) +(996,900 ) +(740,400 ) +Debt issue costs for notes payable to banks +— +(667 ) +— +Excess tax benefits for share-based payments +1,410 +4,336 +3,178 +Cash paid for common stock purchased and retired +(4,093 ) +(49,597 ) +(25,122 ) +Net cash (used for) provided by financing activities +(260,785 ) +33,664 +(163,433 ) +Net increase (decrease) in cash and cash equivalents +55,424 +1,072 +(5,463 ) +Cash and cash equivalents at beginning of year +9,772 +8,700 +14,163 +Cash and cash equivalents at end of year +$ 65,196 +$ 9,772 +$ 8,700 +The accompanying notes are an integral part of these +statements. +37 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis +of Presentation +The consolidated financial statements include +the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany +accounts and transactions have been eliminated. +Nature of Operations +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States of America, including the southwest, mid-continent, Gulf +of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include +Technical Services such as pressure pumping services, coiled tubing services, snubbing services (also referred to as hydraulic +workover services), nitrogen services, and firefighting and well control, and Support Services such as the rental of drill pipe +and other specialized oilfield equipment and oilfield training and consulting. +Reclassifications +Certain prior year amounts have been reclassified to conform to the presentation in the current year. +Common Stock +RPC is authorized to issue 349,000,000 +shares of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by +the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted +to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution +or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for +distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 +shares of preferred stock, $0.10 par value. As of December 31, 2015, there were no shares of preferred stock issued. The Board +of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class +without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable +laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other +class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights +and rights on liquidation. +Dividends +On July 28, 2015, the Board of Directors +voted to temporarily suspend RPC’s quarterly dividend to common stockholders. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in +conformity with accounting principles generally accepted in the United States of America requires management to make estimates +and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities +at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results +could differ from those estimates. +Significant estimates are used in the determination +of the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC’s revenues are generated principally +from providing services and the related equipment. Revenues are recognized when the services are rendered and collectibility is +reasonably assured. Revenues from services and equipment are based on fixed or determinable priced purchase orders or contracts +with the customer and do not include the right of return. Rates for services and equipment are priced on a per day, per unit of +measure, per man hour or similar basis. Sales tax charged to customers is presented on a net basis within the consolidated statement +of operations and excluded from revenues. +38 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Concentration of Credit Risk +Substantially all of the Company’s +customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, +either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The +Company provided oilfield services to several hundred customers during each of the last three years. One customer accounted for +approximately 23 percent of revenues in 2015, and there were no customers that accounted for more than 10 percent of the Company’s +revenues in 2014 and 2013. Additionally, one customer accounted for approximately 14 percent of accounts receivable as of December +31, 2015, and there were no customers that accounted for more than 10 percent of accounts receivable as of December 31, 2014. +Cash and Cash Equivalents +Highly liquid investments with original maturities +of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, +at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, +and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating +services. +Investments +Investments classified as available-for-sale +securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component +of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, +declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are +included in interest income. The Company realized an immaterial realized loss during 2015 and no gains or losses during 2014 or +2013 on its available-for-sale securities. Securities that are held in the non-qualified Supplemental Executive Retirement Plan +(“SERP”) are classified as trading. See Note 10 for further information regarding the SERP. The change in fair value +of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements +of operations. +Management determines the appropriate classification +of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts +receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended +based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are +considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts +due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance +for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, +current economic conditions, and in the case of international customers, judgments about the economic and political environment +of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines +that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, which consist principally of +(i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment +used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are +recorded at the lower of cost or market value. Cost is determined using first-in, first-out (“FIFO”) method or the +weighted average cost method. Market value is determined based on replacement cost for materials and supplies. The Company regularly +reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated +forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, +plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided +on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed +using the following useful lives: operating equipment, 3 to 20 years; buildings and leasehold improvements or the life of the lease, +15 to 39 years; furniture and fixtures, 5 to 7 years; software, 5 years; and vehicles, 3 to 5 years. The cost of assets retired +or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year +of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, +and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset +in good working order constitute repairs and maintenance and are expensed as incurred. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +RPC records impairment losses on long-lived +assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows +estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the +values assigned to long-lived assets, such as property, plant and equipment and other assets, to determine if any impairments should +be recognized. Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. During +2015, RPC recorded immaterial write-downs on certain equipment to comply with the Company’s policy to store and maintain +key equipment in an efficient manner. +Goodwill +Goodwill represents the excess of the +purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $32,150,000 at December +31, 2015 and 2014. Goodwill is reviewed annually, or more frequently if events occur or circumstances change that would more likely +than not reduce the fair value of the reporting unit below its carrying amount, for impairment. The Company completes on an annual +basis a comprehensive qualitative assessment of the various factors that impact goodwill, and concluded it is more likely than +not that the fair value of its reporting units exceeds their carrying amounts as of the annual test date. Therefore the Company +did not proceed to Step 1 of the goodwill impairment test in 2015, 2014 and 2013. Based on the qualitative assessment, the +Company concluded that no impairment of its goodwill occurred for the years ended December 31, 2015, 2014 and 2013. +Advertising +Advertising expenses are charged to expense +during the period in which they are incurred. Advertising expenses totaled $2,058,000 in 2015, $3,959,000 in 2014, and $3,458,000 +in 2013. +Insurance Expenses +RPC self insures, up to certain policy-specified +limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee +health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims +are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based +on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year +in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are +determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect +for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying +value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through +future taxable income. +The Company elected to early adopt the +provisions of Accounting Standards Update 2015-17 that requires all deferred tax balances to be classified as non-current. Accordingly, +net deferred tax balances have been reflected as a non-current liability in the accompanying balance sheet as of December 31, 2015. +Deferred tax balances for prior periods have not been retrospectively adjusted. +Defined Benefit Pension Plan +The Company has a defined benefit pension +plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to +2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under +the defined benefit pension plan. See Note 10 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records the cost of share repurchases +in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder +is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Earnings per Share +FASB ASC Topic 260-10 “Earnings +Per Share-Overall,” requires a basic earnings per share and diluted earnings per share presentation. The Company considers +all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether +paid or unpaid, to be participating securities. The Company has periodically issued share-based payment awards that contain non-forfeitable +rights to dividends, and therefore are considered participating securities. See Note 10 for further information on restricted stock +granted to employees. +The basic and diluted calculations differ +as a result of the dilutive effect of stock options, time lapse restricted shares and performance restricted shares included in +diluted earnings per share, but excluded from basic (loss) earnings per share. Basic and diluted (loss) earnings per share are +computed by dividing net (loss) income by the weighted average number of shares outstanding during the respective periods. +A reconciliation of weighted average shares +outstanding along with the (losses) earnings per share attributable to restricted shares of common stock (participating securities) +is as follows: +(In thousands except per share data ) +2015 +2014 +2013 +Net (loss) income available for stockholders: +$ (99,561 ) +$ 245,193 +$ 166,895 +Less: Dividends paid +Common stock +(33,120 ) +(90,231 ) +(86,282 ) +Restricted shares of common stock +(482 ) +(1,377 ) +(1,507 ) +(Over distributed loss) Undistributed earnings +$ (133,163 ) +$ 153,585 +$ 79,106 +Allocation of (over distributed loss) undistributed earnings: +Common stock +$ (131,130 ) +$ 151,049 +$ 77,620 +Restricted shares of common stock +(2,033 ) +2,536 +1,486 +Basic shares outstanding : +Common stock +210,273 +211,208 +211,305 +Restricted shares of common stock +3,359 +3,632 +4,199 +213,632 +214,840 +215,504 +Diluted shares outstanding : +Common stock +210,273 +211,208 +211,305 +Dilutive effect of stock-based awards +— +1,049 +1,229 +210,273 +212,257 +212,534 +Restricted shares of common stock +3,359 +3,632 +4,199 +213,632 +215,889 +216,733 +Basic (loss) earnings per share: +Common stock: +Distributed (loss) earnings +$ 0.16 +$ 0.43 +$ 0.40 +(Over distributed loss) undistributed earnings +(0.63 ) +0.71 +0.37 +$ (0.47 ) +$ 1.14 +$ 0.77 +Restricted shares of common stock: +Distributed (loss) earnings +$ 0.14 +$ 0.38 +$ 0.36 +(Over distributed loss) Undistributed earnings +(0.61 ) +0.70 +0.35 +$ (0.47 ) +$ 1.08 +$ 0.71 +Diluted (loss) earnings per share: +Common Stock: +Distributed earnings +$ 0.16 +$ 0.43 +$ 0.40 +Undistributed (loss) earnings +(0.63 ) +0.71 +0.37 +$ (0.47 ) +$ 1.14 +$ 0.77 +Fair Value of Financial Instruments +The Company’s financial instruments +consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value +of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature +of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments +held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. +All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 8 for additional information. +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Stock-Based Compensation +Stock-based compensation expense is recognized +for all share-based payment awards, net of an estimated forfeiture rate. Thus, compensation cost is amortized for those shares +expected to vest on a straight-line basis over the requisite service period of the award. See Note 10 for additional information. +Recent Accounting Pronouncements +During the year ended December 31, 2015, +the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update 2014-08, +Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations +and Disclosures of Disposals of Components of an Entity. The amendments in the ASU require that only disposals representing +a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect +on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line +of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued +operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses +of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant +part of an organization that does not qualify for discontinued operations reporting. The Company adopted these provisions in the +first quarter of 2015 and the adoption did not have a material impact on the Company’s consolidated financial statements. +Accounting Standards Update No. +2015-15, Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs +Associated with Line-of-Credit Arrangements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of +Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the presentation of debt issuance +costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 +does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the +absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff +has approved deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs +ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit +arrangement. The Company currently reports its debt issuance costs as part of non-current other assets and therefore is in compliance +with this guidance. +Accounting Standards Updates No. +2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this ASU eliminates +the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet +and now requires that all deferred tax assets and liabilities be classified as noncurrent. +The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, with +early application permitted. The Company elected to early adopt the provisions of this ASU and classified its deferred tax balances +as a non-current liability as of December 31, 2015. Deferred tax balances for prior periods have not been retrospectively adjusted. +Recently Issued Accounting Pronouncements Not Yet Adopted: +Accounting Standards Update No. +2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. To simplify +the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this ASU eliminate +the requirement to retrospectively account for those adjustments. Instead, +an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the +reporting period in which the adjustment amounts are determined. All of the changes are to be recorded in the reporting period +and calculated as if the accounting had been completed at the acquisition date and either disclosed on the face of the income statement +or in the notes by each category. These amendments are effective for fiscal years beginning after December 15, 2015, including +interim periods within those fiscal years. The amendments are to be applied prospectively to adjustments to provisional amounts +that occur after the effective date with earlier application permitted for financial statements that have not been issued. The +Company plans to adopt the provisions in the first quarter of 2016 for all business combinations completed thereafter and currently +does not expect the adoption to have a material impact on its consolidated financial statements. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Accounting Standards Update No. +2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Current guidance requires an entity to measure +inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less +an approximately normal profit margin. The amendments in this ASU simplify the measurement process and allows inventory to be measured +at lower of cost or net realizable value and eliminates the market requirement. Net realizable value is the estimated selling prices +in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments +do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments are effective +for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to +be applied prospectively with earlier application permitted. The Company plans to adopt the provisions in the first quarter of +2017 and currently does not expect the adoption to have a material impact on its consolidated financial statements. +Accounting Standards Update No. +2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per +Share (or Its Equivalent). The amendments apply to the fair value of an investment that is measured using the net asset +value per share (or its equivalent) practical expedient. The amendments remove the requirement to categorize within the fair value +hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments +also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using +the net asset value per share practical expedient. The amendments +are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those +fiscal years and are required to be applied retrospectively to all periods presented, with earlier application permitted. The Company +plans to adopt the provisions in the first quarter of 2016 and currently does not expect the adoption to have a material impact +on its consolidated financial statements. +Accounting Standards Update No. +2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. +The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance +sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and +measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments should be applied on +a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific +effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change +in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition +method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the +financial statement line items (i.e., debt issuance cost asset and the debt liability). The amendments in this ASU are effective +for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. +Early adoption of the amendments is permitted for financial statements that have not been previously issued. The Company plans +to adopt the provisions in the first quarter of 2016 and currently does not expect the adoption to have a material impact on its +consolidated financial statements. +Accounting Standards Update No. +2014-15, Presentation of Financial Statements —Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s +Ability to Continue as a Going Concern. The provisions in this ASU are intended to define management’s responsibility +to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide +related footnote disclosures. Currently, financial statements are prepared under the presumption that the reporting organization +will continue to operate as a going concern, except in limited circumstances. This going concern basis of accounting is critical +to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. This +ASU provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about the organization’s +ability to continue as a going concern and the related footnote disclosures. The amendments are effective for the year ending December +31, 2016, and for interim periods beginning the first quarter of 2017, with early application permitted. The Company plans to adopt +these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events +that raise substantial doubt about its ability to continue as a going concern. The Company currently does not expect the adoption +to have a material impact on its consolidated financial statements. +Accounting Standards Update 2014-09, +Revenue from Contracts with Customers (Topic 606). This ASU affects any entity using U.S. GAAP that either enters into +contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless +those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the +guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount +that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve +that core principle, an entity should apply a five step process – (i) identifying the contract(s) with a customer, (ii) identifying +the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to +the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. +The Company plans to adopt these provisions in the first quarter of 2018 in accordance with ASU 2015-14 that deferred the effective +date of ASU 2014-09 for all entities by one year. The Company is currently evaluating the impact of these provisions on its consolidated +financial statements. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Note 2: Accounts Receivable +Accounts receivable, net consists of the +following: +December 31, +2015 +2014 +(in thousands) +Trade receivables: +Billed +$ 190,567 +$ 521,693 +Unbilled +40,731 +125,363 +Other receivables +11,494 +3,025 +Total +242,792 +650,081 +Less: allowance for doubtful accounts +(10,605 ) +(15,351 ) +Accounts receivable, net +$ 232,187 +$ 634,730 +Trade receivables relate to sale of our services +and products, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables +represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consist +primarily of amounts due from purchases of Company property and rebates from suppliers. +Changes in the Company’s allowance +for doubtful accounts are as follows: +Years Ended December 31, +2015 +2014 +(in thousands) +Beginning balance +$ 15,351 +$ 13,497 +Bad debt +(2,958 ) +2,280 +Accounts written-off +(2,825 ) +(1,225 ) +Recoveries +1,037 +799 +Ending balance +$ 10,605 +$ 15,351 +Note 3: Inventories +Inventories are $128,441,000 at December +31, 2015 and $155,611,000 at December 31, 2014 and consist of raw materials, parts and supplies. +Note 4: Property, Plant and Equipment +Property, plant and equipment are presented +at cost net of accumulated depreciation and consist of the following: +December 31, +2015 +2014 +(in thousands) +Land +$ 19,056 +$ 18,563 +Buildings and leasehold improvements +142,715 +134,994 +Operating equipment +1,440,508 +1,425,846 +Computer software +19,650 +19,005 +Furniture and fixtures +8,043 +7,835 +Vehicles +480,899 +479,628 +Construction in progress +6 +2,675 +Gross property, plant and equipment +2,110,877 +2,088,546 +Less: accumulated depreciation +(1,422,542 ) +(1,239,163 ) +Net property, plant and equipment +$ 688,335 +$ 849,383 +Depreciation expense was $274.4 million +in 2015, $233.4 million in 2014, and $215.4 million in 2013, and includes amounts recorded as costs of sales and inventory. There +were no capital leases outstanding as of December 31, 2015 and December 31, 2014. The Company had accounts payable for purchases +of property and equipment of $2.4 million as of December 31, 2015, $38.5 million as of December 31, 2014, and $19.7 million as +of December 31, 2013. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Effective January 1, 2015, the Company reassessed +the useful life of a specific component of its pressure pumping equipment. Prior to January 1, 2015, this component was recorded +as property, plant and equipment and depreciated over an expected useful life of 18 months. As a result of this reassessment, the +Company has concluded that this component is no longer a long-lived asset, but instead a consumable supply inventory item. Accordingly, +effective January 1, 2015, the cost of this component is being expensed as repairs and maintenance as part of cost of revenues +at the time of installation. Management deemed the change preferable because it more closely reflects the pattern of consumption +of this component as a result of continual increases in wear and tear resulting from harsher geological environments. +This change was accounted for as a change +in accounting estimate effected by a change in accounting principle. The net impact of this change in accounting estimate effected +by a change in accounting principle on operating income and net income is not material. The change has resulted in an increase +in the cost of revenues of $41,919,000 during 2015, while loss on dispositions and depreciation expense relating to this component +decreased by a comparable amount during the period. Additionally, due to the change in accounting estimate effected by a change +in accounting principle, purchases and deployment of this component will no longer be reflected as a capital expenditure under +the investing activities section in the consolidated statement of cash flows, but instead will be reflected within cash flows from +operating activities. The remaining net book value of these components at December 31, 2014 was $16,406,000 and was depreciated +over an estimated weighted average remaining useful life of approximately 12 months. Loss on disposition related to this component +totaled $21,408,000 in 2014. +Note 5: Income Taxes +The following table lists the components +of the provision for income taxes: +Years ended December 31, +2015 +2014 +2013 +(in thousands) +Current (benefit) provision: +Federal +$ (24,727 ) +$ 119,074 +$ 104,890 +State +(3,638 ) +19,858 +15,627 +Foreign +7,898 +2,907 +1,918 +Deferred (benefit) provision: +Federal +(31,178 ) +11,514 +(12,025 ) +State +(1,835 ) +840 +(1,035 ) +Total income tax (benefit) provision +$ (53,480 ) +$ 154,193 +$ 109,375 +Reconciliation between the federal statutory +rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2015 +2014 +2013 +Federal statutory rate +35.0 % +35.0 % +35.0 % +State income taxes, net of federal benefit +— +3.3 +3.8 +Tax credits +0.3 +(0.7 ) +(0.3 ) +Non-deductible expenses +(1.3 ) +0.4 +0.5 +Other +0.9 +0.6 +0.6 +Effective tax rate +34.9 % +38.6 % +39.6 % +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Significant components of the Company’s +deferred tax assets and liabilities are as follows: +December 31, +2015 +2014 +(in thousands) +Deferred tax assets: +Self-insurance +$ 7,274 +$ 7,675 +Pension +12,048 +12,555 +State net operating loss carry forwards +370 +451 +Bad debts +4,041 +5,755 +Accrued payroll +1,330 +2,833 +Stock-based compensation +5,885 +5,583 +All others +4,704 +2,121 +Valuation allowance +(276 ) +(2 ) +Gross deferred tax assets +35,376 +36,971 +Deferred tax liabilities: +Depreciation +(137,606 ) +(172,813 ) +Goodwill amortization +(8,887 ) +(7,974 ) +All others +(4,378 ) +(3,739 ) +Gross deferred tax liabilities +(150,871 ) +(184,526 ) +Net deferred tax liabilities +$ (115,495 ) +$ (147,555 ) +As of December 31, 2015, undistributed +earnings of the Company's foreign subsidiaries totaled $12.6 million. Additional U.S. taxes due upon full repatriation would be +approximately $500 thousand. However, those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal +and state income taxes have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the +Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries. The Company's current +intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of +repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through +the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2015, the Company has +net operating loss carry forwards related to state income taxes of approximately $9.6 million that will expire between 2016 and +2034. As of December 31, 2015, the Company has a valuation allowance of approximately $280 thousand, representing the tax affected +amount of loss carry forwards that the Company does not expect to utilize, against the corresponding deferred tax asset. +Total net income tax (refunds) payments +were $(7.9) million in 2015, $152.2 million in 2014, and $122.9 million in 2013. +The Company and its subsidiaries +are subject to U.S. federal and state income taxes in multiple jurisdictions. In many cases our uncertain tax positions +are related to tax years that remain open and subject to examination by the relevant taxing authorities. The Company’s +2012 through 2015 tax years remain open to examination. Additional years may be open to the extent attributes are being +carried forward to an open year. In 2015, the Internal Revenue Service (IRS) completed an examination of the Company’s +U.S. federal income tax return and related matters for the 2011 tax year that yielded no adjustments. +During 2015 and 2014, the Company recognized +an increase in its liability for unrecognized tax benefits in the current year related primarily to refund claims filed for state +income taxes. If recognized, the liability would affect our effective rate. A reconciliation of the beginning and ending amount +of unrecognized tax benefits is as follows: +2015 +2014 +Balance at January 1 +$ 23,267,000 +$ 16,345,000 +Additions based on tax positions related to the current year +2,171,000 +5,193,000 +Additions for tax positions of prior years +714,000 +1,729,000 +Balance at December 31 +$ 26,152,000 +$ 23,267,000 +The Company’s policy is to record +interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2015 +and 2014 were approximately $411 thousand and $146 thousand, respectively. +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +It is reasonably possible that the amount +of the unrecognized tax benefits with respect to our unrecognized tax positions will significantly decrease in the next 12 months. +These changes may result from, among other things, state tax settlements under or conclusions of ongoing examinations or reviews, +however, quantification of an estimated range cannot be made at this time. +The Protecting Americans from Tax Hikes +Act of 2015 (“PATH”) was signed into law on December 18, 2015 and retroactively reinstated the bonus depreciation deduction +for 2015 and future years. The acceleration of deductions on 2015 qualifying capital expenditures resulting from the bonus depreciation +provision had no impact on our 2015 effective tax rate. +In September 2013, the U.S. Department +of the Treasury issued final regulations under Internal Revenue Code Sections 162(a), 263(a), and 168 that provide guidance on +the deduction and capitalization of expenditures related to tangible property. Adoption of these regulations required certain mandatory +and elective accounting methods with respect to property and equipment, inventory and supplies. RPC adopted these regulations as +of January 1, 2014 and filed all required method changes. The adoption resulted in accelerated deductions totaling approximately +$21.8 million (gross) for assets placed in service before December 31, 2013, approximately $16.2 million (gross) for assets placed +in service during 2014, and approximately $13.5 million (gross) for assets placed in service in 2015. +Note 6: Long-Term Debt +The Company has a revolving +credit facility with Banc of America Securities, LLC, SunTrust Robinson Humphrey, Inc., and Regions Capital Markets as Joint +Lead Arrangers and Joint Book Managers, and a syndicate of other lenders. The facility has a general term of five years +and provides for an unsecured line of credit of up to $125 million, including a $50 million letter of credit subfacility, and +a $35 million swingline subfacility. The revolving credit facility includes a full and unconditional guarantee by the +Company's 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of RPC and +its subsidiaries. The Company’s subsidiaries that are not guarantors are considered minor. +On November 30, 2015, the Company gave +notice to the syndicate it was reducing the size of the facility, which was previously $350 million, to $125 million. No other +terms were changed. +On January 17, 2014, the Company amended +the revolving credit facility extending the maturity date of all the revolving loans from August 31, 2015 to January 17, 2019. +Interest rates on the amended loans were reduced by 0.125% at all pricing levels under the amended revolving credit facility. +The amount of the swing line sub-facility as a result of the amendment was increased from $25 million to $35 million. RPC incurred +commitment fees and other debt related costs associated with the amendment of approximately $0.7 million. +The Company has incurred +loan origination fees and other debt related costs associated with the revolving credit facility in the aggregate of +approximately $3.0 million. These costs, net of amounts written off as a result of the reduction in the revolving +credit facility in 2015, are being amortized to interest expense over the remaining term of the five year loan, and the net +amount of $0.3 million at December 31, 2015 is classified as non-current other assets. +Revolving loans under the Revolving Credit +Agreement bear interest at one of the following two rates, at the Company's election: +· the Base Rate, which is the highest of Bank of America’s "prime rate" for the day of the borrowing, a fluctuating +rate per annum equal to the Federal Funds Rate plus 0.50%, and a rate per annum equal to the one (1) month LIBOR rate plus 1.00%; +in each case plus a margin that ranges from 0.125% to 1.125% based on a quarterly debt covenant calculation; or +· with respect to any Eurodollar borrowings, Adjusted LIBOR (which equals LIBOR as increased to account for the maximum reserve +percentages established by the U.S. Federal Reserve) plus a margin ranging from 1.125% to 2.125%, based upon a quarterly debt covenant +calculation. +In addition, the Company pays an annual +fee ranging from 0.225% to 0.325%, based on a quarterly debt covenant calculation, on the unused portion of the credit facility. +The revolving credit facility +contains customary terms and conditions, including certain financial covenants and restrictions on indebtedness, dividend +payments, business combinations and other related items. Further, the revolving credit facility contains +financial covenants limiting the ratio of the Company's consolidated debt-to-EBITDA to no more than 2.5 to 1, and limiting +the ratio of the Company's consolidated EBITDA to debt service coverage to no less than 2 to 1. The Company was in +compliance with these covenants for the year ended December 31, 2015. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +As of December 31, 2015, RPC had no +outstanding borrowings under the revolving credit facility and letters of credit outstanding relating to +self-insurance programs and contract bids totaling $29.3 million; therefore, a total of $95.7 million was available under the +revolving credit facility. Interest incurred and paid on the credit facility, interest capitalized related to facilities and +equipment under construction, and the related weighted average interest rates were as follows for the periods indicated: +Years Ended December 31, +2015 +2014 +2013 +(in thousands except interest rate data) +Interest incurred +$ 1,913 +$ 2,295 +$ 2,090 +Capitalized interest +$ 534 +$ 563 +$ 935 +Interest paid (net of capitalized interest) +$ 1,169 +$ 1,314 +$ 618 +Weighted average interest rate +2.2 % +2.2 % +3.7 % +On January 4, 2016, the Company +entered into a one year $35 million uncommitted letter of credit facility with Bank of America, N.A; accordingly, $125 +million is now available under the revolving credit facility. Under the terms of the letter of credit facility, the Company +will pay 0.75% per annum on outstanding letters of credit. No origination fees +were incurred in connection with this facility. +Note 7: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income +consists of the following (in thousands): +Pension +Adjustment +Unrealized +Gain (Loss) On +Securities +Foreign +Currency Translation +Total +Balance at December 31, 2013 +$ (9,760 ) +$ 10 +$ (365 ) +$ (10,115 ) +Change during 2014: +Before-tax amount +(10,745 ) +(170 ) +(1,124 ) +(12,039 ) +Tax benefit +3,922 +62 +— +3,984 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +337 +— +— +337 +Total activity in 2014 +(6,486 ) +(108 ) +(1,124 ) +(7,718 ) +Balance at December 31, 2014 +(16,246 ) +(98 ) +(1,489 ) +(17,833 ) +Change during 2015: +Before-tax amount +1,621 +(16 ) +(1,801 ) +(196 ) +Tax (expense) benefit +(592 ) +6 +— +(586 ) +Reclassification adjustment, net of taxes: +Realized loss on securities +— +144 +— +144 +Amortization of net loss (1) +502 +— +— +502 +Total activity in 2015 +1,531 +134 +(1,801 ) +(136 ) +Balance at December 31, 2015 +$ (14,715 ) +$ 36 +$ (3,290 ) +$ (17,969 ) +(1) Reported as part of selling, general and administrative expenses. +Note 8: Fair Value Disclosures +The various inputs used to measure assets +at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s +assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, +quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which +all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the +full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that +market participants would use. +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +The following table summarizes the valuation +of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2015 and 2014: +Fair Value Measurements at December 31, 2015 with: +(in thousands) +Quoted prices in +active markets for +identical assets +Significant other +observable inputs +Significant +unobservable inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Trading securities +$ — +$ 16,081 +$ — +Available-for-sale securities – equity securities +$ 259 +$ — +$ — +Fair Value Measurements at December 31, 2014 with: +(in thousands) +Quoted prices in +active markets for +identical assets +Significant other +observable inputs +Significant +unobservable inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Trading securities +$ — +$ 16,491 +$ — +Available-for-sale securities – equity securities +$ 275 +$ — +$ — +The Company determines the fair value +of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing +price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the +number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the +SERP assets, as described in Note 10, and are recorded primarily at their net cash surrender values, which approximates fair value, +as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to +value the trading securities. As a result, the Company measured the fair value of these investments using level 2 inputs. The Company’s +policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, +2015 there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving +credit facility, there was no balance outstanding at December 31, 2015. The balance outstanding at December 31, 2014 was +$224,500,000, and based on the quote from the lender (level 2 inputs) is similar to the fair value at the same date. The +borrowings under our revolving credit facility bear variable interest rates as described in Note 6. The Company is subject to +interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial +instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the +short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial +instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 9: Commitments and Contingencies +Lease Commitments - Minimum annual +rentals, principally for noncancelable real estate and equipment leases with terms in excess of one year, in effect at December +31, 2015, are summarized in the following table: +(in thousands) +2016 +$ 12,013 +2017 +10,974 +2018 +9,823 +2019 +7,521 +2020 +4,708 +Thereafter +7,406 +Total rental commitments +$ 52,445 +Total rental expense, including short-term +rentals, charged to operations was $20,658,000 in 2015, $22,968,000 in 2014, and $20,582,000 in 2013. +Income Taxes - The amount of income +taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Sales and Use Taxes - The Company +has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could +result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other taxes. +Litigation - RPC is a party to +various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal +injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the +nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future +legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot +be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that +the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s +business or financial condition. +Note 10: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income +Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees +with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation +as an adopting employer. +The Company’s projected +benefit obligation exceeds the fair value of the plan assets under its pension plan by $12.0 million and thus the plan was +under-funded as of December 31, 2015. The following table sets forth the funded status of the Retirement Income Plan and the +amounts recognized in RPC’s consolidated balance sheets: +December 31, +2015 +2014 +(in thousands) +Accumulated benefit obligation at end of year +$ 42,894 +$ 47,410 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ 47,410 +$ 37,528 +Service cost +— +— +Interest cost +1,898 +1,946 +Amendments +— +— +Actuarial loss (gain) +(4,593 ) +9,725 +Benefits paid +(1,821 ) +(1,789 ) +Projected benefit obligation at end of year +$ 42,894 +$ 47,410 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ 32,622 +$ 32,426 +Actual return on plan assets +(714 ) +1,220 +Employer contribution +850 +765 +Benefits paid +(1,821 ) +(1,789 ) +Fair value of plan assets at end of year +$ 30,937 +$ 32,622 +Funded status at end of year +$ (11,957 ) +$ (14,788 ) +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +December 31, +2015 +2014 +(in thousands) +AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: +Noncurrent assets +$ — +$ — +Current liabilities +— +— +Noncurrent liabilities +(11,957 ) +(14,788 ) +$ (11,957 ) +$ (14,788 ) +December 31, +2015 +2014 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss (gain) +$ 23,172 +$ 25,583 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ 23,172 +$ 25,583 +The accumulated benefit obligation for +the Retirement Income Plan at December 31, 2015 and 2014 has been disclosed above. The Company uses a December 31 measurement date +for this qualified plan. +Amounts recognized in the consolidated +balance sheets consist of: +December 31, +2015 +2014 +(in thousands) +Funded status +$ (11,957 ) +$ (14,788 ) +SERP liability +(21,052 ) +(19,611 ) +Long-term pension liability +$ (33,009 ) +$ (34,399 ) +RPC’s funding policy is to contribute +to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. Amounts +contributed to the plan totaled $850,000 in 2015 and $765,000 in 2014. +The components of net periodic benefit +cost are summarized as follows: +Years ended December 31, +2015 +2014 +2013 +(in thousands) +Service cost for benefits earned during the period +$ — +$ — +$ — +Interest cost on projected benefit obligation +1,898 +1,946 +1,741 +Expected return on plan assets +(2,259 ) +(2,240 ) +(2,043 ) +Amortization of net loss +790 +531 +784 +Net periodic benefit plan cost +$ 429 +$ 237 +$ 482 +The Company recognized pre-tax (increases) +decreases to the funded status in accumulated other comprehensive loss of $(2,411,000) in 2015, $10,214,000 in 2014, and $(7,760,000) +in 2014. There were no previously unrecognized prior service costs as of December 31, 2015, 2014 and 2013. The pre-tax amounts +recognized in accumulated other comprehensive loss for the years ended December 31, 2015, 2014 and 2013 are summarized as follows: +(in thousands) +2015 +2014 +2013 +Net loss (gain) +$ (1,621 ) +$ 10,745 +$ (6,976 ) +Amortization of net loss +(790 ) +(531 ) +(784 ) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ (2,411 ) +$ 10,214 +$ (7,760 ) +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +The amounts in accumulated other comprehensive +loss expected to be recognized as components of net periodic benefit cost in 2016 are as follows: +(in thousands) +2016 +Amortization of net loss +$ 753 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ 753 +The weighted average assumptions as of +December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2015 +2014 +2013 +Projected Benefit Obligation: +Discount rate +4.70 % +4.15 % +5.20 % +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.15 % +5.20 % +4.16 % +Expected return on plan assets +7.00 % +7.00 % +7.00 % +Rate of compensation increase +N/A +N/A +N/A +The Company’s expected return on +assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes +a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation +strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested +to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical +returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, +the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +The plan’s weighted average asset +allocation at December 31, 2015 and 2014 by asset category along with the target allocation for 2016 are as follows: +Asset Category +Target +Allocation +for 2016 +Percentage of +Plan Assets as of +December 31, +2015 +Percentage of +Plan Assets as of +December 31, +2014 +Cash and Cash Equivalents +0% - 5 % +0.7 % +1.0 % +Debt Securities – Core Fixed Income +15% - 50 % +25.8 % +24.3 % +Domestic Equity Securities +0% - 40 % +38.5 % +37.0 % +International Equity Securities +0% - 30 % +23.2 % +22.8 % +Real Estate +0% - 20 % +7.2 % +10.5 % +Real Return +0% - 20 % +— % +1.6 % +Alternative/Opportunistic/Special funds +0% - 20 % +4.6 % +2.8 % +Total +100 % +100.0 % +100.0 % +The Company’s overall investment +strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit +payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include +investments in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate +bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds +and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, +the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk +in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset +class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to +individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to +achieve this target allocation. Company management expects to make a contribution to the pension plan of approximately $900,000 +during fiscal year 2016. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Some of our assets, primarily our private +equity and real estate funds, do not have readily determinable market values given the specific investment structures involved +and the nature of the underlying investments. For the December 31, 2015 plan asset reporting, publicly traded asset pricing +was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements +combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are categorized +as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. +In accordance with ASU No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” +these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These +valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect +valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ +judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +The following tables present our plan +assets using the fair value hierarchy as of December 31, 2015 and 2014. The fair value hierarchy has three levels based on +the reliability of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair +value hierarchy. +Fair Value Hierarchy as of December 31, +2015: +Investments ( in thousands ) +Total +Level 1 +Level 2 +Level 3 +Cash and Cash Equivalents +(1 ) +$ 210 +$ 210 +$ — +$ — +Fixed Income Securities +(2 ) +7,987 +— +7,987 +— +Domestic Equity Securities +(3 ) +11,908 +4,285 +7,623 +— +International Equity Securities +(4 ) +7,163 +— +7,163 +— +Real Estate +(5 ) +2,224 +— +— +2,224 +Real Return +(6 ) +— +— +— +— +Alternative/Opportunistic/Special funds +(7 ) +1,445 +— +— +1,445 +$ 30,937 +$ 4,495 +$ 22,773 +$ 3,669 +Fair Value Hierarchy as of December 31, +2014: +Investments ( in thousands ) +Total +Level 1 +Level 2 +Level 3 +Cash and Cash Equivalents +(1 ) +$ 329 +$ 329 +$ — +$ — +Fixed Income Securities +(2 ) +7,915 +3,194 +4,721 +— +Domestic Equity Securities +(3 ) +12,076 +4,324 +7,752 +— +International Equity Securities +(4 ) +7,442 +— +7,442 +— +Real Estate +(5 ) +3,420 +— +— +3,420 +Real Return +(6 ) +515 +— +515 +— +Alternative/Opportunistic/Special funds +(7 ) +925 +— +— +925 +$ 32,622 +$ 7,847 +$ 20,430 +$ 4,345 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market +funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, +base spreads and reported trades. +(3) Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in +their respective markets. +(4) International equity securities are valued using a market approach based on the quoted market prices of identical instruments +in their respective markets. +(5) Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, +which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data. +(6) Real return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using +a market approach based on the quoted market prices of identical instruments in their respective markets. +(7) Alternative/Opportunistic/Special funds can invest across the capital structure in both liquid and illiquid securities that +are valued using a market approach based on the quoted market prices of identical instruments, or if no market price is available, +instruments will be held at their fair market value (which may be cost) as reasonably determined by the investment manager, independent +dealers, or pricing services. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +The following table presents a reconciliation +of Level 3 assets held during the year ended December 31, 2015: +Investments (in thousands) +Balance at +December +31, 2014 +Net Realized +and +Unrealized +Gains/(Losses) +Net +Purchases, +Issuances +and +Settlements +Net +Transfers In +to (Out of) +Level 3 +Balance at +December +31, 2015 +Real Estate +$ 3,420 +$ 279 +$ (1,475 ) +$ — +$ 2,224 +Alternative/Opportunistic/Special funds +925 +70 +450 +— +1,445 +$ 4,345 +$ 349 +$ (1,025 ) +$ — +$ 3,669 +The following table presents a reconciliation +of Level 3 assets held during the year ended December 31, 2014: +Investments (in thousands) +Balance at +December +31, 2013 +Net Realized +and +Unrealized +Gains/(Losses) +Net +Purchases, +Issuances +and +Settlements +Net +Transfers In +to (Out of) +Level 3 +Balance at +December +31, 2014 +Real Estate +$ 2,705 +$ 133 +$ 582 +$ — +$ 3,420 +Alternative/Opportunistic/Special funds +— +21 +904 +— +925 +$ 2,705 +$ 154 +$ 1,486 +$ — +$ 4,345 +The Company estimates that the future +benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2016 +$ 2,228 +2017 +2,328 +2018 +2,449 +2019 +2,510 +2020 +2,546 +2021-2025 +13,818 +Supplemental Executive Retirement Plan (SERP) +The Company +permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested +primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. +The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in +COLI policies consisted of $46.8 million in variable life insurance policies as of December 31, 2015 and $48.0 million as of December +31, 2014. In the COLI policies, the Company is able to allocate investment of the assets across a set of choices provided by the +insurance company, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender +values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating +was A+. +The Company +classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $16,081,000 as +of December 31, 2015 and $16,491,000 as of December 31, 2014. The SERP assets are reported in other assets on the balance sheet. +The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations +as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled +$(519,000) in 2015, $959,000 in 2014, and $2,026,000 in 2013. The SERP liability is recorded on the balance sheet in long-term +pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general +and administrative expenses in the statement of operations. +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +401(k) Plan +RPC sponsors a defined contribution 401(k) +plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees +to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution +imposed by the Internal Revenue Code. RPC matches 50 percent of each employee’s contributions that do not exceed six percent +of the employee’s compensation, as defined by the plan. Employees vest in the RPC contributions after three years of service. +The charges to expense for the Company’s contributions to the 401(k) plan were $4,796,000 in 2015, $6,970,000 in 2014, and +$5,451,000 in 2013. +Stock Incentive Plans +The Company has issued stock options and +restricted stock to employees under three 10 year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. +The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common +stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance +of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. +As of December 31, 2015, 7,120,525 shares were available for grant. +The Company recognizes compensation expense +for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these +awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the +time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based +payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) +are classified as a financing activity in the accompanying consolidated statements of cash flows. +Pre-tax stock-based employee compensation +expense was $9,960,000 in 2015 ($6,325,000 after tax), $9,074,000 in 2014 ($5,762,000 after tax), and $8,177,000 in 2013 ($5,192,000 +after tax). +Stock Options +Stock options are granted at an exercise +price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock +options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the +fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in +10 years, except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, +which expire in five years. +The Company estimates the fair value of +stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to +employees since 2003 and there are none outstanding. There were no stock options exercised during 2015, 2014 or 2013 and there +are no stock options outstanding as of December 31, 2015. +Restricted Stock +The Company has granted employees time +lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. +Time lapse restricted shares issued vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees +receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued +provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have +lapsed. Upon termination of employment from RPC (other than due to death, disability or retirement on or after age 65), shares +with restrictions must be returned to the Company. +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2015: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2015 +3,575,150 +$ 12.04 +Granted +895,725 +12.30 +Vested +(1,054,625 ) +8.66 +Forfeited +(104,075 ) +12.78 +Non-vested shares at December 31, 2015 +3,312,175 +$ 13.17 +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2014: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2014 +4,114,800 +$ 9.67 +Granted +657,375 +18.84 +Vested +(1,108,790 ) +7.20 +Forfeited +(88,235 ) +12.83 +Non-vested shares at December 31, 2014 +3,575,150 +$ 12.04 +The fair value of restricted share awards +is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net +of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value +per share of these restricted stock awards was $12.30 for 2015, $18.84 for 2014 and $13.68 for 2013. The total fair value of shares +vested was $12,727,000 during 2015, $20,664,000 during 2014 and $15,471,000 during 2013. The tax benefit for compensation tax deductions +in excess of compensation expense was credited to capital in excess of par value aggregating $1,410,000 for 2015, $4,336,000 for +2014 and $3,178,000 for 2013. The excess tax deductions are classified as a financing activity in the accompanying consolidated +statements of cash flows. +Other Information +As of December 31, 2015, total unrecognized +compensation cost related to non-vested restricted shares was $38,982,000 which is expected to be recognized over a weighted-average +period of 3.2 years. +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $753,000 in 2015, $663,000 in 2014, and $670,000 in 2013. The Company’s +(payable) receivable due (to) from Marine Products for these services was $(11,000) as of December 31, 2015 and $47,000 as of December +31, 2014. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,127,000 in +2015, $1,092,000 in 2014 and $1,039,000 in 2013. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $100,000 in 2015, $84,000 in 2014 and $83,000 in 2013. +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 +percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a +corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily +by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating +lease agreement with 255 RC, LLC for a period of five years. During 2015, RPC recorded certain net operating costs comprised +of rent and an allocable share of fixed costs of approximately $186,000 for the corporate aircraft. The Company accounts for this investment using the equity method and its proportionate share of income or +loss is recorded in selling, general and administrative expenses. As of December 31, 2015, the investment closely approximates +the underlying equity in the net assets of 255 RC, LLC. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +Note 12: Business Segment Information +RPC’s service lines have been aggregated +into two reportable oil and gas services segments — Technical Services and Support Services — because of the similarities +between the financial performance and approach to managing the service lines within each of the segments, as well as the economic +and business conditions impacting their business activity levels. Corporate includes selected administrative costs incurred by +the Company. +Technical Services include RPC’s oil +and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services +directly to a customer’s well. These services include pressure pumping services, coiled tubing, snubbing, nitrogen pumping, +well control consulting and firefighting, downhole tools, wireline, and fluid pumping services. These Technical Services are primarily +used in the completion, production and maintenance of oil and gas wells. The principal markets for this segment include the United +States, including the Gulf of Mexico, the mid-continent, southwest, Rocky Mountain and Appalachian regions, and international locations +including primarily Africa, Canada, China, Latin America, the Middle East and New Zealand. Customers include major multi-national +and independent oil and gas producers, and selected nationally-owned oil companies. +Support Services include RPC’s oil +and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment +and services include drill pipe and related tools, pipe handling, inspection and storage services, and oilfield training services. +The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets +for this segment include the United States, including the Gulf of Mexico, the mid-continent and Appalachian regions, and international +locations, including primarily Canada, Latin America, and the Middle East. Customers include domestic operations of major multi-national +and independent oil and gas producers, and selected nationally-owned oil companies. +The accounting policies of the reportable +segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of +its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are +reviewed by the Company’s chief decision maker on a consolidated basis, and accordingly the Company does not report gains +or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management +believes approximate prices for arm’s length transactions and are not material to operating results. +Summarized financial information concerning +RPC’s reportable segments for the years ended December 31, 2015, 2014 and 2013 are shown in the following table: +(in thousands) +Technical +Services +Support +Services +Corporate +Loss on disposition of +assets, net +Total +2015 +Revenues +$ 1,175,293 +$ 88,547 +$ — +$ — +$ 1,263,840 +Operating (loss) +(132,982 ) +(2,363 ) +(14,515 ) +(6,417 ) +(156,277 ) +Capital expenditures +155,361 +11,055 +1,010 +— +167,426 +Depreciation and amortization +237,778 +32,697 +502 +— +270,977 +Identifiable assets +976,761 +108,262 +152,071 +— +1,237,094 +2014 +Revenues +$ 2,180,457 +$ 156,956 +$ — +$ — +$ 2,337,413 +Operating profit (loss) +390,004 +42,510 +(16,113 ) +(15,472 ) +400,929 +Capital expenditures +342,932 +27,148 +1,422 +— +371,502 +Depreciation and amortization +198, 636 +31,578 +599 +— +230,813 +Identifiable assets +1,514,084 +157,688 +87,586 +— +1,759,358 +2013 +Revenues +$ 1,729,732 +$ 131,757 +$ — +$ — +$ 1,861,489 +Operating profit (loss) +276,246 +26,223 +(15,659 ) +(9,371 ) +277,439 +Capital expenditures +167,586 +32,250 +1,845 +— +201,681 +Depreciation and amortization +181,026 +31,417 +685 +— +213,128 +Identifiable assets +1,113,877 +202,243 +67,740 +— +1,383,860 +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 +The following summarizes selected information +between the United States and all international locations combined for the years ended December 31, 2015, 2014 and 2013. The revenues +are presented based on the location of the use of the product or service. Assets related to international operations are less than +10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2015 +2014 +2013 +(in thousands) +United States Revenues +$ 1,191,704 +$ 2,249,260 +$ 1,795,592 +International Revenues +72,136 +88,153 +65,897 +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +58 +Item 9. Changes in and Disagreements with Accountants on +Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2015 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 30 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2015 and issued a report thereon which +is included on page 31 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive +officers will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders, in the section titled “Election +of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on +page 13 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee +of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2016 Annual Meeting +of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit +Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct +that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers +and Related Party Transaction Policy. Both of these documents are available on the Company’s Web site at www.rpc.net. Copies +are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 520, N.E., Atlanta, +GA 30329. +RPC, Inc. intends to satisfy the disclosure +requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements +of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which +is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section +16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s +Proxy Statement for its 2016 Annual Meeting of Stockholders, which is incorporated herein by reference. +59 +Item 11. Executive Compensation +Information concerning director and executive +compensation will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders, in the sections titled “Compensation +Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and +Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated +herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners +and Management and Related Stockholder Matters +Information concerning +security ownership will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders, in the sections “Capital +Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance Under +Equity Compensation Plans +The following table sets forth certain +information regarding equity compensation plans as of December 31, 2015. +Plan Category +(A) +Number of +Securities To +Be Issued Upon Exercise of +Outstanding Options, +Warrants and Rights +(B) +Weighted +Average Exercise Price of +Outstanding Options, Warrants and +Rights +(C) +Number +of Securities Remaining +Available for Future Issuance +Under Equity Compensation +Plans (Excluding Securities +Reflected in Column (A)) +Equity compensation plans approved by +securityholders +— +$ — +7,120,525 (1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ — +7,120,525 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 10 to the Consolidated Financial +Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant +fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC +Proxy Statement for its 2016 Annual Meeting of Stockholders. This information is incorporated herein by reference. +60 +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule +and Exhibits +1. Consolidated +financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this +report. +2. The +financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part +of this report. +3. Exhibits listed +in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or +compensatory plans or arrangements: +10.1 2004 +Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed +on March 24, 2004). +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated +herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated +herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit +10.14 to the Form 10-K filed on March 2, 2007). +10.10 Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, +2006). +10.11 Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form +10-K filed on March 3, 2010). +10.14 Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May +2, 2012). +10.15 Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 +to the Form 10-K filed on February 27, 2015). +10.17 2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement +filed on March 17, 2014). +61 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated herein by reference to Exhibit 3.2 to the Form 10-Q filed on November 3, 2014). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Form 10-K filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Form 10-K filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Form 10-K filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Form 10-K filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by +reference to Exhibit 10.15 to the Form 10-K filed on February 27, 2015). +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +18 +Preferability Letter from Independent Registered Public Accounting Firm (incorporated by reference to Exhibit 18 to Registrant’s Quarterly Report on Form 10-Q filed on May 1, 2015). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +62 +SIGNATURES +Pursuant to the requirements of Section 13 +or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, +thereunto duly authorized. +RPC, Inc. +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 29, 2016 +Pursuant to the requirements of the Securities +Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities +and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 29, 2016 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Treasurer +(Principal Financial and Accounting Officer) +February 29, 2016 +The Directors of RPC (listed below) executed +a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +James A. Lane, Jr., Director +Gary W. Rollins, Director +Linda H. Graham, Director +Henry B. Tippie, Director +Bill J. Dismuke, Director +James B. Williams, Director +Larry L. Prince, Director +/s/ Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 29, 2016 +63 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following +documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +30 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +31 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +32 +Consolidated Balance Sheets as of December 31, 2015 and 2014 +33 +Consolidated Statements of Operations for the three years ended December 31, 2015 +34 +Consolidated Statements of Comprehensive Income for the three years ended December 31, 2015 +35 +Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2015 +36 +Consolidated Statements of Cash Flows for the three years ended December 31, 2015 +37 +Notes to Consolidated Financial Statements +38 - 58 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +64 +Schedules not listed above have been omitted +because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +SCHEDULE II — VALUATION AND QUALIFYING +ACCOUNTS +For the years ended +December 31, 2015, 2014 and 2013 +(in thousands) +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Net (Deductions) +Recoveries +Balance +at End of +Period +Year ended December 31, 2015 +Allowance for doubtful accounts +$ 15,351 +$ (2,958 ) +$(1,788) (1) +$ 10,605 +Deferred tax asset valuation allowance +$ 2 +$ 274 +$ — (2) +$ 276 +Year ended December 31, 2014 +Allowance for doubtful accounts +$ 13,497 +$ 2,280 +$(426) (1) +$ 15,351 +Deferred tax asset valuation allowance +$ 83 +$ — +$(81) (2) +$ 2 +Year ended December 31, 2013 +Allowance for doubtful accounts +$ 9,110 +$ 8,815 +$(4,428) (1) +$ 13,497 +Deferred tax asset valuation allowance +$ 1,003 +$ — +$(920) (2) +$ 83 +(1) Net (deductions) recoveries in the allowance for doubtful +accounts principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state net operating losses +that management believes will not be utilized before they expire. +64 +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2015 +Revenues +$ 406,270 +$ 297,560 +$ 291,924 +$ 268,086 +Operating profit (loss) +$ 6,374 +$ (52,347 ) +$ (52,899 ) +$ (57,405 ) +Net income (loss) +$ 7,548 +$ (34,055 ) +$ (35,173 ) +$ (37,881 ) +Net income (loss) per share — basic (a) +$ 0.04 +$ (0.16 ) +$ (0.16 ) +$ (0.18 ) +Net income (loss) per share — diluted (a) +$ 0.04 +$ (0.16 ) +$ (0.16 ) +$ (0.18 ) +2014 +Revenues +$ 501,692 +$ 582,831 +$ 620,684 +$ 632,206 +Operating profit +$ 65,416 +$ 103,484 +$ 106,408 +$ 125,621 +Net income +$ 39,388 +$ 63,283 +$ 64,885 +$ 77,637 +Net income per share — basic (a) +$ 0.18 +$ 0.29 +$ 0.30 +$ 0.36 +Net income per share — diluted (a) +$ 0.18 +$ 0.29 +$ 0.30 +$ 0.36 +(a) The sum of the income per share for the four quarters may differ from annual amounts due to the required method of computing +the weighted average shares for the respective periods. +65 \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/filing_metadata.csv b/raw/filings/0000742278/2015/0001571049-16-012371/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..428367714c9968c2e52a408a94610a138749eb44 --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2016-02-29,2015-12-31,2016-02-29T20:04:23.000Z,0001571049-16-012371,t1600094_10k.htm,FORM 10-K,6544061,1,0,https://www.sec.gov/Archives/edgar/data/742278/000157104916012371/t1600094_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000157104916012371/,2015,2015,1 diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/item1.txt b/raw/filings/0000742278/2015/0001571049-16-012371/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6599a275acc52b5324796b7e4655f4b00d421c66 --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/item1.txt @@ -0,0 +1,364 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include, among +others, (1) pressure pumping services, (2) downhole tool services, (3) coiled tubing services, (4) snubbing services (also referred +to as hydraulic workover services), (5) nitrogen services, (6) the rental of drill pipe and other specialized oilfield equipment, +and (7) well control. RPC acts as a holding company for its operating units, Cudd Energy Services, Patterson Rental and Fishing +Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and others. As of December 31, 2015, RPC had approximately +3,100 employees. +2 +Business Segments +RPC’s service lines have been aggregated +into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities +between the financial performance and approach to managing the service lines within each of the segments, as well as the economic +and business conditions impacting their business activity levels. +During 2015, less than one percent of RPC’s +consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico and in the Gulf of Alaska. We also +estimate that 70 percent of our 2015 revenues were related to drilling and production activities for oil, and 30 percent were related +to drilling and production activities for natural gas. +Technical Services include RPC’s oil +and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services +directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest +capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or +to address well control issues. This business segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, +nitrogen, well control, wireline and fishing. The principal markets for this business segment include the United States, including +the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. Customers +include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. +Support Services include RPC’s oil +and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment +and services include drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and +consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and +Appalachian regions and project work in selected international locations in the last three years including primarily Canada, Latin +America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas +producers, and selected nationally owned oil companies. +Technical Services +The following is a description of the primary +service lines conducted within the Technical Services business segment: +Pressure Pumping . Pressure pumping +services, which accounted for approximately 54 percent of 2015 revenues, 57 percent of 2014 revenues and 55 percent of 2013 revenues +are provided to customers throughout Texas, and the Appalachian, mid-continent and Rocky Mountain regions of the United States. +We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that +have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed +for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in +varying geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and +bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier +for each item. Pressure pumping services offered include: +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +bauxite or synthetic proppant, which is often suspended in gel, is pumped into the fracture. When the pressure is released at the +surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil +and natural gas can flow through the fracture into the production tubing and ultimately the well surface. In some cases, fracturing +is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or +with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 18 percent of 2015 revenues, 15 percent of 2014 revenues and 16 percent of 2013 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation at the completion stage +of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +3 +Coiled Tubing . Coiled tubing services, +which accounted for approximately nine percent of revenues in 2015, 2014 and 2013, involve the injection of coiled tubing into +wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion +of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous +lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and +used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing coiled tubing in +a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel +continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into +a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a +coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities +in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete +multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility +allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the +strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses +for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter +coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in +more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible +steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for approximately three percent of revenues in 2015 and 2014 and four percent +of revenues in 2013, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing +and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole +equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing +the pressure from the well, which stops production and can damage the formation, and because a snubbing rig can perform many applications +at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing +segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required +to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer +reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe +conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for approximately +four percent of revenues in 2015, three percent of revenues in 2014 and four percent of revenues in 2013. There are a number of +uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside +of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in +various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which +production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing +medium for our fracturing service line. In addition, nitrogen can be complementary to our snubbing and coiled tubing service lines, +because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our +pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in +which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +4 +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process, near the end of the life cycle of a well. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +The following is a description of the primary +service lines conducted within the Support Services business segment: +Rental Tools . Rental tools accounted +for approximately four percent of revenues in 2015, 2014 and 2013. The Company rents specialized equipment for use with onshore +and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas +wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of +the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical +to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities +are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent +region, Appalachian region and the Rocky Mountains. +Patterson Rental Tools offers a broad range +of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +5 +Due to aging oilfields and lower-cost sources +of oil internationally, the drilling rig count in the U.S. has declined by approximately 89 percent from its peak in 1981. However, +due to continuously enhanced technology, more wells are drilled during periods of strong industry activity, and these wells are +increasingly productive. For these reasons, the domestic production of natural gas rose to record levels in the third quarter of +2015, and domestic production of crude oil in the third quarter of 2015 reached its highest level since the third quarter of 1971. +Domestic production of both natural gas and oil began to decline during the third and fourth quarters of 2015, however, due to +the decline in domestic drilling and completion activities. Oil and gas industry activity levels have historically been volatile, +experiencing multiple cycles, including down cycle troughs in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling +rig count in the industry’s history), 2002 and again in 2009. The rig count during the peak of the most recent cycle occurred +at the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014. The rig count continued +to decline in 2015 and 2016. Early in 2016, the U.S. domestic drilling rig count had declined by approximately 73 percent from +its most recent peak in 2014 and was only five percent higher than the April 1999 record low drilling rig count. +The fluctuations in domestic drilling activity +since the most recent peak in the third quarter of 2014 are consistent with global supply of and demand for oil, the domestic supply +of and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar +on world currency markets, and projected near-term economic growth. During 2015 the average price of natural gas decreased by approximately +39 percent compared to the prior year, but during the first quarter of 2016 stabilized at a price approximately equal to the average +price in the fourth quarter of 2015. The average price of oil decreased by approximately 48 percent during 2015 compared to 2014. +Early in the first quarter of 2016, the price of oil decreased by approximately 26 percent compared to the fourth quarter of 2015. +RPC believes that the decrease in the price of oil during this period has been caused by the actions of the OPEC cartel, increased +supply from the domestic U.S. market, weak global demand, the strength of the U.S. dollar on global currency markets and high storage +levels of oil. The precipitous decline in the price of oil that has taken place since the third quarter of 2014 has caused a significant +decrease in oil-directed drilling activity. During this period the U.S. domestic oil-directed drilling rig count has fallen by +approximately 70 percent. In addition to oil and natural gas, the price of natural gas liquids has become a determinant of our +customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production +of various natural gas liquids has increased to a level comparable to that of natural gas. During 2015 the average price of natural +gas liquids decreased by approximately 56 percent compared to 2014, and early in the first quarter of 2016 had declined by approximately +26 percent compared to the average price in 2015. The declines in the prices of oil, natural gas, and natural gas liquids during +2015 and the first quarter of 2016 to date carry significant negative implications for RPC’s customer activity levels over +the near term. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count early in the first quarter of 2016 was the lowest natural gas drilling rig count ever recorded. +Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent years due to increased domestic +reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. The price of natural gas +has declined in 2015 and early in the first quarter of 2016, and has fallen to a level not observed since the fourth quarter of +1998. We have observed that these natural gas market dynamics discourage our customers from conducting natural gas-directed drilling +activities. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and in the fourth quarter +of 2015, the United States began to export natural gas for the first time. We anticipate that oil-directed drilling will continue +to represent the majority of the total drilling rig count, in spite of the fact that the price of oil has declined tremendously +from the third quarter of 2014 through the first quarter of 2016 to date. Over the long term, we believe that natural gas-directed +drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural gas demand from +U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. +We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons +generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides to +its customers. +There are certain types of wells being drilled +in the U.S. domestic market for which there is a higher demand for RPC’s services. Known as either directional or horizontal +wells, these wells are more difficult and costly to complete. They have become an increasingly large percentage of the U.S. domestic +market, and since the third quarter of 2008, have consistently comprised the majority of U.S. domestic drilling. Because they are +drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when +they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which +in turn require a great deal of pressure pumping horsepower on location to complete the well. Furthermore, since they are not drilled +in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, +rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping +and coiled tubing services, as well as our downhole tools and services. +6 +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately six percent +of RPC’s consolidated revenues in 2015 and four percent in 2014 and 2013. RPC’s equipment investments over the last +several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected +financial returns. International revenues decreased primarily due to lower customer activity levels in Canada, Australia, Bolivia +and Mexico in 2015 partially offset by increased activity in Argentina compared to the prior year. During 2015, RPC provided snubbing, +well control and oilfield training services in several countries including Gabon and Australia. We also provided downhole motors +and tools in Argentina, Canada, China and Oman, and rental tools in Equatorial Guinea. We continue to focus on the selected development +of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent +of total revenues in 2016. +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth in service lines and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. As the current industry downturn continues, +we believe that many financial investors who have provided capital to smaller oilfield service companies in the past several years +are seeking to liquidate their investments. This development, along with continued depressed financial results in our industry, +may make valuations for acquisition targets more attractive. We will continue to consider the acquisitions of existing businesses +but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility to fund +the purchase of revenue-producing equipment and other working capital requirements. In January 2014, this facility was extended +for five years, and in November of 2015, RPC voluntarily reduced the borrowing capacity of the facility. We have pursued this capital +source because of the high returns on investment that have been generated by many of our service lines during the previous several +years, and because of the low cost and ready availability of debt capital. During 2014, we purchased additional revenue-producing +equipment to support high industry activity levels. We took delivery of this equipment during the third and fourth quarters of +2014 and the first and second quarters of 2015. We had no outstanding balance on our credit facility at the end of 2015 due to +a decrease in capital expenditures and working capital. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and products +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2015, RPC provided oilfield services to several hundred +customers. Of these customers, only one, Anadarko Petroleum Corporation (Anadarko) at approximately 23 percent of revenues, accounted +for more than 10 percent of revenues. RPC believes that the relationship with this customer is good, but the loss of this customer +could have a material adverse effect on Company revenues in the near term. +7 +Sales are generated by RPC’s sales +force and through referrals from existing customers. Over the past three years we have from time to time entered into agreements, +with terms beyond one year, to provide services to certain domestic customers. We monitor closely the financial condition of these +customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short +lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales +backlog in most of our service lines. +Competition +RPC operates in highly competitive areas +of the oilfield services industry. Our products and services are sold in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. Strong oilfield activity during the past several years and the availability +of capital have encouraged several new, smaller companies to seek debt and equity capital and accelerate their growth rates. The +presence of these new competitors has increased competitive pricing pressures as domestic oilfield activity moderated during 2013, +2014 and 2015. Although the growth in the overall domestic fleet of revenue-producing equipment has moderated, pricing for our +services remains competitive. RPC believes that the principal competitive factors in the market areas that it serves are product +availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety +and technical proficiency, and price. +The oil and gas services industry includes +a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton +Company, Baker Hughes and Schlumberger Ltd., and a significant number of locally oriented businesses. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high +demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, Texas +that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana +that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional +information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently +operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, +the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, +which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day as they are filed with the Securities and Exchange Commission. +8 \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/item13.txt b/raw/filings/0000742278/2015/0001571049-16-012371/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4fa8311c5fcd9ca74128598edc10adbdac209f74 --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/item13.txt @@ -0,0 +1,7 @@ +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2016 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/item9a.txt b/raw/filings/0000742278/2015/0001571049-16-012371/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..00c603012d455220bed440d6a3140d5719b5be7c --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/item9a.txt @@ -0,0 +1,22 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2015 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 30 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2015 and issued a report thereon which +is included on page 31 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/rp_note.txt b/raw/filings/0000742278/2015/0001571049-16-012371/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..b736fa59d4a34e3452cbda43ab8533d2dcee0cfb --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/rp_note.txt @@ -0,0 +1,43 @@ +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $753,000 in 2015, $663,000 in 2014, and $670,000 in 2013. The Company’s +(payable) receivable due (to) from Marine Products for these services was $(11,000) as of December 31, 2015 and $47,000 as of December +31, 2014. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,127,000 in +2015, $1,092,000 in 2014 and $1,039,000 in 2013. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $100,000 in 2015, $84,000 in 2014 and $83,000 in 2013. +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 +percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a +corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily +by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating +lease agreement with 255 RC, LLC for a period of five years. During 2015, RPC recorded certain net operating costs comprised +of rent and an allocable share of fixed costs of approximately $186,000 for the corporate aircraft. The Company accounts for this investment using the equity method and its proportionate share of income or +loss is recorded in selling, general and administrative expenses. As of December 31, 2015, the investment closely approximates +the underlying equity in the net assets of 255 RC, LLC. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2015, 2014 and 2013 \ No newline at end of file diff --git a/raw/filings/0000742278/2015/0001571049-16-012371/rpt_disclosure.txt b/raw/filings/0000742278/2015/0001571049-16-012371/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..07ddefda0157d65f9a31860dd229ba6f9b493ef1 --- /dev/null +++ b/raw/filings/0000742278/2015/0001571049-16-012371/rpt_disclosure.txt @@ -0,0 +1,8 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $753,000 in 2015. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2015, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $186,000 for the corporate aircraft. +During 2015, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2015, payments totaling approximately $1,127,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $100,000 in 2015. +27 +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2015 were reviewed, approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Code. \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/filing.txt b/raw/filings/0000742278/2016/0001571049-17-001715/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e86351edc6455fb80b3457142a49909f6dae327f --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/filing.txt @@ -0,0 +1,4993 @@ +10-K +1 +t1700131_10k.htm +FORM 10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +x +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +¨ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, 2016 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 520 +ATLANTA, GEORGIA 30329 +(404) 321-2140 +Securities +registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant +to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant +is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No +Indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No +Indicate by check mark whether the registrant +(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding +12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such +filing requirements for the past 90 days. Yes x No ¨ +Indicate by check mark whether the registrant +has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted +and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such +shorter period that the registrant was required to submit and post such files). Yes x +No ¨ +Indicate by check mark if disclosure of delinquent +filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s +knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment +to this Form 10-K. x +Indicate by check mark whether the registrant +is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of +“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 +of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer ¨ Non-accelerated filer ¨ +Smaller reporting company ¨ +Indicate by check mark whether the registrant +is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x +The aggregate market value of RPC, Inc. Common +Stock held by non-affiliates on June 30, 2016, the last business day of the registrant’s most recently completed second +fiscal quarter, was $905,616,000 based on the closing price on the New York Stock Exchange on June 30, 2016 of $15.53 per share. +RPC, Inc. had 217,792,539 shares of Common +Stock outstanding as of February 17, 2017. +Documents Incorporated by Reference +Portions of the Proxy Statement for the 2017 +Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., +together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that +are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. +Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, +and our beliefs and expectations regarding future demand for our products and services and other events and conditions that may +influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report +include without limitation statements regarding our belief that the long-term demand outlook for natural gas is favorable and +that natural gas-directed drilling will increase over the long-term; our belief that oil-directed drilling will continue to represent +the majority of the total drilling rig activity; our continued belief in the long-term growth opportunities for our business; +our expectation to continue to focus on the development of international business opportunities in current and other international +markets; our expectations regarding acquisition targets in our industry; the adequacy of our insurance coverage; the impact of +lawsuits, legal proceedings and claims on our business and financial condition; our expectations regarding payment of cash dividends +to common stockholders; our belief that industry factors will continue to depress natural gas directed drilling activity during +the near-term; our belief that U.S. oilfield activity will continue to increase during the near term; our belief that recovering +commodity prices will have moderately positive implications for our near-term activity levels; our belief that the U.S. domestic +rig count will continue to recover moderately during the near term; our belief regarding potential revenue related to uncompleted +wells; our expectations regarding competition in our market; our expectations regarding the return of assets to service when markets +improve; our statement that we plan minimal increases in our fleet of revenue-producing equipment during 2017; our ability to +maintain sufficient liquidity and a conservative capital structure; our expectations about contributions to the defined benefit +pension plan in 2017; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures +and contractual obligations for future periods; our expectations regarding the costs of skilled labor and many of the raw materials +used in providing our services; our belief that it will be difficult to increase prices for our services; estimates made with +respect to our critical accounting policies; the effect of new accounting standards; and the effect of the changes in foreign +exchange rates on our consolidated results of operations or financial condition. +The words “may,” “will,” +“expect,” “believe,” “anticipate,” “project,” “estimate,” and similar +expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made +by our management in light of its experience and its perception of historical trends, current conditions, expected future developments +and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of +future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking +statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to +differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized +in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for its operating +units: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services +and regulatory compliance are classified under Corporate. RPC is further organized into Technical Services and Support Services +which are its operating segments. As of December 31, 2016, RPC had approximately 2,500 employees. +2 +Business Segments +RPC manages its business as either +services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the +well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel +operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based +on the similarities of the operational characteristics and costs associated with providing the service. The businesses under +Support Services are primarily able to generate revenues through one source, which is either a hard +asset or a personnel resource. During 2016, less than one percent of RPC’s consolidated revenues were generated from +offshore operations in the U.S. Gulf of Mexico. We also estimate that 70 percent of our 2016 revenues were related to +drilling and production activities for oil, and 30 percent were related to drilling and production activities for natural +gas. +Technical Services include RPC’s oil +and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include +major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered +under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial +success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel +who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well +servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a +whole across these various services. The principal markets for this business segment include the United States, including the southwest, +mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. +Support Services include all of the +services that provide (i) equipment for customers’ use on the well site without RPC personnel and (ii) services that +are provided in support of customer operations off the well site such as classroom and computer training, and other +consulting services. The primary drivers of operational success for equipment provided for customers’ use on the well +site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design +characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the +well site and competitive marketing of such services. The equipment and services offered include drill pipe and related +tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for +these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this +segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and +project work in selected international locations in the last three years, including primarily Canada, Latin America and the +Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas producers, +and selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, +which accounted for approximately 46 percent of 2016 revenues, 54 percent of 2015 revenues and 57 percent of 2014 revenues are +provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide +these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. +Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping +service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. +Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives. +Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure +pumping services offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid +gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. +Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped +into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 23 percent of 2016 revenues, 18 percent of 2015 revenues and 15 percent of 2014 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation at the completion stage +of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for approximately 10 percent of revenues in 2016 and nine percent in 2015 and 2014, involve the injection of coiled +tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate +completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in +continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production +tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing +in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to +reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids +into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility +of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities +in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete +multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility +allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the +strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses +for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter +coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in +more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible +steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to +as hydraulic workover services), which accounted for approximately three percent of revenues in 2016, 2015 and 2014, involves +using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment +in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure +on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops +production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other +alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and +gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services +safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores +which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing +unit. +4 +Nitrogen . Nitrogen accounted for approximately +five percent of revenues in 2016, four percent of revenues in 2015 and three percent of revenues in 2014. There are a number of +uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside +of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in +various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which +production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing +medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because +it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure +pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids +used in fracturing or acidizing would damage a customer’s well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these +sources of supply are adequate. +Well Control . Cudd Energy Services specializes +in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. +In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, +expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company +has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds +to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the +most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. +In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations +can resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring +objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor +line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline +services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Fishing . Fishing involves the use of +specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for approximately three percent of revenues in 2016 and four percent of revenues in 2015 and 2014. The Company rents specialized +equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent +operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the +geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often +find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. +The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, +the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range +of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control School +provides industry and government accredited training for the oil and gas industry both in the United States and in limited international +locations. Well Control School provides training in various formats including conventional classroom training, interactive computer +training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and +lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 83 percent from +its peak in 1981. However, due to continuously enhanced technology, more wells are drilled during periods of strong industry +activity, and these wells are increasingly productive. For these reasons, the domestic production of natural gas rose to +record levels in the third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 reached its +highest level since the third quarter of 1971. Due to the decline in domestic drilling and completion activities, domestic +production of both natural gas and oil began to decline during the third and fourth quarters of 2015, although production +continues to remain high in comparison to historical levels. Oil and gas industry activity levels have historically been +volatile, experiencing multiple cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the +lowest U.S. domestic rig count in U.S. oilfield history. The rig count during the peak of the most recent cycle occurred at +the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014. The rig count continued +to decline in 2015 and 2016, until June of 2016 when it stabilized and began to increase. Early in 2017, the rig count had +recovered by approximately 87 percent from the historical low set during the second quarter of 2016, but was still +approximately 62 percent lower than the most recent cyclical peak in the third quarter of 2014. +6 +The fluctuations in domestic drilling activity +since the most recent peak in the third quarter of 2014 are consistent with global supply of and demand for oil, the domestic +supply of and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. +dollar on world currency markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the +price of oil fell by approximately 78 percent from its most recent cyclical peak in the third quarter of 2014. From its low price +in early 2016, the price of oil had risen by approximately 80 percent early in the first quarter of 2017. RPC believes that the +decrease in the price of oil during this period was caused by the actions of the Organization of the Petroleum Exporting Countries +(OPEC) cartel, increased supply from the domestic U.S. market, weak global demand, the strength of the U.S. dollar on global currency +markets and high storage levels of oil. The precipitous decline in the price of oil that took place between the third quarter +of 2014 and the second quarter of 2016 caused a significant decrease in oil-directed drilling activity. The price of natural gas +fell during this time as well, declining by approximately 42 percent from the beginning of 2015 to the second quarter of 2016. +Early in the first quarter of 2017, however, the price of natural gas had risen by approximately 77 percent from the low recorded +in the second quarter of 2016, and was approximately 19 percent higher than its price early in 2015. Early in 2017, the price +of oil was high enough to encourage increased drilling and production activity, but the price of natural gas had not reached levels +that were adequate to encourage natural gas-directed drilling activity in the U.S. domestic oilfield. In addition to oil and natural +gas, the price of natural gas liquids is a determinant of our customers’ activity levels, since it is produced in many of +the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable +to that of natural gas. During 2015 the average price of natural gas liquids decreased by approximately 56 percent compared to +2014, but during 2016 the average price of natural gas liquids increased by approximately six percent compared to 2015. Early +in the first quarter of 2017, the price of natural gas liquids had increased by approximately 65 percent compared to the average +price in 2016. The fluctuations in the prices of these commodities, and in particular, the extreme volatility in the price of +oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. Early +in the first quarter of 2017, the natural gas drilling rig count had risen by approximately 79 percent, although it remains very +low by historical standards. Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent +years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed +wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and in the fourth quarter +of 2015, the United States began to export natural gas for the first time. We anticipate that oil-directed drilling will continue +to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that natural gas-directed +drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural gas demand from +U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. +We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons +generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides to +its customers. +Unconventional wells generate a higher +demand for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. +domestic drilling and reached a historical high of approximately 90 percent of total drilling during the first quarter of +2017. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require +additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the +well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require +tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, +these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and +services. +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately seven percent +of RPC’s consolidated revenues in 2016, six percent in 2015 and four percent in 2014. RPC’s allocation of growth capital +over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels +and expected financial returns. International revenues decreased 29 percent in 2016 compared to the prior year primarily due to +lower customer activity levels in Australia, Gabon, Equatorial Guinea, China and Argentina partially offset by increased activity +in Bolivia. During 2016, RPC provided snubbing, well control and oilfield training services in several countries including Gabon +and Australia. We also provided downhole motors and tools in Argentina, Canada, China and Oman, and rental tools in Equatorial +Guinea. We continue to focus on the selected development of international opportunities in these and other markets, although we +believe that it will continue to be less than ten percent of total revenues in 2017. +7 +RPC provides services to its international customers +through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including +the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term +perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic +operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to +have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting +the timing and duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for +further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. As the current industry downturn continues, +we believe that many financial investors who have provided capital to smaller oilfield service companies in the past several years +are seeking to liquidate their investments. This development, along with continued depressed financial results in our industry, +may make valuations for acquisition targets more attractive. We will continue to consider the acquisitions of existing businesses +but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is the lesser of $125 million +or a specified percentage of eligible accounts receivable less the amount of any outstanding letters of credit. There was no +outstanding balance on this credit facility as of December 31, 2016. Our capital structure is more conservative than that of +many of our peers. +Customers +Demand for RPC’s services and products +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2016, RPC provided oilfield services to several hundred +customers. Of these customers, there were no customers in 2016 and only one, Anadarko Petroleum Corporation (Anadarko) at 23 percent +of revenues in 2015, that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force +and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure +plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services +or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our services. +8 +Competition +RPC operates in highly competitive areas of +the oilfield services industry. We sell our products and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the past several years, a number of small oilfield services +companies as well as several of our publicly traded peers have become insolvent and either been forced to liquidate or undergo +bankruptcy proceedings. During the third and fourth quarters of 2016, however, the availability of capital and high public equity +valuations have allowed many insolvent companies to resume operations or continue operations as the result of a business combination. +As of the first quarter of 2017, RPC has not experienced increased competition from these entities, but we assume that the financial +capabilities of these competitors will increase competitive pressures in the future. Pricing for our services has been extremely +competitive over the past several years due to the severe industry downturn and the oversupply of equipment and crews operating +in the U.S. domestic oilfield. RPC believes that the principal competitive factors in the market areas that it serves are product +availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety +and technical proficiency, and price. +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, +Baker Hughes and Schlumberger Ltd. The industry also includes a number of publicly traded peers whose operations are more +similar to RPC, including Patterson-UTI Energy, Inc., Superior Energy Services, Weatherford International, Inc., Mammoth +Energy Services, Inc. and Keane Group, Inc., as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily of +oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high +demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana +that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For +additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal +and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker +safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such +laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will +be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws +and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we +currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and +ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, +which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day as they are filed with the Securities and Exchange Commission. +9 +Item 1A. Risk Factors +Demand for our products and services is affected by the volatility +of oil and natural gas prices. +Oil and natural gas prices affect demand throughout +the oil and gas industry, including the demand for our products and services. Our business depends in large part on the conditions +of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production +of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil is affected by, among other +things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, +an oil cartel which controls slightly less than 40 percent of global oil production. OPEC’s actions have historically been +unpredictable, and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil +and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, +producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged +low level of customer activity in the oil and gas industry has adversely affected the demand for our products and services and +our financial condition and results of operations. +Reliance +upon a large customer may adversely affect our revenues and operating results. +At +times our business has had a concentration of one or more major customers. There were no customers that accounted for more than +10 percent of the Company’s revenues in 2016 and 2014. However, one of our customers, Anadarko, accounted +for approximately 23 percent of revenues in 2015 with no other customers exceeding 10 percent of revenues in 2015. In addition, +there was no customer as of December 31, 2016 that accounted for more than 10 percent of accounts receivable, while Anadarko +accounted for approximately 14 percent of accounts receivable as of December 31, 2015. +The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction +in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon +our revenues and operating results. +Our +concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us +to experience increased losses for doubtful accounts. +Substantially +all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure +to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry +conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade +receivables. The periodic downturns that our industry experiences may adversely affect our customers’ operations which +could cause us to experience increased losses for doubtful accounts. +We may be unable to compete in the highly competitive oil +and gas industry in the future. +We operate in highly competitive areas of the +oilfield services industry. The products and services in our industry segments are sold in highly competitive markets, and our +revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in +major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry +competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in +the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency +and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be +able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be +a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition +candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions +and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could +result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations +and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired +businesses could have a material adverse effect on our results of operations and financial condition. +10 +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the +weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains +and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain +times of the year may also affect our operations, and severe hurricanes may affect our customers’ activities for a period of several +years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms +can also decrease our customers’ activities immediately after they occur. Such hurricanes may also affect the prices of oil and +natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged +by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching +customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. +Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact +growth potential and profitability. +Our ability to be productive and profitable +will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, +impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result +in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, +our capacity and profitability could be diminished, and our growth potential could be impaired. +Our business has potential liability for litigation, personal +injury and property damage claims assessments. +RPC’s subsidiaries have a number of agreements +of various types in place with our customers. In general, these agreements indemnify RPC and its subsidiaries against damage or +liabilities that arise from the actions of our employees or the operation of our equipment. The provisions in these agreements +do not make a distinction among the types of services that RPC provides or the location of the work. These agreements also require +that RPC maintain a certain level and type of insurance coverage against any claims that are determined to be our responsibility. +RPC has insurance coverage in place with several well-capitalized insurance companies for accidental environmental claims. +Our operations involve the use of heavy equipment +and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result +in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation +may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result +in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships +with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe +is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates +we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable +to comply with regulations and environmental laws. +Our business is significantly affected by stringent +environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement +of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations +may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption +of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, +environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have +potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, +or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled to be +unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances +in connection with our operations. We believe that our present operations substantially comply with applicable federal and state +pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no +material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict +whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties +for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively +affect our future financial results. +11 +Compliance with federal and state regulations relating to hydraulic +fracturing and designation of economic development zones related to natural gas-directed drilling from shale formations could +increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are +the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding +the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. +Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing +practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices +and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) +has also undertaken a study of the environmental impact of hydraulic fracturing practices. In the second quarter of 2015, the +EPA issued a report which concluded that hydraulic fracturing had not caused a measureable impact on drinking water sources in +the U.S. While this conclusion and other conclusions from similar efforts are favorable for our industry, we are unable to predict +whether future scrutiny of RPC’s pressure pumping business and any resulting regulatory change will impact our business +through increased operational costs, operational delays, or a reduction in demand for hydraulic fracturing services. +Our international operations could have a material adverse +effect on our business. +Our operations in various countries including, +but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to +risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency +exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material +adverse effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common stock +of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock +has varied significantly in the past. +Our management has a substantial ownership interest, and public +stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled +Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The +Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. +Randall Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, +controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company +need not comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors and +their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 73 percent of RPC’s +outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election +of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. +This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over +the Company at a premium. +Our management has a substantial ownership interest, and the +availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock +to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which +could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. +Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect +the trading price of our common stock. +Provisions in RPC’s +certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws +and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms for +the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s +Board of Directors more difficult or expensive. +12 +Some of our equipment and several types of +materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited +number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not +be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. +There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service. While these +materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, +and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our +revenues and profits. +We have used outside financing to accomplish +our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business +requires a great deal of capital in order to maintain our equipment and increase our fleet of equipment to expand our operations, +and we have access to our credit facility to fund our necessary working capital and equipment requirements. Our credit facility, +as amended June 30, 2016, provides a borrowing base at the lesser of (a) $125 million or (b) the difference between (i) a specified +percentage (ranging from 70% to 80%) of eligible accounts receivable less (ii) the amount of any outstanding letters of credit, +and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources +become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional +funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing +sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the +issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating +activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand +our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future +revenues and profits. +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +RPC owns or leases approximately 120 offices +and operating facilities. The Company leases approximately 18,600 square feet of office space in Atlanta, Georgia that serves +as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” +contained in Item 7. The lease agreement on the headquarters is effective through October 2020. RPC believes its current operating +facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities +used in our operations are as follows: +Owned +Locations +Broussard, Louisiana — Operations, sales +and equipment storage yards +Vilonia, Arkansas — Maintenance and rebuild +facilities +Elk City, Oklahoma — Operations, sales +and equipment storage yards +Houma, Louisiana — Administrative office +Houston, Texas — Pipe storage terminal +and inspection sheds +Kilgore, Texas — Operations, sales and +equipment storage yards +Odessa, Texas — Operations, sales and +equipment storage yards +Rock Springs, Wyoming — Operations, sales +and equipment storage yards +Vernal, Utah — Operations, sales and +equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Leased +Locations +Canton, Pennsylvania — Operations, sales +and equipment storage yards +Hobbs, New Mexico — Pumping services +facility +Oklahoma City, Oklahoma — Operations, +sales and administrative office +San Antonio, Texas — Operations, sales +and equipment storage yards +Seminole, Oklahoma — Pumping services +facility +The Woodlands, Texas — Operations, sales +and administrative office +Washington, Pennsylvania — Operations, +sales and equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +13 +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings +primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against +these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance +will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its +business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management +believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s +business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) +of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 +to this Form 10-K. +Item 4A. Executive Officers of the Registrant +Each of the executive officers of RPC was +elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting +of stockholders or until his or her earlier removal by the Board of Directors or his or her resignation. The following table lists +the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected +to Present Office +R. Randall Rollins (1) +85 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +72 +4/22/03 +President and Chief Executive Officer +Linda H. Graham (3) +80 +1/27/87 +Vice President and Secretary +Ben M. Palmer (4) +56 +7/8/96 +Vice President, Chief Financial Officer and Treasurer +(1) R. Randall Rollins began working for Rollins, +Inc. (consumer services) in 1949. Mr. Rollins has served as Chairman of the Board of +RPC since the spin-off of RPC from Rollins, Inc. in 1984. He has served as Chairman of +the Board of Marine Products Corporation (boat manufacturing) since it was spun off from +RPC in 2001 and Chairman of the Board of Rollins, Inc. since October 1991. He is also +a director of Dover Downs Gaming and Entertainment, Inc. and Dover Motorsports, Inc. +(2) Richard A. Hubbell has been the President of +RPC since 1987 and Chief Executive Officer since 2003. He has also been the President +and Chief Executive Officer of Marine Products Corporation since it was spun off from +RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +(3) Linda H. Graham has been the Vice President +and Secretary of RPC since 1987. She has also been the Vice President and Secretary of +Marine Products Corporation since it was spun off from RPC in 2001. Ms. Graham serves +on the Board of Directors of both of these companies. +(4) Ben M. Palmer has been the Vice President, Chief +Financial Officer and Treasurer of RPC since 1996. He has also been the Vice President, +Chief Financial Officer and Treasurer of Marine Products Corporation since it was spun +off from RPC in 2001. +14 +PART II +Item 5. Market for Registrant’s Common Equity, Related +Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading +on the New York Stock Exchange under the symbol RES. As of February 17, 2017 there were 217,792,539 shares of common stock outstanding +and approximately 16,600 beneficial holders of our common stock. The following table sets forth the high and low prices of RPC’s +common stock and dividends paid for each quarter in the years ended December 31, 2016 and 2015: +2016 +2015 +Quarter +High +Low +Dividends +High +Low +Dividends +First +$ 15.51 +$ 9.73 +$ - +$ 14.15 +$ 10.58 +$ 0.105 +Second +16.84 +13.12 +- +16.66 +12.81 +0.050 +Third +16.92 +13.50 +- +13.85 +8.54 +- +Fourth +22.28 +16.48 +0.050 +13.69 +8.45 +- +On July 28, 2015, the Board of Directors voted +to temporarily suspend RPC’s regular quarterly cash dividend to common stockholders; however, a special year-end cash dividend +of $0.05 per share was paid to common stockholders during the fourth quarter of 2016. Subject to industry conditions and +RPC’s earnings, financial condition, and other relevant factors, the Company expects to resume regular quarterly cash dividends +to common stockholders sometime in the future. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated +purchases in the fourth quarter of 2016 are outlined below. +Period +Total Number +of Shares +(or Units) +Purchased +Average Price +Paid Per Share +(or Unit) +Total Number of +Shares (or Units) +Purchased +as Part of +Publicly Announced +Plans or Programs +Maximum Number +(or +Approximate Dollar +Value) of Shares (or +Units) that May Yet Be +Purchased Under the +Plans or Programs (1) +October 1, 2016 to October 31, 2016 +- +$ - +- +2,050,154 +November 1, 2016 to November 30, 2016 +1,533 (2) +17.08 +- +2,050,154 +December 1, 2016 to December 31, 2016 +718 (2) +18.12 +- +2,050,154 +Totals +2,251 +$ 17.41 +- +2,050,154 +(1) +The Company has a stock buyback program initially +adopted in 1998 and subsequently amended in 2013 that authorizes the repurchase of up to 31,578,125 shares. There +were no shares repurchased as part of this program during the fourth quarter of 2016. As of December 31, 2016, +there are 2,050,154 shares available to be repurchased under the current authorization. Currently the program does +not have a predetermined expiration date. +(2) +Represents shares +repurchased by the Company in connection with taxes related to vesting of restricted shares. +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 1000 Index ("Russell 1000"), the Philadelphia Stock Exchange's Oil Service Index ("OSX"), and a peer group which includes companies that are considered peers of the Company (the "Peer Group"). The Company has voluntarily chosen to provide both an industry and a peer group index. +15 +The Company was a component +of the Russell 1000 during 2016. The Russell 1000 is a stock index representing large capitalization U.S. stocks with high historical +growth in revenues and earnings. The components of the index had a weighted average market capitalization in 2016 of $140 billion, +and a median market capitalization of $9 billion. The Russell 1000 was chosen because it represents companies with comparable market +capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that +provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company +is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same +or similar products and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., +Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. Patterson-UTI Energy, Inc. was not previously +included in the Peer Group because it conducts exploration and production activities and contract drilling activities as well as +providing pressure pumping services. However, during 2016 Patterson-UTI Energy, Inc. eliminated exploration and production activities +as an operating segment and announced a significant acquisition in the pressure pumping and rental tools business. Also, Patterson-UTI +Energy’s market capitalization was similar to the market capitalization of the Company as of December 31, 2016. For these +reasons, the Company added Patterson-UTI Energy to the Peer Group. In addition, the Company eliminated Basic Energy Services, Inc. +from the Peer Group because during the third and fourth quarters of 2016, Basic Energy Services announced that it could not fulfill +its financial obligations and was entering bankruptcy proceedings. We believe that Basic Energy Services’ stock price performance +during 2016 reflected the risk of bankruptcy to its shareholders rather than the financial performance of a peer of the Company. +For comparison purposes, the following graph includes the Peer Group as well as a group of companies which includes Weatherford +International, Inc., Basic Energy Services, Inc., Superior Energy Services, Inc. and Halliburton Company (the Former Peer Group). +The companies included in the Peer Group and the Former Peer Group have been weighted according to each respective issuer's stock +market capitalization at the beginning of each year. +16 +Item 6. Selected Financial Data +The following table summarizes certain selected +financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. +The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial +Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere +in this document. +STATEMENT OF OPERATIONS DATA: +Years Ended December 31, +2016 +2015 +2014 +2013 +2012 +(in thousands, except +employee and per share amounts) +Revenues +$ 728,974 +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +$ 1,945,023 +Cost of revenues +607,888 +986,144 +1,493,082 +1,178,412 +1,105,886 +Selling, general and administrative expenses +150,690 +156,579 +197,117 +183,139 +174,397 +Depreciation and amortization +217,258 +270,977 +230,813 +213,128 +214,899 +(Gain) loss on disposition of assets, net +(7,920 ) +6,417 +15,472 +9,371 +6,099 +Operating (loss) profit +(238,942 ) +(156,277 ) +400,929 +277,439 +443,742 +Interest expense +(681 ) +(2,032 ) +(1,431 ) +(1,822 ) +(1,976 ) +Interest income +467 +83 +19 +408 +28 +Other (expense) income, net +(204 ) +5,185 +(131 ) +245 +825 +(Loss) income before income taxes +(239,360 ) +(153,041 ) +399,386 +276,270 +442,619 +Income tax (benefit) provision +(98,114 ) +(53,480 ) +154,193 +109,375 +168,183 +Net (loss) income +$ (141,246 ) +$ (99,561 ) +$ 245,193 +$ 166,895 +$ 274,436 +(Loss) earnings per share : +Basic +$ (0.66 ) +$ (0.47 ) +$ 1.14 +$ 0.77 +$ 1.28 +Diluted +$ (0.66 ) +$ (0.47 ) +$ 1.14 +$ 0.77 +$ 1.27 +Dividends paid per share +$ 0.050 +$ 0.155 +$ 0.420 +$ 0.400 +$ 0.520 +OTHER DATA: +Operating margin percent +(32.8 )% +(12.4 )% +17.2 % +14.9 % +22.8 % +Net cash provided by operating activities +$ 101,704 +$ 473,792 +$ 322,757 +$ 365,624 +$ 559,933 +Net cash used for investing activities +(21,339 ) +(157,583 ) +(355,349 ) +(207,654 ) +(315,838 ) +Net cash (used for) provided by financing activities +(13,726 ) +(260,785 ) +33,664 +(163,433 ) +(237,325 ) +Capital expenditures +$ 33,938 +$ 167,426 +$ 371,502 +$ 201,681 +$ 328,936 +Employees at end of period +2,500 +3,100 +4,500 +3,900 +3,600 +BALANCE SHEET DATA AT END OF YEAR: +Accounts receivable, net +$ 169,166 +$ 232,187 +$ 634,730 +$ 437,132 +$ 387,530 +Working capital +377,589 +384,744 +612,616 +436,873 +403,316 +Property, plant and equipment, net +497,986 +688,335 +849,383 +726,307 +756,326 +Total assets +1,035,452 +1,237,094 +1,759,358 +1,383,860 +1,367,163 +Long-term debt +- +- +224,500 +53,300 +107,000 +Total stockholders’ equity +$ 806,799 +$ 952,281 +$ 1,078,382 +$ 968,702 +$ 899,232 +17 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +The following discussion should be read in +conjunction with “Selected Financial Data” and the Consolidated Financial Statements included elsewhere in this document. +See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) provides a +broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated +by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and +enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and +invest our capital in equipment and geographic markets that we believe will earn high +returns on capital. +- To maintain a flexible cost structure that +can respond quickly to volatile industry conditions and business activity levels. +- To maintain an efficient, low-cost capital +structure which includes an appropriate use of debt financing. +- To maintain high asset utilization which +leads to increased revenues and leverage of direct and overhead costs, while also ensuring +that increased maintenance resulting from high utilization does not interfere with customer +performance requirements or jeopardize safety. +- To deliver equipment and services to our +customers safely. +- To secure adequate sources of supplies of +certain high-demand raw materials used in our operations, both in order to conduct our +operations and to enhance our competitive position. +- To maintain and selectively increase market +share. +- To maximize stockholder return by optimizing +the balance between cash invested in the Company’s productive assets, the payment of +dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management +and stockholders. +In assessing the outcomes of these strategies +and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual +results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization +of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, +general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to +those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price +of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our +financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the +world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ +drilling and production activities. +18 +Current industry conditions are characterized +by oil prices which have risen from a low of approximately $29 per barrel in the first quarter of 2016 to approximately $53 per +barrel in the first quarter of 2017. As a result of this moderate increase in the price of oil, as well as improvements in the +prices of natural gas and natural gas liquids, the U.S. domestic rig count has risen from an historic low of 404 in the second +quarter of 2016 to 751 early in the first quarter of 2017. We believe that the principal reason for the increase in the price +of oil and the improvement in U.S. domestic oilfield activity relates to the announcement by the OPEC cartel during the fourth +quarter of 2016 that it would impose production quotas on its member countries in order to support the price of oil on the world +market. RPC believes that an important catalyst for an increase in world oil prices is declining production in the United States. +We believe this because the United States grew to be the world’s largest producer of oil during the second quarter of 2015, +and the increase in oil production was due to the growth of oil-directed drilling in shale formations. These wells produce a large +amount of oil immediately following their completion, but typically experience large production declines within two years. Following +its recent peak, U.S. oil production has fallen by approximately nine percent as of the most recent reported statistic during +the fourth quarter of 2016. Therefore, the declining production of these wells, and the rapid decline in drilling of new wells +of this type are additional catalysts for improving industry conditions. Customer activities directed towards natural gas drilling +and production have been weak for several years, with the U.S. domestic natural gas rig count during the first quarter of 2016 +falling to the lowest level ever recorded. We believe that customer activities directed towards drilling for natural gas have +been weak because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated +with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. +While natural gas-directed drilling has increased through early in the first quarter of 2017, we believe that these factors will +continue to depress natural gas-directed drilling during the near term. From a low of $1.72 per Mcf during the second quarter +of 2016, the price of natural gas had risen to $3.04 per Mcf early in the first quarter of 2017. In spite of this increase, we +believe that the price of natural gas remains too low to encourage our customers to conduct exploration and production activities +directed exclusively towards natural gas. +In 2016, the Company’s strategy of +utilizing equipment in unconventional basins has continued. During 2016, we made capital expenditures totaling $33.9 million primarily +for the maintenance of our existing revenue-producing equipment. +Revenues during 2016 totaled $729.0 million, +a decrease of 42.3 percent compared to 2015 primarily as a result of lower industry activity levels. Cost of revenues decreased +$378.3 million in 2016 compared to the prior year also due to lower activity levels. As a percentage of revenue, cost of revenues +also increased due to inefficiencies resulting from lower activity levels coupled with continued low pricing for our services. +Selling, general and administrative expenses as a percentage of revenues increased to 20.7 percent of revenues in 2016 compared +to 12.4 percent of revenues in 2015 due to increases in bad debt expense and professional fees as well as significantly lower +revenues. +Losses before income taxes were $239.4 million +for 2016 compared to $153.0 million in 2015. Net loss for 2016 was $141.2 million, or $0.66 loss per share compared to net loss +of $99.6 million, or $0.47 loss per share in 2015. +Cash flows from operating activities decreased +to $101.7 million in 2016 compared to $473.8 million in 2015 primarily due to unfavorable changes in working capital coupled with +lower earnings. As of December 31, 2016, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic oilfields, +as measured by the rotary drilling rig count, reached a recent cyclical peak of 1,931 during the third quarter of 2014. Between +the third quarter of 2014 and the second quarter of 2016, the drilling rig count fell by approximately 79 percent. During the +second quarter of 2016, the U.S. domestic drilling rig count reached the lowest level ever recorded. The principal catalyst for +this steep rig count decline is the decrease in the price of oil in the world markets, which began in the second quarter of 2014. +The price of oil began to fall at that time due to the perceived oversupply of oil, weak global demand growth, and the strength +of the U.S. dollar on world currency markets. During the second quarter of 2016, the price of oil and the U.S. domestic rig count +began to increase, and increased steadily throughout the remainder of 2016 and into the beginning of the first quarter of 2017. +As of the beginning of the first quarter of 2017, RPC believes that U.S. oilfield activity will continue to increase during the +near term, although our long-term visibility remains limited. +The current and projected prices of oil, +natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. During the first two quarters +of 2016, the prices of oil and natural gas remained at low levels that discouraged our customers from undertaking most of their +potential exploration and production activities. The prices of oil and natural gas have increased during the third and fourth +quarters of 2016 and into the first quarter of 2017, and we believe that the price of oil has risen to a level that provides adequate +financial returns to our customers and encourages increased drilling and production activities in many domestic oil-producing +basins. However, the price of natural gas has not risen to a level that encourages our customers to increase their drilling and +production activities, and we remain discouraged that U.S. production of natural gas remains high in spite of historically low +drilling activities. The average price of natural gas liquids during 2016 increased by approximately six percent compared to 2015, +and early in the first quarter of 2017 the price of natural gas liquids rose to levels not recorded since the fourth quarter of +2014. These commodity price trends, if they continue, have moderately positive implications for our near-term activity levels. +As evidence of the impact of recovering commodity prices on our customers’ activity levels, the oil-directed drilling rig +count at the beginning of the first quarter of 2017 had increased by approximately 89 percent compared to the lowest oil-directed +rig count recorded during the second quarter of 2016, and the natural gas-directed rig count had increased by approximately 79 +percent during the same period. +19 +The majority of the U.S. domestic rig count +remains directed towards oil. At the beginning of the first quarter of 2017, approximately 80 percent of the U.S. domestic rig +count was directed towards oil, consistent with the prior year. We believe that oil-directed drilling will remain the majority +of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near +term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing +natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +We continue to monitor the market for our +services and the competitive environment in 2017. We believe that the U.S. domestic rig count will continue to recover moderately +during the near term. However, we believe that in spite of the large percentage increases in oilfield activity during the past +several quarters, the pricing for our services has not yet reached a level that provides financial returns that will allow the +industry to maintain its fleet of revenue-producing equipment or hire additional personnel to operate idle equipment. Furthermore, +our customers during the first quarter of 2017 have thus far been very reluctant to accept increases in pricing for their services +in order to compensate us for our increased costs and to allow us to generate higher financial returns. For this reason, we believe +that continued near-term expansion in U.S. domestic oilfield activities will be moderate until commodity prices increase significantly. +Over the long term, we believe that the steep decline in oil-directed drilling in the U.S. domestic market will reduce U.S. domestic +oil production and serve as a catalyst for oil prices to increase. This belief is due to the fact that oil-directed wells drilled +in shale resource plays typically exhibit high initial production soon after being completed followed by a decline in production +in later years. We note that U.S. domestic oil production has declined by approximately 10 percent since its most recent peak +in the third quarter of 2014. We are encouraged by the fact that drilling and completion activities continue to be highly service-intensive +and require a large amount of equipment and raw materials. Furthermore, we note that some wells in the U.S. domestic market have +been drilled but not completed. We believe that many of our customers have started to complete these wells, and that they provide +potential revenue for RPC’s completion-directed services during the near term. Finally, we are encouraged by our belief +that many of our competitors have not maintained their equipment to a level that allows them to provide reliable, consistent services +to their customers. During 2015 and the first three quarters of 2016, we responded to the significant declines in industry activity +levels and pricing for our services by reducing costs and employee headcount and closed selected operational locations. During +the fourth quarter of 2016 and the first quarter of 2017, however, we have started recruiting and hiring operational personnel +to respond to increased industry activity levels. +We note in the current competitive +environment that many of our smaller competitors have high levels of debt, higher cost structures, and less-developed +logistical capabilities than RPC. During 2015 and through the first three quarters of 2016, a number of smaller competitors +ceased operations and sold their businesses or liquidated their assets. During 2016, several of our peers filed for +bankruptcy protection. While these developments place us in a more favorable competitive position, they are offset by the +fact that the capital markets have recently provided capital to allow several of our competitors to emerge from bankruptcy +and several other private equity-funded companies to complete initial public offerings of their common stock. In the fourth +quarter of 2015 we initiated a process whereby we more closely scrutinize the maintenance status of our currently idled +revenue-producing assets. Through this process, we are attempting to ensure that our idle equipment is prepared to return to +service as soon as market conditions encourage us to do so. We believe that this process will allow RPC to return our idle +revenue-producing equipment to service quickly and at minimal cost as market conditions improve. In this environment RPC also +monitors the financial stability of our customers, due to the fact that many of them have also financed their operations with +a large amount of debt, and this type of financing is less available than in previous years, although we also note that many +of our customers have recently raised equity to stabilize their capital structures and expand their operations. RPC plans +minimal increases in our fleet of revenue-producing equipment during 2017. Our consistent response to the industry’s +potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary +spending. We intend to maintain a financial structure which includes little or no debt during the near term. +20 +Results of Operations +Years Ended December 31, +2016 +2015 +2014 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ 728,974 +$ 1,263,840 +$ 2,337,413 +Revenues by business segment: +Technical +$ 679,654 +$ 1,175,293 +$ 2,180,457 +Support +49,320 +88,547 +156,956 +Consolidated operating (loss) profit +$ (238,942 ) +$ (156,277 ) +$ 400,929 +Operating (loss) profit by business segment: +Technical +$ (203,804 ) +$ (132,982 ) +$ 390,004 +Support +(26,021 ) +(2,363 ) +42,510 +Corporate expenses +(17,037 ) +(14,515 ) +(16,113 ) +Gain (loss) on disposition of assets, net +7,920 +(6,417 ) +(15,472 ) +Net (loss) income +$ (141,246 ) +$ (99,561 ) +$ 245,193 +(Loss) earnings per share — diluted +$ (0.66 ) +$ (0.47 ) +$ 1.14 +Percentage of cost of revenues to revenues +83 % +78 % +64 % +Percentage of selling, general and administrative expenses to revenues +21 % +12 % +8 % +Percentage of depreciation and amortization expenses to revenues +30 % +21 % +10 % +Effective income tax rate +41.0 % +34.9 % +38.6 % +Average U.S. domestic rig count +509 +982 +1,862 +Average natural gas price (per thousand cubic feet (mcf)) +$ 2.52 +$ 2.58 +$ 4.25 +Average oil price (per barrel) +$ 43.49 +$ 48.77 +$ 93.25 +Year Ended December 31, 2016 Compared to Year Ended December +31, 2015 +Revenues. Revenues in 2016 decreased +$534.9 million or 42.3 percent compared to 2015. The Technical Services segment revenues for 2016 decreased $495.6 million or +42.2 percent compared to the prior year due primarily to lower activity levels and pricing as compared to prior year, particularly +within our pressure pumping service, which is the largest service within this segment. The Support Services segment revenues in +2016 decreased $39.2 million or 44.3 percent compared to 2015 due primarily to lower pricing and activity levels in the majority +of our services within this segment. Both the Technical and Support Services continue to report operating losses due to lower +levels of revenues, partially offset by cost control efforts undertaken throughout the Company and lower depreciation and amortization +expenses. The average price of oil decreased 10.8 percent while the average price of natural gas decreased 2.4 percent during +2016 compared to the prior year. The average domestic rig count during 2016 was 48.2 percent lower than 2015. International revenues, +which decreased from $72.1 million in 2015 to $51.2 million in 2016, were seven percent of consolidated revenues in 2016 and six +percent of consolidated revenues in 2015. International revenues decreased primarily due to lower customer activity levels in +Australia, Gabon, Equatorial Guinea, China and Argentina in 2016, partially offset by increased activity in Bolivia compared to +the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in +2016 was $607.9 million compared to $986.1 million in 2015, a decrease of $378.3 million or 38.4 percent, due to lower activity +levels coupled with reduced personnel headcount and incentive compensation. As a percentage of revenues, cost of revenues increased +in 2016 compared to 2015 due to inefficiencies resulting from lower activity levels coupled with continued low pricing for our +services. +Selling, general and administrative expenses. +Selling, general and administrative expenses decreased 3.8 percent to $150.7 million in 2016 compared to $156.6 million in +2015. These expenses decreased due to lower total employment costs due to headcount reductions, as well as other expense reduction +efforts partially offset by an increase in bad debt expense and professional fees. The Company recorded a contingent professional +fee of $2.0 million during the first quarter of 2016 in connection with the resolution of an open income tax matter. As a percentage +of revenues, these costs increased during 2016 compared to 2015 due to increases in bad debt expense and professional fees previously +noted as well as significantly lower revenues. +21 +Depreciation and amortization. Depreciation +and amortization were $217.3 million in 2016, a decrease of $53.7 million, compared to $271.0 million in 2015 due to lower capital +expenditures during the last two years. As a percentage of revenues, depreciation and amortization increased in 2016 compared +to 2015 due to significantly lower revenues. +Gain (loss) on disposition of assets, net. +Gain on disposition of assets, net was $7.9 million in 2016 compared to a loss on disposition of assets, net of $6.4 million +in 2015. RPC recorded a gain on disposition of assets of $4.0 million during the fourth quarter of 2016 resulting from the sale +of operating equipment related to its oilfield pipe inspection service. The remaining gain (loss) on disposition of assets, net +is comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged +rental equipment. +Other (expense) income, net. Other expense, +net was $204 thousand in 2016 compared to other income, net of $5.2 million in 2015. Proceeds from a legal settlement totaling +$6.3 million was recorded during 2015. +Interest expense and interest income. +Interest expense decreased to $0.7 million in 2016 compared to $2.0 million in 2015. Interest expense in 2016 declined in +comparison to the prior year because interest expense in the prior year included the accelerated amortization of loan fees totaling +$0.6 million associated with RPC’s voluntary reduction of its syndicated credit facility. The current year expense principally +consists of facility fees on the unused portion of the credit facility. Interest income increased to $467 thousand in 2016 compared +to $83 thousand in 2015. +Income tax benefit. The income tax +benefit was $98.1 million in 2016 compared to $53.5 million in 2015. The effective tax rate was 41.0 percent in 2016 compared +to 34.9 percent in 2015. The income tax benefit in 2016 includes a discrete tax benefit of $15.7 million recorded in connection +with the favorable resolution of an open income tax matter. +Net loss and diluted loss per share . +Net loss was $141.2 million in 2016, or $0.66 loss per diluted share, compared to a net loss of $99.6 million in 2015, or $0.47 +loss per diluted share. This increase in loss per share was due to lower profitability as average shares outstanding was essentially +unchanged. +Year Ended December 31, 2015 Compared to Year Ended December +31, 2014 +Revenues. Revenues in 2015 decreased +$1.1 billion or 45.9 percent compared to 2014. The Technical Services segment revenues for 2015 decreased 46.1 percent compared +to the prior year due primarily to lower activity levels and pricing as compared to prior year, partially offset by increasing +service intensity in our pressure pumping service, which is the largest service within this segment. The Support Services segment +revenues for 2015 decreased 43.6 percent compared to 2014 due primarily to lower pricing and activity levels in the rental tool +service, which is the largest service within this segment. Both the Technical and Support Services reported operating losses due +to lower revenues, partially offset by cost control efforts undertaken throughout the Company. The average price of oil decreased +47.7 percent while the average price of natural gas decreased 39.3 percent during 2015 compared to the prior year. The average +domestic rig count during 2015 was 47.3 percent lower than 2014. International revenues, which decreased from $88.2 million in +2014 to $72.1 million in 2015, were as a percentage of consolidated revenues, six percent in 2015 and four percent in 2014. International +revenues decreased primarily due to lower customer activity levels in Canada, Australia, Bolivia and Mexico in 2015 partially +offset by increased activity in Argentina compared to the prior year. Our international revenues are impacted by the timing of +project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in +2015 was $986.1 million compared to $1.5 billion in 2014, a decrease of $506.9 million or 34.0 percent. The decrease in these +costs was due to lower costs resulting from lower activity levels, reduced personnel headcount and incentive compensation, and +price reductions from suppliers, partially offset by the impact of increasing service intensity. Also during 2015, replacement +parts totaling approximately $41.9 million were charged to cost of revenues rather than capitalized as a result of a change in +accounting estimate. As a percentage of revenues, cost of revenues increased in 2015 compared to 2014 due to competitive pricing +for our services and inefficiencies resulting from lower activity levels. +Selling, general and administrative expenses. +Selling, general and administrative expenses decreased 20.6 percent to $156.6 million in 2015 compared to $197.1 million in +2014. \This decrease was due to lower total employment costs and other cost reduction efforts as well as decreases in expenses +which vary with activity and profitability. As a percentage of revenues, selling, general and administrative expenses increased +in 2015 compared to 2014 due to the relatively fixed nature of some of these costs during the short term. +22 +Depreciation and amortization. Depreciation +and amortization were $271.0 million in 2015, an increase of $40.2 million, compared to $230.8 million in 2014 due to assets placed +in service during late 2014 and the first six months of 2015. As a percentage of revenues, depreciation and amortization increased +in 2015 compared to 2014. +Loss on disposition of assets, net. Loss +on disposition of assets, net was $6.4 million in 2015 compared to $15.5 million in 2014. The loss on disposition of assets, net +is comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged +rental equipment. The decrease in losses compared to the prior year resulted from a change in accounting estimate beginning in +2015 whereby the cost of replacing certain pressure pumping unit components was recorded as cost of revenues upon installation +rather than being capitalized. During 2014, the remaining net book value of these components damaged beyond repair was recorded +as a loss on disposition. +Other income (expense), net. Other income, +net was $5.2 million in 2015 compared to other expense, net of $131 thousand in 2014. Proceeds from a legal settlement totaling +$6.3 million was recorded during 2015. +Interest expense and interest income. Interest +expense was $2.0 million in 2015 compared to $1.4 million in 2014. Interest expense in 2015 included the accelerated amortization +of loan fees totaling $0.6 million associated with RPC’s voluntary reduction of the borrowing capacity under its syndicated +credit facility from $350 million to $125 million. This cost was partially offset by lower interest expense due to a lower average +debt balance on our revolving credit facility. Interest income increased to $83 thousand in 2015 compared to $19 thousand in 2014. +Income tax (benefit) provision. The income +tax benefit was $53.5 million in 2015 compared to an income tax provision of $154.2 million in 2014. The benefit in 2015 resulted +from the pretax loss. The effective tax rate was 34.9 percent in 2015 compared to 38.6 percent in 2014. The decrease in the effective +tax rate in 2015 is due primarily to state tax calculations based on revenues rather than taxable income or losses. +Net (loss) income and diluted (loss) earnings +per share . Net loss was $99.6 million in 2015, or $0.47 loss per diluted share, compared to net income of $245.2 million, +or $1.14 earnings per diluted share in 2014. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents +were $131.8 million as of December 31, 2016, $65.2 million as of December 31, 2015 and $9.8 million as of December 31, 2014. +The following +table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2016 +2015 +2014 +Net cash provided by operating activities +$ 101,704 +$ 473,792 +$ 322,757 +Net cash used for investing activities +(21,339 ) +(157,583 ) +(355,349 ) +Net cash (used for) provided by financing activities +(13,726 ) +(260,785 ) +33,664 +2016 +Cash provided by operating activities in +2016 decreased by $372.1 million compared to the same period in the prior year. This decrease is due primarily to +net unfavorable changes in working capital of $237.0 million coupled with an increase in net losses of $41.7 million, a +decrease in depreciation and amortization expenses of $54.4 million, a decrease in (gains) and losses on sale of assets of +$14.3 million and a decrease in long-term liabilities of $15.7 million primarily related to the positive resolution of an +income tax matter. +The net unfavorable change in working capital +is primarily due to unfavorable changes of $337.0 million in accounts receivable due to a less significant decline in business +activity levels in 2016 compared to 2015, and $6.4 million decrease in inventory consistent with lower business activity levels. +This unfavorable change was partially offset by favorable changes of $56.2 million in accounts payable; $28.6 million in accrued +payroll and related expenses; $6.1 million in income taxes payable/ receivable, net; $5.0 million in prepaid expenses and other +current assets and $4.2 million in accrued state, local and other taxes consistent with lower business activity levels coupled +with the timing of payments. +23 +Cash used for investing activities for 2016 +decreased by $136.2 million, compared to 2015, primarily as a result of significantly lower capital expenditures in response to +weaker industry conditions. +Cash used for financing activities for 2016 +decreased by $247.1 million primarily as a result of lower net loan repayments as there has been no outstanding borrowings since +the fourth quarter of 2015 coupled with lower common stock dividends during 2016 compared to the same period in the prior year. +The Company reduced its common stock dividend during the first quarter of 2015 and then temporarily suspended its regular quarterly +common stock dividend beginning in the second quarter of 2015. The Company paid a special year-end cash dividend of $0.05 per +share to common stockholders in the fourth quarter of 2016. +2015 +Cash provided by operating activities increased +$151.0 million in 2015 compared to the prior year due primarily to a favorable change in working capital of $506.8 million partially +offset by a decrease in net income (loss) of $344.8 million, an increase in depreciation and amortization of $41.3 million, and +an unfavorable change in deferred taxes of $45.4 million due to a decrease in tax benefits resulting from lower capital expenditures. +The favorable change in working capital was +primarily due to favorable changes of $599.8 million in accounts receivable and $56.4 million in inventory as a result of lower +business activity levels in 2015 compared to the prior year. Also, there was a favorable change in income taxes receivable/payable +of $3.9 million due to the timing of payments. These favorable changes were partially offset by unfavorable changes in accounts +payable of $98.9 million, accrued payroll of $46.4 million and accrued state, local and other taxes of $5.8 million due to lower +business activity levels coupled with the timing of payments. +Cash used for investing activities in 2015 +decreased by $197.8 million compared to 2014, primarily as a result of lower capital expenditures in response to weaker industry +conditions. +Cash used for financing activities in 2015 +increased by $294.4 million primarily as a result of higher net loan payments funded primarily by the favorable changes in working +capital, partially offset by lower open market share repurchases and common stock dividends during 2015 compared to the prior +year. The Company reduced and then suspended its common stock dividend during 2015. +Financial Condition and Liquidity +The Company’s financial condition +as of December 31, 2016 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and +our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve +months. The Company currently has a $125 million revolving credit facility that matures in January 2019. The facility +contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and +other related items. On June 30, 2016, the Company amended the revolving credit facility to (1) establish a borrowing base to +be the lesser of $125 million or a specified percentage of eligible accounts receivable less the amount of any outstanding +letters of credit. As of December 31, 2016, there were no outstanding borrowings. RPC had letters of credit outstanding +relating to self-insurance programs and contract bids totaling $19.1 million as of December 31, 2016. For additional +information with respect to RPC’s facility, see Note 6 of the Notes to Consolidated Financial Statements. +The Company’s decisions about the amount +of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings +under our facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide +the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity +levels. The Company’s decisions about the amount of cash to be used for investing and financing activities could be influenced +by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities. The Company +is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $33.9 million in +2016, and we currently expect capital expenditures to be approximately $70 million in 2017. We expect that a majority of these +expenditures in 2017 will be directed towards capitalized equipment maintenance. The remaining capital expenditures will +be directed towards the purchase of revenue-producing equipment. The actual amount of capital expenditures will depend primarily +on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. +24 +The Company’s Retirement Income Plan, +a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. +During 2016, the Company contributed $4.3 million to the pension plan and does not expect to make any additional contributions +to the plan during 2017. +The Company has a stock buyback program, initially +adopted in 1998 and subsequently amended in 2013, that authorizes the repurchase of up to 31,578,125 shares. There were no shares +purchased on the open market by the Company during 2016, and 2,050,154 shares remain available to be repurchased under the current +authorization as of December 31, 2016. The Company may repurchase outstanding common shares periodically based on market conditions +and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have +a predetermined expiration date. +On July 28, 2015, the Board of Directors voted +to temporarily suspend RPC’s regular quarterly dividend to common stockholders; however, the Board of Directors voted to +pay a special year-end cash dividend of $0.05 per share to common stockholders during the fourth quarter of 2016. The Company +expects to resume cash dividends to common stockholders sometime in the future, subject to the earnings and financial condition +of the Company and other relevant factors. +Contractual Obligations +The Company’s obligations and commitments +that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other +long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, +2016: +Contractual obligations +Payments due by period +(in thousands) +Total +Less than +1 year +1-3 +years +3-5 +years +More than +5 years +Long-term debt obligations +$ — +$ — +$ — +$ — +$ — +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +42,994 +12,648 +18,077 +8,074 +4,195 +Purchase obligations (2) +21,316 +10,354 +10,962 +— +— +Other long-term liabilities (3) +1,054 +860 +194 +— +— +Total contractual obligations +$ 65,364 +$ 23,862 +$ 29,233 +$ 8,074 +$ 4,195 +(1) Operating +leases include agreements for various office locations, office equipment, and certain +operating equipment. +(2) Includes +agreements to purchase raw materials, goods or services that have been approved and that +specify all significant terms (pricing, quantity, and timing). As part of the normal +course of business the Company occasionally enters into purchase commitments to manage +its various operating needs. +(3) Includes +expected cash payments for long-term liabilities reflected on the balance sheet where +the timing of the payments is known. These amounts include incentive compensation. These +amounts exclude pension obligations with uncertain funding requirements and deferred +compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities +measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used +for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. +Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified +as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using +unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For +defined benefit plan and Supplemental Executive Retirement Plan (“SERP”) investments measured at net asset value, +the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based +comparable data or on net asset values calculated by the fund or when not publicly available. +25 +Inflation +The Company purchases its equipment and materials +from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the +general economy increases, the Company’s costs for equipment, materials and labor could increase as well. Also, increases +in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees as well +as increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. +In previous periods of strong oilfield activity, we experienced high employment costs due to the demand for skilled labor in our +markets as well as high costs for certain raw materials the Company uses to provide its services. During 2015 and 2016, however, +supplies of raw materials became more readily available as domestic oilfield activity decreased. In addition, skilled labor became +more available, and upward wage pressures subsided. During the third quarter of 2016, however, the Company began to experience +upward pressure on the price of labor, due to increased oilfield activity and a shortage of skilled employees caused by the industry’s +headcount reductions since the first quarter of 2015. Early in the first quarter of 2017, the Company has also started to experience +increases in the prices of certain raw materials used in providing our services. The market +for the Company’s services remains competitive, due to relatively low commodity prices, so it may be difficult for the Company +to increase the prices charged to our customers to compensate for these cost increases. +Off Balance Sheet Arrangements +The Company does not have any material off balance +sheet arrangements. +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products +Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then +distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products +entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $739,000 in 2016, $753,000 in 2015, and $663,000 in 2014. The Company’s +receivable (payable) due to (from) Marine Products for these services was $60,000 as of December 31, 2016 and $(11,000) as of +December 31, 2015. The Company’s directors are also directors of Marine Products and all of the executive officers are employees +of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary +course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated with +the directors of RPC. The total amounts paid to these affiliated parties were $890,000 in 2016, $1,127,000 in 2015 and $1,092,000 +in 2014. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are +subsidiaries of the Company) for such services and rent totaled $111,000 in 2016, $100,000 in 2015 and $84,000 in 2014. +A group that includes the Company’s Chairman +of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. +The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution +by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, +LLC for a period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs +of approximately $197,000 in 2016 and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using +the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As +of December 31, 2016, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +26 +Critical Accounting Policies +The consolidated financial statements are prepared +in accordance with accounting principles generally accepted in the United States, which require significant judgment by management +in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, +terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior +management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee +of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher +degree of judgment and complexity: +Allowance for doubtful accounts — +Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United +States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined +using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit +evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability +to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility +in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. +Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible +and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the +required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from +period to period. Recoveries were insignificant in 2016 and 2014 and approximately $1.0 million in 2015. We record specific provisions +when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings +or deterioration in the customer’s operating results or financial position. If circumstances related to a customer changes, our +estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated allowance for doubtful accounts +is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical +write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic +and political environment of the related country and region. In addition to reserves established for specific customers, we establish +general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on +management judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues +have ranged from 0.8 percent to (0.2) percent over the last three years. Increasing or decreasing the estimated general reserve +percentages by 0.50 percentage points as of December 31, 2016 would have resulted in a change of approximately $0.9 million to +the allowance for doubtful accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The effective income +tax rates were 41.0 percent in 2016, 34.9 percent in 2015 and 38.6 percent in 2014. Our effective tax rates vary due to changes +in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which our earnings and deductions +are realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. +As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. +We establish a valuation allowance against the +carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through +future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we +later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable +portion of the previously provided valuation allowance. We have considered future market growth, forecasted earnings, future taxable +income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies in determining +the need for a valuation allowance. +We calculate our current and deferred tax provision +based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the +subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the third quarter of the +subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are determined based on the differences +between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the year the differences are +expected to reverse. +The amount of income taxes we pay is subject +to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the +potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably +foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to +our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments +expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +27 +Insurance expenses – The Company +self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, +vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual +case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost +of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments +occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range +of exposure for these claims. As of December 31, 2016, the Company estimates the range of exposure to be from $12.1 million to +$15.3 million. The Company has recorded liabilities at December 31, 2016 of approximately $13.6 million which represents management’s +best estimate of probable loss. +Depreciable life of assets — RPC’s +net property, plant and equipment at December 31, 2016 was $498.0 million representing 48.1 percent of the Company’s consolidated +assets. Depreciation and amortization expenses for the year ended December 31, 2016 were $217.3 million. Management judgment is +required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation and amortization +expense. +Property, plant and equipment are reported +at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives +of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed +by the Company and is determined by management based on many factors including historical experience with similar assets. Assets +are monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted +accordingly. During 2015 the Company reassessed the useful life of a specific component of its pressure pumping equipment that +prior to 2015 had an expected useful life of 18 months. As a result of this reassessment, the Company concluded that this component +is no longer a long-lived asset, but instead a consumable supply inventory item. Accordingly, effective January 1, 2015, the cost +of this component was expensed as repairs and maintenance as part of cost of revenues at the time of installation. Management +deemed the change preferable because it more closely reflects the pattern of consumption of this component as a result of continual +increases in wear and tear resulting from harsher geological environments. We did not make any changes to the estimated lives +of assets resulting in a material impact in 2016 and 2014. +Defined +benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit plan, +although the Company remains obligated to provide employees benefits earned through March 2002. The Company accounts for the defined +benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) ASC 715, “Compensation – +Retirement Benefits” and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, +the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, +the discount rate, and other factors, and makes adjustments to these liabilities as necessary. +The Company chooses an expected rate of return +on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views +of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized +over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s +assumption for the expected return on plan assets was seven percent for 2016, 2015 and 2014. +The discount rate reflects the current rate +at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes +a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the +life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same +time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to +all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate +bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 4.45 percent as of December +31, 2016 compared to 4.70 percent as of December 31, 2015 and 4.15 percent in 2014. +28 +As set forth in Note 10 to the Company’s +financial statements, included among the asset categories for the Plan’s investments are real estate and alternative/ opportunistic/ +special fund investments comprised of real estate funds and private equity funds. These investments are measured at net +asset value and are valued using significant non-observable inputs which do not have a readily determinable fair value. +These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of +incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of +the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for +reasonableness. +As of December 31, 2016, the defined benefit +plan was under-funded and the recorded change within accumulated other comprehensive loss decreased stockholders’ equity +by approximately $1.3 million after tax. Holding all other factors constant, a change in the discount rate used to measure +plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of approximately $1.2 million to the +net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense +of $0.7 million in 2016, $0.4 million in 2015 and $0.2 million in 2014. Based on the under-funded status of the defined benefit +plan as of December 31, 2016, the Company expects to recognize pension expense of $0.4 million in 2017. Holding all other factors +constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase +or decrease in pension expense of approximately $0.2 million in 2017. Holding all other factors constant, a change in the discount +rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of +an immaterial amount in 2017. +Recent Accounting Pronouncements +During the year ended December 31, 2016, +the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASUs): +Recently Adopted Accounting Pronouncements: +· ASU No. 2015-16, +Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period +Adjustments. The amendments eliminate the requirement to retrospectively account +for adjustments made to provisional amounts recognized in a business combination. Adjustments +to provisional amounts that are identified during the measurement period are required +to be recognized in the reporting period in which the adjustments are determined and +calculated as if the accounting had been completed at the acquisition date and either +disclosed on the face of the income statement or in the notes by each category. The Company +adopted these provisions in the first quarter of 2016 and plans to apply the provisions +for all future business combinations. The adoption did not have a material impact on +the Company’s consolidated financial statements. +· ASU No. 2015-07, +Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That +Calculate Net Asset Value per Share (or Its Equivalent). The amendments remove the +requirement to categorize within the fair value hierarchy all investments for which fair +value is measured using the net asset value per share (or its equivalent) practical expedient. +In addition, there is no requirement to make certain disclosures for such investments. +The Company adopted these provisions in the first quarter of 2016 applied retrospectively +and has excluded the pension assets that are measured using the net asset value per share +from the fair value hierarchy disclosure. The adoption did not have a material impact +on the Company’s consolidated financial statements. +· ASU No. 2014-15, +Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure +of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Financial +statements are generally prepared under the presumption that the reporting organization +will continue to operate as a going concern, except in limited circumstances. This ASU +provides guidance on management’s responsibility to include footnote disclosures +when there is substantial doubt about the organization’s ability to continue as +a going concern. The Company adopted these provisions in the first quarter of 2016 and +will provide such disclosures as required if there are conditions and events that raise +substantial doubt about its ability to continue as a going concern. The adoption did +not have a material impact on the Company’s consolidated financial statements. +Recently Issued Accounting Pronouncements Not Yet Adopted: +To be adopted in 2017: +· ASU No. 2015-11, +Inventory (Topic 330): Simplifying the Measurement of Inventory. Current requirements +are to measure inventory at the lower of cost or market. Market could be replacement +cost, net realizable value, or net realizable value less an approximated normal profit +margin. These amendments allow inventory to be measured at lower of cost or net realizable +value and eliminates the market requirement. Net realizable value is the estimated selling +price in the ordinary course of business, less reasonably predictable costs of completion, +disposal, and transportation. The amendments do not apply to inventory that is measured +using last-in, first-out or the retail inventory method. The amendments will be adopted +in the first quarter of 2017 and applied prospectively. The Company does not expect the +adoption of these provisions to have a material impact on its consolidated financial +statements. +29 +· ASU No. 2016-07, +Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition +to the Equity Method of Accounting. The amendments eliminate the requirement to adjust +the investment, results of operations, and retained earnings retroactively when an investment +qualifies for use of the equity method as a result of an increase in the level of ownership +interest or degree of influence. The cost of acquiring the additional interest in the +investee is to be added to the current basis of the investor’s previously held +interest and the equity method is to be adopted as of the date the investment qualifies. +In addition, an entity that has an available-for-sale equity security that becomes qualified +for the equity method of accounting is required to recognize through earnings the unrealized +holding gain or loss in accumulated other comprehensive income at the date the investment +becomes qualified for use of the equity method. The amendments will be adopted in the +first quarter of 2017 and applied prospectively. The Company does not expect the adoption +of these provisions to have a material impact on its consolidated financial statements. +· ASU No. 2016-09, +Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based +Payment Accounting. The amendments simplify several aspects of the accounting for +share-based payment award transactions, requiring excess tax benefits and deficiencies +to be recognized as a component of income tax expense rather than equity. This guidance +also requires excess tax benefits and deficiencies to be presented as an operating activity +on the statement of cash flows and allows an entity to make an accounting policy election +to either estimate expected forfeitures or to account for them as they occur. The Company +will adopt these provisions in the first quarter of 2017 and adoption of these provisions +will result in the inclusion of excess tax benefits and deficiencies as a component of +income tax expense which may increase volatility of the provision for income taxes as +the amount of excess tax benefits or deficiencies from stock-based compensation awards +are dependent on the Company’s stock price as of the date the stock awards vest. +Based on the Company’s current stock price and its stock incentive plan awards, +this change resulted in a beneficial adjustment of approximately $2.5 million to the +provision for income taxes in the first quarter of 2017. The Company will continue to +estimate expected forfeitures. +· ASU No. 2016-17, Consolidation +(Topic 810): Interests Held through Related Parties That are under Common Control. The +amendments affect reporting entities that are required to evaluate whether they should +consolidate a variable interest entity in certain situations involving entities under +common control. Specifically, the amendments change the evaluation of whether a reporting +entity is the primary beneficiary of a variable interest entity by changing how a reporting +entity that is a single decision maker of a variable interest entity treats indirect +interests in the entity held through related parties that are under common control with +the reporting entity. The amendments will be adopted in the first quarter of 2017 and +the Company does not expect the adoption to have a material impact on its consolidated +financial statements. +To be adopted in 2018: +REVENUE RECOGNITION: +The Financial Accounting Standards Board and +International Accounting Standards Board issued their converged standard on revenue recognition in May 2014. The standard provides +a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies +and industries and significantly reduce the complexity inherent in today’s revenue recognition guidance. The various ASUs related +to Revenue from Contracts with Customers (Topic 606) have been listed below: +· ASU No. 2014-09. +The core principle of the guidance is that an entity should recognize revenue to +depict the transfer of promised goods or services to customers in an amount that reflects +the consideration to which the entity expects to be entitled in exchange for those goods +or services using a five step process. +· ASU No. 2015-14 . +Deferred the effective date of ASU 2014-09 for all entities by one year to the first +quarter of 2018 with early application permitted. +· ASU No. 2016-08, +Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments +provide guidance on whether an entity is a principal or agent when providing services +to a customer along with another party. +· ASU No. 2016-10, +Identifying Performance Obligations and Licensing. The amendments clarify the earlier +guidance on identifying performance obligations and licensing implementation. +30 +· ASU No. 2016-11, +Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16 +Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds +certain SEC guidance related to issues that are currently codified under various topics. +· ASU No. 2016-12, +Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying +guidance on certain aspects of the five step process and practical expedients regarding +the effect of modifications and status of completed contracts under legacy GAAP and disclosures +related to the application of this guidance using the modified retrospective or retrospective +transition method. +· ASU No. 2016-20, +Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. +The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU +2014-09 and includes among others, loan guarantees, impairment testing of contract costs, +performance obligations disclosures and accrual of advertising costs. +Current Status of implementation: +The Company is currently analyzing the effect +of the standard across all of its revenue streams to evaluate the impact of the new standard +on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that +would result from applying the requirements under the new standard. Most of the Company’s services are primarily +short-term in nature, and the assessment at this stage is that the Company does not expect the adoption of the new revenue recognition +standard to have a material impact on its financial statements. The Company plans to adopt the standard in the first quarter of +2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an +adjustment to the opening balance of retained earnings. +· ASU No. 2016-01, +Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement +of Financial Assets and Financial Liabilities. The amendments make targeted improvements +to existing U.S. GAAP and affects accounting for equity investments and financial instruments +and liabilities and related disclosures. The amendments are effective starting in the +first quarter of 2018, with early adoption permitted for certain provisions. The Company +is currently evaluating the impact of these provisions on its consolidated financial +statements. +· ASU No. 2016-15, +Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash +Payments. The amendments provide guidance in the presentation and classification +of certain cash receipts and cash payments in the statement of cash flows including debt +prepayment or debt extinguishment costs, contingent consideration payments made after +a business combination, proceeds from the settlement of insurance claims, proceeds from +the settlement of corporate-owned life insurance policies, and distributions received +from equity method investees. The amendments are effective starting in the first quarter +of 2018 with early adoption permitted. The amendments should be applied using a retrospective +transition method to each period presented. If it is impracticable to apply the amendments +retrospectively for some of the issues, the amendments for those issues would be applied +prospectively as of the earliest date practicable. The Company is currently evaluating +the impact of adopting these provisions on its consolidated financial statements. +· ASU No. 2016-16, +Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The +amendments require an entity to recognize the income tax consequences of an intra-entity +transfer of an asset other than inventory when the transfer occurs. The amendments eliminate +the exception for an intra-entity transfer of an asset other than inventory. Two common +examples of assets included in the scope of the amendments are intellectual property +and property, plant, and equipment. The amendments do not include new disclosure requirements; +however, existing disclosure requirements might be applicable when accounting for the +current and deferred income taxes for an intra-entity transfer of an asset other than +inventory. The amendments are effective starting in the first quarter of 2018 with early +adoption permitted. The amendments are required to be applied on a modified retrospective +basis through a cumulative-effect adjustment directly to retained earnings as of the +beginning of the period of adoption. The Company is currently evaluating the impact of +adopting these provisions on its consolidated financial statements. +· ASU No. 2016-18, Statement +of Cash Flows (230): Restricted Cash. The amendments require that a statement of +cash flows explain the change during the period in the total of cash, cash equivalents, +and amounts generally described as restricted cash or restricted cash equivalents. As +a result, amounts generally described as restricted cash and restricted cash equivalents +should be included with cash and cash equivalents when reconciling the beginning-of-period +and end-of-period total amounts shown on the statement of cash flows. The amendments +do not provide a definition of restricted cash or restricted cash equivalents. The amendments +are effective starting in the first quarter of 2018 with early adoption permitted. The +amendments should be applied using a retrospective transition method to each period presented. +The Company is currently evaluating the impact of adopting these provisions on its consolidated +financial statements. +31 +To be adopted in 2019 and later: +· ASU No. 2016-02, +Leases (Topic 842). Under the new guidance, lessees will need to recognize a right-of-use +asset and a lease liability for virtually all of their leases (other than leases that +meet the definition of a short-term lease), at the commencement of the lease term. The +liability will be equal to the present value of lease payments. The asset will be based +on the liability, subject to adjustment, such as for initial direct costs. The amendments +in this standard are effective for fiscal years beginning after December 15, 2018, including +interim periods within those fiscal years. Early application is permitted. Lessees (for +capital and operating leases) and lessors (for sales-type, direct financing, and operating +leases) must apply a modified retrospective transition approach for leases existing at, +or entered into after, the beginning of the earliest comparative period presented in +the financial statements. Lessees and lessors may not apply a full retrospective transition +approach. The Company is currently evaluating the impact of adopting these provisions +on its consolidated financial statements. +· ASU No. 2016-13, +Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses +on Financial Instruments. The amendments require that credit losses on available-for-sale +debt securities and purchased financial assets with credit deterioration should be presented +as an allowance rather than a write-down. It also allows recording of credit loss reversals +in current period net income. The amendments are effective in the first quarter of 2020 +with early application permitted a year earlier. The Company is currently evaluating +the impact of adopting these provisions on its consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about Market +Risk +The Company is subject to interest rate risk +exposure through borrowings on its credit agreement. As of December 31, 2016, there are no outstanding interest-bearing advances +on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market +risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in +U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +32 +MANAGEMENT’S REPORT ON INTERNAL +CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, +Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, +Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets +are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce +financial statements in accordance with accounting principles generally accepted in the United States of America. The internal +control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified +personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable +laws and regulations. +There are inherent limitations +to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, +not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute +assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design +of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered +relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision +and with the participation of our management, including our principal executive officer and principal financial officer, we conducted +an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December +31, 2016 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained +effective internal control over financial reporting as of December 31, 2016. +The independent registered +public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December +31, 2016, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, +included in this report on page 34. +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Vice President, Chief Financial Officer and Treasurer +Atlanta, Georgia +February 28, 2017 +33 +Report of Independent Registered Public +Accounting Firm +Board of Directors and Stockholders +RPC, Inc. +We have audited the +internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as +of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining +effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial +reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility +is to express an opinion on the Company’s internal control over financial reporting based on our audit. +We conducted our audit +in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that +we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting +was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, +assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe +that our audit provides a reasonable basis for our opinion. +A company’s internal +control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. +A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance +of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; +(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only +in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention +or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material +effect on the financial statements. +Because of its inherent +limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation +of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, +or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the +Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based +on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial +statements of the Company as of and for the year ended December 31, 2016, and our report dated February 28, 2017 expressed an +unqualified opinion on those financial statements. +/s/ GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2017 +34 +Report of Independent Registered Public +Accounting Firm +Board of Directors and Stockholders +RPC, Inc. +We have audited the +accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as +of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ +equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits of the basic consolidated +financial statements included the financial statement schedule listed in the index appearing under Item 15(2). These financial +statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to +express an opinion on these financial statements and financial statement schedule based on our audits. +We conducted our audits +in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that +we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. +An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An +audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating +the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +In our opinion, the +consolidated financial statements referred to above present fairly, in all material respects, the financial position of RPC, Inc. +and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three +years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of +America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated +financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal +control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February +28, 2017 expressed an unqualified opinion thereon. +/s/ GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2017 +35 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2016 +2015 +ASSETS +Cash and cash equivalents +$ 131,835 +$ 65,196 +Accounts receivable, net +169,166 +232,187 +Inventories +108,316 +128,441 +Income taxes receivable +57,174 +51,392 +Prepaid expenses +6,718 +8,961 +Other current assets +5,848 +6,031 +Current assets +479,057 +492,208 +Property, plant and equipment, net +497,986 +688,335 +Goodwill +32,150 +32,150 +Other assets +26,259 +24,401 +Total assets +$ 1,035,452 +$ 1,237,094 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ 70,536 +$ 75,811 +Accrued payroll and related expenses +12,130 +16,654 +Accrued insurance expenses +4,099 +4,296 +Accrued state, local and other taxes +3,094 +2,838 +Income taxes payable +4,929 +7,639 +Other accrued expenses +6,680 +226 +Current liabilities +101,468 +107,464 +Long-term accrued insurance expenses +9,537 +11,348 +Long-term pension liabilities +32,864 +33,009 +Deferred income taxes +81,466 +115,495 +Other long-term liabilities +3,318 +17,497 +Total liabilities +228,653 +284,813 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $0.10 par value, 349,000,000 shares authorized, 217,489,402 and 216,991,357 shares +issued and outstanding in 2016 and 2015, respectively +21,749 +21,699 +Capital in excess of par value +— +— +Retained earnings +803,152 +948,551 +Accumulated other comprehensive loss +(18,102 ) +(17,969 ) +Total stockholders’ equity +806,799 +952,281 +Total liabilities and stockholders’ equity +$ 1,035,452 +$ 1,237,094 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2016 +2015 +2014 +REVENUES +$ 728,974 +$ 1,263,840 +$ 2,337,413 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +607,888 +986,144 +1,493,082 +Selling, general and administrative expenses +150,690 +156,579 +197,117 +Depreciation and amortization +217,258 +270,977 +230,813 +(Gain) loss on disposition of assets, net +(7,920 ) +6,417 +15,472 +Operating (loss) profit +(238,942 ) +(156,277 ) +400,929 +Interest expense +(681 ) +(2,032 ) +(1,431 ) +Interest income +467 +83 +19 +Other (expense) income, net +(204 ) +5,185 +(131 ) +(Loss) income before income taxes +(239,360 ) +(153,041 ) +399,386 +Income tax (benefit) provision +(98,114 ) +(53,480 ) +154,193 +Net (loss) income +$ (141,246 ) +$ (99,561 ) +$ 245,193 +(LOSS) EARNINGS PER SHARE +Basic +$ (0.66 ) +$ (0.47 ) +$ 1.14 +Diluted +$ (0.66 ) +$ (0.47 ) +$ 1.14 +Dividends paid per share +$ 0.050 +$ 0.155 +$ 0.420 +The accompanying notes are an integral part of these statements. +37 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE +(LOSS) INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2016 +2015 +2014 +NET (LOSS) INCOME +$ (141,246 ) +$ (99,561 ) +$ 245,193 +OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES: +Pension adjustment +(788 ) +1,531 +(6,486 ) +Foreign currency translation +652 +(1,801 ) +(1,124 ) +Unrealized gain (loss) on securities, net reclassification adjustments +3 +134 +(108 ) +COMPREHENSIVE (LOSS) INCOME +$ (141,379 ) +$ (99,697 ) +$ 237,475 +The accompanying notes are an integral part of these statements. +38 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ +EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Three Years Ended +Common Stock +Capital +in +Excess +of +Retained +Accumulated +Other +Comprehensive +December 31, 2016 +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2013 +218,986 +$ 21,899 +$ — +$ 956,918 +$ (10,115 ) +$ 968,702 +Stock issued for stock incentive plans, net +569 +57 +9,017 +— +— +9,074 +Stock purchased and retired +(3,016 ) +(302 ) +(13,353 ) +(35,942 ) +— +(49,597 ) +Net income +— +— +— +245,193 +— +245,193 +Pension adjustment, net of taxes +— +— +— +— +(6,486 ) +(6,486 ) +Foreign currency translation +— +— +— +— +(1,124 ) +(1,124 ) +Unrealized loss on securities, net of taxes +— +— +— +— +(108 ) +(108 ) +Dividends declared +— +— +— +(91,608 ) +— +(91,608 ) +Excess tax benefits +for share-based payments +— +— +4,336 +— +— +4,336 +Balance, December 31, 2014 +216,539 +21,654 +— +1,074,561 +(17,833 ) +1,078,382 +Stock issued for stock incentive plans, net +791 +79 +9,802 +— +— +9,881 +Stock purchased and retired +(339 ) +(34 ) +(11,212 ) +7,153 +— +(4,093 ) +Net loss +— +— +— +(99,561 ) +— +(99,561 ) +Pension adjustment, net of taxes +— +— +— +— +1,531 +1,531 +Foreign currency translation +— +— +— +— +(1,801 ) +(1,801 ) +Unrealized gain on securities, net of taxes and reclassification +adjustment +— +— +— +— +134 +134 +Dividends declared +— +— +— +(33,602 ) +— +(33,602 ) +Excess tax benefits +for share-based payments +— +— +1,410 +— +— +1,410 +Balance, December 31, 2015 +216,991 +21,699 +— +948,551 +(17,969 ) +952,281 +Stock issued for stock incentive plans, net +796 +80 +9,508 +— +— +9,588 +Stock purchased and retired +(298 ) +(30 ) +(9,935 ) +6,708 +— +(3,257 ) +Net loss +— +— +— +(141,246 ) +— +(141,246 ) +Pension adjustment, net of taxes +— +— +— +— +(788 ) +(788 ) +Foreign currency translation +— +— +— +— +652 +652 +Unrealized gain on securities, net of taxes and reclassification +adjustment +— +— +— +— +3 +3 +Dividends declared +— +— +— +(10,861 ) +— +(10,861 ) +Excess tax benefits +for share-based payments +— +— +427 +— +— +427 +Balance, December 31, 2016 +217,489 +$ 21,749 +$ — +$ 803,152 +$ (18,102 ) +$ 806,799 +The accompanying notes are an integral part of these statements. +39 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2016 +2015 +2014 +OPERATING ACTIVITIES +Net (loss) income +$ (141,246 ) +$ (99,561 ) +$ 245,193 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +221,038 +275,413 +233,940 +Stock-based compensation expense +10,218 +9,960 +9,074 +(Gain) loss on disposition of assets, net +(7,920 ) +6,417 +15,472 +Deferred income tax (benefit) provision +(34,209 ) +(33,013 ) +12,354 +Excess tax benefits for share-based payments +(427 ) +(1,410 ) +(4,336 ) +(Increase) decrease in assets: +Accounts receivable +64,715 +401,753 +(198,021 ) +Income taxes receivable +(5,355 ) +(20,867 ) +(19,059 ) +Inventories +20,294 +26,667 +(29,708 ) +Prepaid expenses +2,244 +161 +2 +Other current assets +2 +(2,881 ) +(749 ) +Other non-current assets +(1,851 ) +1,768 +(2,238 ) +Increase (decrease) in liabilities: +Accounts payable +(6,250 ) +(62,446 ) +36,421 +Income taxes payable +(2,710 ) +6,695 +944 +Accrued payroll and related expenses +(4,540 ) +(33,143 ) +13,221 +Accrued insurance expenses +(197 ) +(1,336 ) +(440 ) +Accrued state, local and other taxes +256 +(3,983 ) +1,819 +Other accrued expenses +5,017 +(180 ) +(775 ) +Pension liabilities +(1,385 ) +1,021 +2,219 +Long-term accrued insurance expenses +(1,811 ) +1,249 +(126 ) +Other long-term liabilities +(14,179 ) +1,508 +7,550 +Net cash provided by operating activities +101,704 +473,792 +322,757 +INVESTING ACTIVITIES +Capital expenditures +(33,938 ) +(167,426 ) +(371,502 ) +Proceeds from sale of assets +12,599 +9,843 +18,707 +Investment in joint venture +— +— +(2,554 ) +Net cash used for investing activities +(21,339 ) +(157,583 ) +(355,349 ) +FINANCING ACTIVITIES +Payment of dividends +(10,861 ) +(33,602 ) +(91,608 ) +Borrowings from notes payable to banks +— +613,300 +1,168,100 +Repayments of notes payable to banks +— +(837,800 ) +(996,900 ) +Debt issue costs for notes payable to banks +(35 ) +— +(667 ) +Excess tax benefits for share-based payments +427 +1,410 +4,336 +Cash paid for common stock purchased and retired +(3,257 ) +(4,093 ) +(49,597 ) +Net cash (used for) provided by financing activities +(13,726 ) +(260,785 ) +33,664 +Net increase in cash and cash equivalents +66,639 +55,424 +1,072 +Cash and cash equivalents at beginning of year +65,196 +9,772 +8,700 +Cash and cash equivalents at end of year +$ 131,835 +$ 65,196 +$ 9,772 +The accompanying notes are an integral part of these statements. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. +and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis +of Presentation +The consolidated financial statements include +the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant +intercompany accounts and transactions have been eliminated. +Nature of Operations +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States of America, including the southwest, mid-continent, Gulf +of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided +include Technical Services such as pressure pumping services, coiled tubing services, snubbing services (also referred to as hydraulic +workover services), nitrogen services, and firefighting and well control, and Support Services such as the rental of drill pipe +and other specialized oilfield equipment and oilfield training and consulting. +Common Stock +RPC is authorized to issue 349,000,000 shares +of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board +of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a +vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution +or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for +distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 +shares of preferred stock, $0.10 par value. As of December 31, 2016, there were no shares of preferred stock issued. The Board +of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a +class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the +applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares +of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to +dividend rights and rights on liquidation. +Dividends +On July 28, 2015, the Board of Directors voted +to temporarily suspend RPC’s regular quarterly dividend to common stockholders. However, the Company paid a special year-end +cash dividend of $0.05 per share to common stockholders during the fourth quarter of 2016. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity +with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions +that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of +the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ +from those estimates. +Significant estimates are used in the determination +of the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC’s revenues are generated principally +from providing services and the related equipment. Revenues are recognized when the services are rendered and collectibility is +reasonably assured. Revenues from services and equipment are based on fixed or determinable priced purchase orders or contracts +with the customer and do not include the right of return. Rates for services and equipment are priced on a per day, per unit of +measure, per man hour or similar basis. Sales tax charged to customers is presented on a net basis within the consolidated statements +of operations and excluded from revenues. +41 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Concentration of Credit Risk +Substantially all of the Company’s customers +are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively +or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided +oilfield services to several hundred customers during each of the last three years. There were no customers that accounted for +more than 10 percent of the Company’s revenues in 2016 and 2014; and one customer accounted for approximately 23 percent +of revenues in 2015. Additionally, there were no customers that accounted for more than 10 percent of accounts receivable as of +December 31, 2016 and one customer accounted for approximately 14 percent of accounts receivable as of December 31, 2015. +Cash and Cash Equivalents +Highly liquid investments with original maturities +of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, +at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, +and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating +services. +Investments +Investments classified as available-for-sale +securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component +of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and +losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities +are included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2016 and +2014, and an immaterial realized loss during 2015. Securities that are held in the non-qualified Supplemental Executive Retirement +Plan (“SERP”) are classified as trading. See Note 10 for further information regarding the SERP. The change in fair +value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated +statements of operations. +Management determines the appropriate classification +of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts +receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended +based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable +are considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts +due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance +for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, +current economic conditions, and in the case of international customers, judgments about the economic and political environment +of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines +that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, which consist principally of (i) +raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment +used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are +recorded at the lower of cost or market value. Cost is determined using first-in, first-out (“FIFO”) method or the +weighted average cost method. Market value is determined based on replacement cost for materials and supplies. The Company regularly +reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated +forecast of product demand, market conditions, production requirements and technological developments. +42 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Property, Plant and Equipment +Property, +plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided +on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed +using the following useful lives: operating equipment, 3 to 20 years; buildings and leasehold improvements, 15 to 39 years or +the life of the lease; furniture and fixtures, 5 to 7 years; software, 5 years; and vehicles, 3 to 5 years. The cost of assets +retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in +the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, +major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for +maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived +assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows +estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews +the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. During 2015, RPC recorded +immaterial write-downs on certain equipment to comply with the Company’s policy to store and maintain key equipment in an +efficient manner. +Goodwill +Goodwill represents the excess of the purchase +price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $32,150,000 at December +31, 2016 and 2015. Goodwill is reviewed annually, or more frequently if events occur or circumstances change that would more likely +than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In light of the operating losses +for the years ended December 31, 2016 and 2015, the Company proceeded to step 1 of the goodwill impairment test at the annual +test date in 2016. The Company estimated the fair value of each of its reporting unit using a discounted cash flow analysis +based on management’s short-term and long-term forecast of operating results. The discounted cash flow analysis for +each reporting unit includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted +capital expenditures, the timing of an anticipated market recovery and the timing of expected future cash flows. Based on the +analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore no impairment +of goodwill occurred for the year ended December 31, 2016. The Company completed on an annual basis a comprehensive qualitative +assessment of the various factors that impact goodwill for the years ended December 31, 2015 and 2014, and concluded it is more +likely than not that the fair value of its reporting units exceeded their carrying amounts as of the annual test date. Therefore, +the Company did not proceed to Step 1 of the goodwill impairment test in 2015 and 2014. Based on the qualitative assessment +in 2015 and 2014, the Company concluded that no impairment of its goodwill occurred for the years ended December 31, 2015 and +2014. +Advertising +Advertising expenses are charged to expense +during the period in which they are incurred. Advertising expenses totaled $1,296,000 in 2016, $2,058,000 in 2015, and $3,959,000 +in 2014. +Insurance Expenses +RPC self-insures, up to certain policy-specified +limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee +health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the +claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised +based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than +one year in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are determined +based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the +year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value +of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through +future taxable income. +43 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Defined Benefit Pension Plan +The Company has a defined benefit pension +plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to +2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under +the defined benefit pension plan. See Note 10 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records +the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares +acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value +is depleted. The Company tracks capital in excess of par value on a cumulative basis and at each reporting period, discloses the +excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ +equity. +Earnings per Share +FASB ASC Topic 260-10 “Earnings Per +Share-Overall,” requires a basic earnings per share and diluted earnings per share presentation. The Company considers all +outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether +paid or unpaid, to be participating securities. The Company has periodically issued share-based payment awards that contain non-forfeitable +rights to dividends, and therefore are considered participating securities. See Note 10 for further information on restricted +stock granted to employees. +The basic and diluted calculations differ +as a result of the dilutive effect of stock options, time lapse restricted shares and performance restricted shares included in +diluted earnings per share, but excluded from basic (loss) earnings per share. Basic and diluted (loss) earnings per share are +computed by dividing net (loss) income by the weighted average number of shares outstanding during the respective periods. +Restricted shares of common stock (participating +securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In +thousands except per share data ) +2016 +2015 +2014 +Net (loss) +income available for stockholders +$ (141,246 ) +$ (99,561 ) +$ 245,193 +Less: Adjustments +for losses attributable to participating securities +(147 ) +(240 ) +(3,913 ) +Net +loss used in calculating losses per share +$ (141,393 ) +$ (99,801 ) +$ 241,280 +Weighted average shares outstanding (including +participating securities) +217,509 +213,632 +214,840 +Adjustment +for participating securities +(3,282 ) +(3,359 ) +(3,632 ) +Shares used in calculating +basic losses per share +214,227 +210,273 +211,208 +Dilutive +effect of stock based awards +— +— +1,049 +Shares +used in calculating diluted losses per share +214,227 +210,273 +212,257 +Fair Value of Financial Instruments +The Company’s financial instruments consist +primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash +and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such +instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments +held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. +All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 8 for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized +for all share-based payment awards, net of an estimated forfeiture rate. Thus, compensation cost is amortized for those shares +expected to vest on a straight-line basis over the requisite service period of the award. See Note 10 for additional information. +44 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Recent Accounting Pronouncements +During the year ended December 31, 2016, +the Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASUs): +Recently Adopted Accounting Pronouncements: +· ASU No. 2015-16, +Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period +Adjustments. The amendments eliminate the requirement to retrospectively account +for adjustments made to provisional amounts recognized in a business combination. Adjustments +to provisional amounts that are identified during the measurement period are required +to be recognized in the reporting period in which the adjustments are determined and +calculated as if the accounting had been completed at the acquisition date and either +disclosed on the face of the income statement or in the notes by each category. The Company +adopted these provisions in the first quarter of 2016 and plans to apply the provisions +for all future business combinations. The adoption did not have a material impact on +the Company’s consolidated financial statements. +· ASU No. 2015-07, +Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That +Calculate Net Asset Value per Share (or Its Equivalent). The amendments remove the +requirement to categorize within the fair value hierarchy all investments for which fair +value is measured using the net asset value per share (or its equivalent) practical expedient. +In addition, there is no requirement to make certain disclosures for such investments. +The Company adopted these provisions in the first quarter of 2016 applied retrospectively +and has excluded the pension assets that are measured using the net asset value per share +from the fair value hierarchy disclosure. The adoption did not have a material impact +on the Company’s consolidated financial statements. +· ASU No. 2014-15, +Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure +of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Financial +statements are generally prepared under the presumption that the reporting organization +will continue to operate as a going concern, except in limited circumstances. This ASU +provides guidance on management’s responsibility to include footnote disclosures +when there is substantial doubt about the organization’s ability to continue as +a going concern. The Company adopted these provisions in the first quarter of 2016 and +will provide such disclosures as required if there are conditions and events that raise +substantial doubt about its ability to continue as a going concern. The adoption did +not have a material impact on the Company’s consolidated financial statements. +Recently Issued Accounting Pronouncements Not Yet Adopted: +To be adopted in 2017: +· ASU No. 2015-11, +Inventory (Topic 330): Simplifying the Measurement of Inventory. Current requirements +are to measure inventory at the lower of cost or market. Market could be replacement +cost, net realizable value, or net realizable value less an approximated normal profit +margin. These amendments allow inventory to be measured at lower of cost or net realizable +value and eliminates the market requirement. Net realizable value is the estimated selling +price in the ordinary course of business, less reasonably predictable costs of completion, +disposal, and transportation. The amendments do not apply to inventory that is measured +using last-in, first-out or the retail inventory method. The amendments will be adopted +in the first quarter of 2017 and applied prospectively. The Company does not expect the +adoption of these provisions to have a material impact on its consolidated financial +statements. +· ASU No. 2016-07, +Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition +to the Equity Method of Accounting. The amendments eliminate the requirement to adjust +the investment, results of operations, and retained earnings retroactively when an investment +qualifies for use of the equity method as a result of an increase in the level of ownership +interest or degree of influence. The cost of acquiring the additional interest in the +investee is to be added to the current basis of the investor’s previously held +interest and the equity method is to be adopted as of the date the investment qualifies. +In addition, an entity that has an available-for-sale equity security that becomes qualified +for the equity method of accounting is required to recognize through earnings the unrealized +holding gain or loss in accumulated other comprehensive income at the date the investment +becomes qualified for use of the equity method. The amendments will be adopted in the +first quarter of 2017 and applied prospectively. The Company does not expect the adoption +of these provisions to have a material impact on its consolidated financial statements. +45 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +· ASU No. 2016-09, +Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based +Payment Accounting. The amendments simplify several aspects of the accounting for +share-based payment award transactions, requiring excess tax benefits and deficiencies +to be recognized as a component of income tax expense rather than equity. This guidance +also requires excess tax benefits and deficiencies to be presented as an operating activity +on the statement of cash flows and allows an entity to make an accounting policy election +to either estimate expected forfeitures or to account for them as they occur. The Company +will adopt these provisions in the first quarter of 2017 and adoption of these provisions +will result in the inclusion of excess tax benefits and deficiencies as a component of +income tax expense which may increase volatility of the provision for income taxes as +the amount of excess tax benefits or deficiencies from stock-based compensation awards +are dependent on the Company’s stock price as of the date the stock awards vest. +Based on the Company’s current stock price and its stock incentive plan awards, +this change resulted in a beneficial adjustment of approximately $2.5 million to the +provision for income taxes in the first quarter of 2017. The Company will continue to +estimate expected forfeitures. +· ASU No. 2016-17, Consolidation +(Topic 810): Interests Held through Related Parties That are under Common Control. The +amendments affect reporting entities that are required to evaluate whether they should +consolidate a variable interest entity in certain situations involving entities under +common control. Specifically, the amendments change the evaluation of whether a reporting +entity is the primary beneficiary of a variable interest entity by changing how a reporting +entity that is a single decision maker of a variable interest entity treats indirect +interests in the entity held through related parties that are under common control with +the reporting entity. The amendments will be adopted in the first quarter of 2017 and +the Company does not expect the adoption to have a material impact on its consolidated +financial statements. +To be adopted in 2018: +REVENUE RECOGNITION: +The Financial Accounting Standards Board and International Accounting +Standards Board issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral +revenue recognition model intended to increase financial statement comparability across companies and industries and significantly +reduce the complexity inherent in today’s revenue recognition guidance. The various ASUs related to Revenue from Contracts +with Customers (Topic 606) have been listed below: +· ASU No. 2014-09. +The core principle of the guidance is that an entity should recognize revenue to +depict the transfer of promised goods or services to customers in an amount that reflects +the consideration to which the entity expects to be entitled in exchange for those goods +or services using a five step process. +· ASU No. 2015-14 . +Deferred the effective date of ASU 2014-09 for all entities by one year to the first +quarter of 2018 with early application permitted. +· ASU No. 2016-08, +Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments +provide guidance on whether an entity is a principal or agent when providing services +to a customer along with another party. +· ASU No. 2016-10, +Identifying Performance Obligations and Licensing. The amendments clarify the earlier +guidance on identifying performance obligations and licensing implementation. +· ASU No. 2016-11, +Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16 +Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds +certain SEC guidance related to issues that are currently codified under various topics. +· ASU No. 2016-12, +Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying +guidance on certain aspects of the five step process and practical expedients regarding +the effect of modifications and status of completed contracts under legacy GAAP and disclosures +related to the application of this guidance using the modified retrospective or retrospective +transition method. +· ASU No. 2016-20, +Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. +The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU +2014-09 and includes among others, loan guarantees, impairment testing of contract costs, +performance obligations disclosures and accrual of advertising costs. +46 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Current Status of implementation: +The Company is currently analyzing the effect of the +standard across all of its revenue streams to evaluate the impact of the new standard on +revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would +result from applying the requirements under the new standard. Most of the Company’s services are primarily short-term +in nature, and the assessment at this stage is that the Company does not expect the adoption of the new revenue recognition standard +to have a material impact on its financial statements. The Company plans to adopt the standard in the first quarter of 2018 using +the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment +to the opening balance of retained earnings. +· ASU No. 2016-01, +Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement +of Financial Assets and Financial Liabilities. The amendments make targeted improvements +to existing U.S. GAAP and affects accounting for equity investments and financial instruments +and liabilities and related disclosures. The amendments are effective starting in the +first quarter of 2018, with early adoption permitted for certain provisions. The Company +is currently evaluating the impact of these provisions on its consolidated financial +statements. +· ASU No. 2016-15, +Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash +Payments. The amendments provide guidance in the presentation and classification +of certain cash receipts and cash payments in the statement of cash flows including debt +prepayment or debt extinguishment costs, contingent consideration payments made after +a business combination, proceeds from the settlement of insurance claims, proceeds from +the settlement of corporate-owned life insurance policies, and distributions received +from equity method investees. The amendments are effective starting in the first quarter +of 2018 with early adoption permitted. The amendments should be applied using a retrospective +transition method to each period presented. If it is impracticable to apply the amendments +retrospectively for some of the issues, the amendments for those issues would be applied +prospectively as of the earliest date practicable. The Company is currently evaluating +the impact of adopting these provisions on its consolidated financial statements. +· ASU No. 2016-16, +Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The +amendments require an entity to recognize the income tax consequences of an intra-entity +transfer of an asset other than inventory when the transfer occurs. The amendments eliminate +the exception for an intra-entity transfer of an asset other than inventory. Two common +examples of assets included in the scope of the amendments are intellectual property +and property, plant, and equipment. The amendments do not include new disclosure requirements; +however, existing disclosure requirements might be applicable when accounting for the +current and deferred income taxes for an intra-entity transfer of an asset other than +inventory. The amendments are effective starting in the first quarter of 2018 with early +adoption permitted. The amendments are required to be applied on a modified retrospective +basis through a cumulative-effect adjustment directly to retained earnings as of the +beginning of the period of adoption. The Company is currently evaluating the impact of +adopting these provisions on its consolidated financial statements. +· ASU No. 2016-18, Statement +of Cash Flows (230): Restricted Cash. The amendments require that a statement of +cash flows explain the change during the period in the total of cash, cash equivalents, +and amounts generally described as restricted cash or restricted cash equivalents. As +a result, amounts generally described as restricted cash and restricted cash equivalents +should be included with cash and cash equivalents when reconciling the beginning-of-period +and end-of-period total amounts shown on the statement of cash flows. The amendments +do not provide a definition of restricted cash or restricted cash equivalents. The amendments +are effective starting in the first quarter of 2018 with early adoption permitted. The +amendments should be applied using a retrospective transition method to each period presented. +The Company is currently evaluating the impact of adopting these provisions on its consolidated +financial statements. +47 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +To be adopted in 2019 and later: +· ASU No. 2016-02, +Leases (Topic 842). Under the new guidance, lessees will need to recognize a right-of-use +asset and a lease liability for virtually all of their leases (other than leases that +meet the definition of a short-term lease), at the commencement of the lease term. The +liability will be equal to the present value of lease payments. The asset will be based +on the liability, subject to adjustment, such as for initial direct costs. The amendments +in this standard are effective for fiscal years beginning after December 15, 2018, including +interim periods within those fiscal years. Early application is permitted. Lessees (for +capital and operating leases) and lessors (for sales-type, direct financing, and operating +leases) must apply a modified retrospective transition approach for leases existing at, +or entered into after, the beginning of the earliest comparative period presented in +the financial statements. Lessees and lessors may not apply a full retrospective transition +approach. The Company is currently evaluating the impact of adopting these provisions +on its consolidated financial statements. +· ASU No. 2016-13, +Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses +on Financial Instruments. The amendments require that credit losses on available-for-sale +debt securities and purchased financial assets with credit deterioration should be presented +as an allowance rather than a write-down. It also allows recording of credit loss reversals +in current period net income. The amendments are effective in the first quarter of 2020 +with early application permitted a year earlier. The Company is currently evaluating +the impact of adopting these provisions on its consolidated financial statements. +Note 2: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2016 +2015 +(in thousands) +Trade receivables: +Billed +$ 122,216 +$ 190,567 +Unbilled +39,223 +40,731 +Other receivables +10,280 +11,494 +Total +171,719 +242,792 +Less: allowance for doubtful accounts +(2,553 ) +(10,605 ) +Accounts receivable, net +$ 169,166 +$ 232,187 +Trade receivables relate to sale of our services +and products, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables +represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables relate +primarily to sale of Company property and rebates from suppliers. +Changes in the Company’s allowance for +doubtful accounts are as follows: +Years Ended December 31, +2016 +2015 +(in thousands) +Beginning balance +$ 10,605 +$ 15,351 +Bad debt expense (reduction) +6,021 +(2,958 ) +Accounts written-off +(14,101 ) +(2,825 ) +Recoveries +28 +1,037 +Ending balance +$ 2,553 +$ 10,605 +Note 3: Inventories +Inventories are $108,316,000 at December +31, 2016 and $128,441,000 at December 31, 2015 and consist of raw materials, parts and supplies. +48 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Note 4: Property, Plant and Equipment +Property, plant and equipment are presented +at cost net of accumulated depreciation and consist of the following: +December 31, +2016 +2015 +(in thousands) +Land +$ 19,070 +$ 19,056 +Buildings and leasehold improvements +142,741 +142,715 +Operating equipment +1,432,007 +1,440,508 +Computer software +22,050 +19,650 +Furniture and fixtures +8,056 +8,043 +Vehicles +469,570 +480,899 +Construction in progress +— +6 +Gross property, plant and equipment +2,093,494 +2,110,877 +Less: accumulated depreciation +(1,595,508 ) +(1,422,542 ) +Net property, plant and equipment +$ 497,986 +$ 688,335 +Depreciation expense was $220.6 million in +2016, $274.4 million in 2015, and $233.4 million in 2014, and includes amounts recorded as costs of revenues and inventory. There +were no capital leases outstanding as of December 31, 2016 and December 31, 2015. The Company had accounts payable for purchases +of property and equipment of $3.4 million as of December 31, 2016, $2.4 million as of December 31, 2015, and $38.5 million as +of December 31, 2014. +Effective January 1, 2015, the Company reassessed +the useful life of a specific component of its pressure pumping equipment. Prior to January 1, 2015, this component was recorded +as property, plant and equipment and depreciated over an expected useful life of 18 months. As a result of this reassessment, +the Company concluded that this component is no longer a long-lived asset, but instead a consumable supply inventory item. Accordingly, +effective January 1, 2015, the cost of this component was expensed as repairs and maintenance as part of cost of revenues at the +time of installation. Management deemed the change preferable because it more closely reflects the pattern of consumption of this +component as a result of continual increases in wear and tear resulting from harsher geological environments. +This change was accounted for as a change in +accounting estimate effected by a change in accounting principle. The net impact of this change in accounting estimate effected +by a change in accounting principle on operating income and net income is not material. The change has resulted in an increase +in the cost of revenues of $41,919,000 during 2015, while loss on dispositions and depreciation expense relating to this component +decreased by a comparable amount during the period. Additionally, due to the change in accounting estimate effected by a change +in accounting principle, purchases and deployment of this component will no longer be reflected as a capital expenditure under +the investing activities section in the consolidated statement of cash flows, but instead will be reflected within cash flows +from operating activities. The remaining net book value of these components at December 31, 2014 was $16,406,000 and was depreciated +over an estimated weighted average remaining useful life of approximately 12 months. Loss on disposition related to this component +totaled $21,408,000 in 2014. +49 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Note 5: Income Taxes +The following table lists the components +of the (benefit) provision for income taxes: +Years ended December 31, +2016 +2015 +2014 +(in thousands) +Current (benefit) provision: +Federal +$ (43,993 ) +$ (24,727 ) +$ 119,074 +State +(24,479 ) +(3,638 ) +19,858 +Foreign +4,567 +7,898 +2,907 +Deferred (benefit) provision: +Federal +(31,505 ) +(31,178 ) +11,514 +State +(2,704 ) +(1,835 ) +840 +Total income tax (benefit) provision +$ (98,114 ) +$ (53,480 ) +$ 154,193 +Reconciliation between the federal statutory +rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2016 +2015 +2014 +Federal statutory rate +35.0 % +35.0 % +35.0 % +State income taxes, net of federal benefit +1.3 +— +3.3 +Tax credits +0.1 +0.3 +(0.7 ) +Non-deductible expenses +(0.7 ) +(1.3 ) +0.4 +Change in contingencies +6.6 +— +— +Other +(1.3 ) +0.9 +0.6 +Effective tax rate +41.0 % +34.9 % +38.6 % +Significant components of the Company’s +deferred tax assets and liabilities are as follows: +December 31, +2016 +2015 +(in thousands) +Deferred tax assets: +Self-insurance +$ 5,907 +$ 7,274 +Pension +11,995 +12,048 +State net operating loss carryforwards +1,455 +370 +Bad debt +991 +4,041 +Accrued payroll +857 +1,330 +Stock-based compensation +5,847 +5,885 +All others +2,483 +4,704 +Valuation allowance +(356 ) +(276 ) +Gross deferred tax assets +29,179 +35,376 +Deferred tax liabilities: +Depreciation +(95,606 ) +(137,606 ) +Goodwill amortization +(9,340 ) +(8,887 ) +Basis differences in variable interest entities +(5,281 ) +(4,876 ) +Basis differences in joint ventures +(396 ) +518 +All others +(22 ) +(20 ) +Gross deferred tax liabilities +(110,645 ) +(150,871 ) +Net deferred tax liabilities +$ (81,466 ) +$ (115,495 ) +50 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +As of December 31, 2016, undistributed earnings +of the Company’s foreign subsidiaries totaled $10.2 million. Additional U.S. taxes due upon full repatriation would be negligible. +However, those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes +have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject +to both U.S. income taxes and withholding taxes payable to the foreign countries. The Company’s current intention is to permanently +reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that +have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign +tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2016, the Company has +net operating loss carryforwards related to state income taxes of approximately $33.5 million that will expire between 2017 and +2035. As of December 31, 2016, the Company has a valuation allowance of approximately $356 thousand, representing the tax affected +amount of loss carryforwards that the Company does not expect to utilize, against the corresponding deferred tax asset. +Total net income tax (refunds) payments were +$(42.4) million in 2016, $(7.9) million in 2015, and $152.2 million in 2014. +The Company and its subsidiaries are subject +to U.S. federal and state income taxes in multiple jurisdictions. In many cases our uncertain tax positions are related to tax +years that remain open and subject to examination by the relevant taxing authorities. The Company’s 2013 through 2016 tax +years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +The Company’s subsidiaries are also +subject to foreign income taxes in certain jurisdictions. In November 2016, the Canadian Revenue Agency (CRA) initiated an examination +of the Company’s Canadian subsidiary for the periods 2013 – 2015. As of December 31, 2016, the CRA has not proposed +any adjustments in connection with this examination. +During 2016, the Company recognized a decrease +in its liability for unrecognized tax benefits in the current year related primarily due to settlements with state tax authorities. +The remaining liability, if recognized, would affect our effective rate. A reconciliation of the beginning and ending amount of +unrecognized tax benefits is as follows: +2016 +2015 +Balance at January 1 +$ 26,152,000 +$ 23,267,000 +Additions based on tax positions related to the current year +0 +2,171,000 +Additions for tax positions of prior years +0 +714,000 +Reductions for tax positions of prior years +(23,937,000 ) +0 +Balance at December 31 +$ 2,215,000 +$ 26,152,000 +The Company’s policy is to record interest +and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2016 and +2015 were approximately $76 thousand and $411 thousand, respectively. +It is reasonably possible that the amount +of the unrecognized tax benefits with respect to our unrecognized tax positions will significantly decrease in the next 12 months. +These changes may result from, among other things, state tax settlements under or conclusions of ongoing examinations or reviews, +however, quantification of an estimated range cannot be made at this time. +Note 6: Long-Term Debt +The Company has a revolving credit facility +with Banc of America Securities, LLC, SunTrust Robinson Humphrey, Inc., and Regions Capital Markets as Joint Lead Arrangers and +Joint Book Managers, and a syndicate of four other lenders. The facility has a general term of five years ending January +17, 2019 and provides for a line of credit of up to $125 million, including a $50 million letter of credit subfacility, and a +$35 million swingline subfacility. The revolving credit facility contains customary terms and conditions, including restrictions +on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full +and unconditional guarantee by the Company’s 100 percent owned domestic subsidiaries whose assets equal substantially all of the +consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. +51 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +On June 30, 2016, the Company amended the revolving +credit facility to (1) establish a borrowing base to be the lesser of (a) $125 million or (b) the difference between (i) a specified +percentage (ranging from 70% to 80%) of eligible accounts receivable less (ii) the amount of any outstanding letters of credit, +(2) secure payment obligations under the credit facility with a security interest in the consolidated accounts receivable, and +(3) replace the financial covenants related to minimum leverage and debt service coverage ratios with a covenant to maintain a +minimum tangible net worth of not less than $700 million. As of December 31, 2016, the Company was in compliance with this covenant. +Revolving loans under the amended revolving +credit facility bear interest at one of the following two rates at the Company’s election: +· the Base Rate, +which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate +plus 0.50%, (b) Bank of America’s publicly announced “prime rate,” +and (c) the Eurodollar Rate plus 1.00%; in each case plus a margin that ranges from 0.125% +to 1.125% based on a quarterly consolidated leverage ratio calculation; or +· the Eurodollar +Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); +plus, a margin ranging from 1.125% to 2.125%, based upon a quarterly debt covenant calculation. +In addition, the Company pays an annual fee +ranging from 0.225% to 0.325%, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit +facility. +The Company has incurred loan origination +fees and other debt related costs associated with the revolving credit facility in the aggregate of approximately $3.0 million. These +costs, net of amounts written off as a result of a reduction in the size of the revolving credit facility in 2015, are being amortized +to interest expense over the remaining term of the five-year loan, and the remaining net balance of $0.2 million at December 31, +2016 is classified as part of non-current other assets. +On January 4, 2016, the Company entered into +a separate one year $35 million uncommitted letter of credit facility with Bank of America, N.A. Under the terms of the letter +of credit facility, the Company paid 0.75% per annum on outstanding letters of credit. This letter of credit facility expired +on January 3, 2017. All letters of credit are currently issued under RPC’s $125 million credit facility. Letters of credit +outstanding totaled $19.1 million as of December 31, 2016 and $29.3 million as of December 31, 2015. +As of December 31, 2016, RPC had no outstanding +borrowings under the revolving credit facility. Interest incurred and paid on the credit facility, interest capitalized related +to facilities and equipment under construction, and the related weighted average interest rates were as follows for the periods +indicated: +Years Ended December 31, +2016 +2015 +2014 +(in thousands except interest +rate data) +Interest incurred +$ 449 +$ 1,913 +$ 2,295 +Capitalized interest +$ — +$ 534 +$ 563 +Interest paid (net of capitalized interest) +$ 284 +$ 1,169 +$ 1,314 +Weighted average interest rate +— % +2.2 % +2.2 % +52 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Note 7: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income +consists of the following (in thousands): +Pension +Adjustment +Unrealized +Gain (Loss) +On +Securities +Foreign +Currency +Translation +Total +Balance at December 31, 2014 +$ (16,246 ) +$ (98 ) +$ (1,489 ) +$ (17,833 ) +Change during 2015: +Before-tax amount +1,621 +(16 ) +(1,801 ) +(196 ) +Tax (expense) benefit +(592 ) +6 +— +(586 ) +Reclassification adjustment, net of taxes: +Realized loss on securities +— +144 +— +144 +Amortization +of net loss (1) +502 +— +— +502 +Total activity in 2015 +1,531 +134 +(1,801 ) +(136 ) +Balance at December 31, 2015 +(14,715 ) +36 +(3,290 ) +(17,969 ) +Change during 2016: +Before-tax amount +(2,039 ) +5 +652 +(1,382 ) +Tax (expense) benefit +744 +(2 ) +— +742 +Reclassification adjustment, net of taxes: +Realized loss on securities +— +— +— +— +Amortization +of net loss (1) +507 +— +— +507 +Total activity in 2016 +(788 ) +3 +652 +(133 ) +Balance at December 31, 2016 +$ (15,503 ) +$ 39 +$ (2,638 ) +$ (18,102 ) +(1) Reported as part of selling, general and administrative expenses. +Note 8: Fair Value Disclosures +The various inputs used to measure assets +at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s +assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for +identical assets or liabilities. +2. Level 2 – Quoted +prices for similar instruments in active markets, quoted prices for identical or similar +instruments in markets that are not active, and model-based valuation techniques for +which all significant assumptions are observable in the market or can be corroborated +by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s +estimates and assumptions, which reflect those that market participants would use. +53 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The following table summarizes the valuation +of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2016 and 2015: +Fair Value Measurements at December 31, 2016 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity +securities +$ 264 +$ 264 +$ — +$ — +Investments measured at net asset value - trading securities +$ 18,367 +Fair Value Measurements at December 31, 2015 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity +securities +$ 259 +$ 259 +$ — +$ — +Investments measured at net asset value - trading securities +$ 16,081 +The Company determines the fair value of +marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing +price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by +the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised +of the SERP assets, as described in Note 10, and are recorded primarily at their net cash surrender values, calculated using their +net asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, +in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers +between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2016 there were no significant +transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit +facility, there was no balance outstanding at December 31, 2016 and 2015. Outstanding balances based on the quote from the lender +(level 2 inputs) is similar to the fair value at the same date. The borrowings under our revolving credit facility bear variable +interest rates as described in Note 6. The Company is subject to interest rate risk on the variable component of the interest +rate. +The carrying amounts of other financial instruments +reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity +of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments +and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 9: Commitments and Contingencies +Lease Commitments - Minimum annual +rentals, principally for noncancelable real estate and equipment leases with terms in excess of one year, in effect at December +31, 2016, are summarized in the following table: +(in thousands) +2017 +$ 10,267 +2018 +10,280 +2019 +7,797 +2020 +4,786 +2021 +3,288 +Thereafter +4,195 +Total rental commitments +$ 40,613 +54 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +Total rental expense, including short-term +rentals, charged to operations was $15,723,000 in 2016, $20,658,000 in 2015, and $22,968,000 in 2014. +Income Taxes - The amount of income +taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company +has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that +could result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other +taxes. +Litigation - RPC is a party to various +routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. +RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature +and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal +proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted +with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome +of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or +financial condition. +Note 10: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income Plan, +a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees with +at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation +as an adopting employer. +The Company’s projected benefit obligation +exceeds the fair value of the plan assets under its pension plan by $9.6 million and thus the plan was under-funded as of December +31, 2016. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s +consolidated balance sheets: +December 31, +2016 +2015 +(in thousands) +Accumulated benefit obligation at end of year +$ 44,315 +$ 42,894 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ 42,894 +$ 47,410 +Service cost +— +— +Interest cost +2,006 +1,898 +Amendments +— +— +Actuarial loss (gain) +1,371 +(4,593 ) +Benefits paid +(1,956 ) +(1,821 ) +Projected benefit obligation at end of year +$ 44,315 +$ 42,894 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ 30,937 +$ 32,622 +Actual return on plan assets +1,464 +(714 ) +Employer contribution +4,300 +850 +Benefits paid +(1,956 ) +(1,821 ) +Fair value of plan assets at end of year +$ 34,745 +$ 30,937 +Funded status at end of year +$ (9,570 ) +$ (11,957 ) +55 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +December 31, +2016 +2015 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss (gain) +$ 24,412 +$ 23,172 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ 24,412 +$ 23,172 +The accumulated benefit obligation for the +Retirement Income Plan at December 31, 2016 and 2015 has been disclosed above. The Company uses a December 31 measurement date +for this qualified plan. +Amounts recognized in the consolidated balance +sheets consist of: +December 31, +2016 +2015 +(in thousands) +Funded status of the Retirement Income Plan +$ (9,570 ) +$ (11,957 ) +SERP liability +(23,294 ) +(21,052 ) +Long-term pension liabilities +$ (32,864 ) +$ (33,009 ) +RPC’s funding policy is to contribute +to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. Amounts +contributed to the plan totaled $4,300,000 in 2016 and $850,000 in 2015. +The components of net periodic benefit cost of the Retirement Income Plan +are summarized as follows: +Years ended December 31, +2016 +2015 +2014 +(in thousands) +Service cost for benefits earned during the period +$ — +$ — +$ — +Interest cost on projected benefit obligation +2,006 +1,898 +1,946 +Expected return on plan assets +(2,131 ) +(2,259 ) +(2,240 ) +Amortization of net loss +799 +790 +531 +Net periodic benefit plan cost +$ 674 +$ 429 +$ 237 +56 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The Company recognized pre-tax (increases) +decreases to the funded status in accumulated other comprehensive loss of $1,240,000 in 2016, $(2,411,000) in 2015, and $10,214,000 +in 2014. There were no previously unrecognized prior service costs as of December 31, 2016, 2015 and 2014. The pre-tax amounts +recognized in accumulated other comprehensive loss for the years ended December 31, 2016, 2015 and 2014 are summarized as follows: +(in thousands) +2016 +2015 +2014 +Net loss (gain) +$ 2,039 +$ (1,621 ) +$ 10,745 +Amortization of net loss +(799 ) +(790 ) +(531 ) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ 1,240 +$ (2,411 ) +$ 10,214 +The amounts in accumulated other comprehensive +loss expected to be recognized as components of net periodic benefit cost in 2017 are as follows: +(in thousands) +2017 +Amortization of net loss +$ 825 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ 825 +The weighted average assumptions as of December +31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2016 +2015 +2014 +Projected Benefit Obligation: +Discount rate +4.45 % +4.70 % +4.15 % +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.70 % +4.15 % +5.20 % +Expected return on plan assets +7.00 % +7.00 % +7.00 % +Rate of compensation increase +N/A +N/A +N/A +The Company’s expected return on assets +assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes +a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation +strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested +to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical +returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, +the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +57 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The plan’s weighted average asset allocation +at December 31, 2016 and 2015 by asset category along with the target allocation for 2017 are as follows: +Asset Category +Target +Allocation +for 2017 +Percentage of +Plan +Assets as of +December 31, +2016 +Percentage of +Plan +Assets as of +December 31, +2015 +Cash and cash equivalents +0% +- 5 % +3.3 % +0.7 % +Fixed income securities +15% - 50 % +25.3 % +25.8 % +Domestic equity securities +0% - 40 % +25.5 % +27.6 % +International equity securities +0% - 40 % +20.8 % +19.1 % +Investments measured at net asset value +0% +- 20 % +25.1 % +26.8 % +Total +100.0 % +100.0 % +The Company’s overall investment strategy +is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, +with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments +in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, +mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and +private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, +the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of +risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each +asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited +to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds +to achieve this target allocation. Company management does not expect to make any contribution to the pension plan during +fiscal year 2017. +Some of our assets, primarily our private +equity and real estate funds, do not have readily determinable market values given the specific investment structures involved +and the nature of the underlying investments. For plan asset reporting as of December 31, 2016, publicly traded asset pricing +was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements +combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued +based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant +non-observable inputs which do not have a readily determinable fair value. These assets have been excluded from the fair value +hierarchy applied retrospectively based on the accounting guidance recently adopted. The valuations are subject to judgments and +assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The +Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing +the financial data included in the funds’ financial statements for reasonableness. +58 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The following tables present our plan assets +using the fair value hierarchy as of December 31, 2016 and 2015. The fair value hierarchy has three levels based on the reliability +of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2016: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1 ) +$ 1,154 +$ 1,154 +$ — +Fixed Income Securities +(2 ) +8,804 +— +8,804 +Domestic Equity Securities +(3 ) +8,865 +4,469 +4,396 +International Equity Securities +(4 ) +7,215 +— +7,215 +Total Assets in the Fair Value Hierarchy +$ 26,038 +$ 5,623 +$ 20,415 +Investments measured at Net Asset Value +8,707 +Investments at Fair Value +$ 34,745 +Fair Value Hierarchy as of December 31, 2015: +Investments (in thousands) +Total +Level +1 +Level +2 +Cash and Cash Equivalents +(1 ) +$ 210 +$ 210 +$ — +Fixed Income Securities +(2 ) +7,987 +— +7,987 +Domestic Equity Securities +(3 ) +8,527 +4,285 +4,242 +International Equity Securities +(4 ) +5,911 +— +5,911 +Total Assets in the Fair Value Hierarchy +$ 22,635 +$ 4,495 +$ 18,140 +Investments measured at Net Asset Value +8,302 +Investments at Fair Value +$ 30,937 +(1) Cash and cash equivalents, which are used to pay benefits +and plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) Fixed income securities are primarily valued using a market +approach with inputs that include broker quotes, benchmark yields, base spreads and reported +trades. +(3) Domestic equity securities are valued using a market approach +based on the quoted market prices of identical instruments in their respective markets. +(4) International equity securities are valued using a market +approach based on the quoted market prices of identical instruments in their respective +markets. +The Company estimates that the future benefits +payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2017 +$ 2,432 +2018 +2,530 +2019 +2,589 +2020 +2,626 +2021 +2,710 +2022-2026 +14,194 +Supplemental Executive Retirement Plan (SERP) +The Company +permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested +primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the +SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments +in COLI policies consisted of $47.7 million in variable life insurance policies as of December 31, 2016 and $46.8 million as of +December 31, 2015. In the COLI policies, the Company is able to allocate investment of the assets across a set of choices provided +by the insurance company, including fixed income securities and equity funds. The COLI policies are recorded at their net cash +surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s +credit rating was A+. +The Company +classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $18,367,000 as +of December 31, 2016 and $16,081,000 as of December 31, 2015. The SERP assets are reported in other assets on the balance sheet. +The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations +as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled +$966,000 in 2016, $(519,000) in 2015, and $959,000 in 2014. The SERP liability is recorded on the balance sheet in long-term pension +liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative +expenses in the consolidated statements of operations. +59 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +401(k) Plan +RPC sponsors a defined contribution 401(k) plan +that is available to substantially all full-time employees with more than three months of service. This plan allows employees +to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution +imposed by the Internal Revenue Code. RPC matches 50 percent of each employee’s contributions that do not exceed six percent +of the employee’s compensation, as defined by the plan. Employees vest in the RPC contributions after three years of service. +The charges to expense for the Company’s contributions to the 401(k) plan were $3,250,000 in 2016, $4,796,000 in 2015, and +$6,970,000 in 2014. +Stock Incentive Plans +The Company has issued stock options and restricted +stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. The 1994 +plan expired in 2004 and the 2004 Plan expired in 2014. In April 2015, the Company reserved 8,000,000 shares of common stock under +the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various +forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As +of December 31, 2016, 6,250,634 shares were available for grant. +The Company recognizes compensation expense +for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these +awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the +time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based +payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) +are classified as a financing activity in the accompanying consolidated statements of cash flows. +Pre-tax stock-based employee compensation +expense was $10,218,000 in 2016 ($6,488,000 after tax), $9,960,000 in 2015 ($6,325,000 after tax), and $9,074,000 in 2014 ($5,762,000 +after tax). +Stock Options +Stock options are granted at an exercise price +equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options +to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market +value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years, +except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire +in five years. +The Company estimates the fair value of stock +options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees +since 2003 and there are none outstanding. There were no stock options exercised during 2016, 2015 or 2014 and there are no stock +options outstanding as of December 31, 2016. +Restricted Stock +The Company has granted employees time lapse +restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time +lapse restricted shares issued vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees +receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is +issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans +have lapsed. Upon termination of employment from RPC (other than due to death, disability or retirement on or after age 65), shares +with restrictions must be returned to the Company. +60 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2016: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2016 +3,312,175 +$ 13.17 +Granted +920,100 +10.77 +Vested +(891,245 ) +11.58 +Forfeited +(123,955 ) +13.41 +Non-vested shares at December 31, 2016 +3,217,075 +$ 12.91 +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2015: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2015 +3,575,150 +$ 12.04 +Granted +895,725 +12.30 +Vested +(1,054,625 ) +8.66 +Forfeited +(104,075 ) +12.78 +Non-vested shares at December 31, 2015 +3,312,175 +$ 13.17 +The fair value of restricted share awards +is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net +of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value +per share of these restricted stock awards was $10.77 for 2016, $12.30 for 2015 and $18.84 for 2014. The total fair value of shares +vested was $9,751,000 during 2016, $12,727,000 during 2015 and $20,664,000 during 2014. The tax benefit for compensation tax deductions +in excess of compensation expense was credited to capital in excess of par value aggregating $427,000 for 2016, $1,410,000 for +2015 and $4,336,000 for 2014. The excess tax deductions are classified as a financing activity in the accompanying consolidated +statements of cash flows. +Other Information +As of December 31, 2016, total unrecognized +compensation cost related to non-vested restricted shares was $38,673,000 which is expected to be recognized over a weighted-average +period of 3.4 years. +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products +Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then +distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products +entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $739,000 in 2016, $753,000 in 2015, and $663,000 in 2014. The Company’s +receivable (payable) due to (from) Marine Products for these services was $60,000 as of December 31, 2016 and $(11,000) as of +December 31, 2015. The Company’s directors are also directors of Marine Products and all of the executive officers are employees +of both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $890,000 in 2016, $1,127,000 in 2015 and $1,092,000 +in 2014. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are +subsidiaries of the Company) for such services and rent totaled $111,000 in 2016, $100,000 in 2015 and $84,000 in 2014. +61 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain +companies under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. +The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution +by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, +LLC for a period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs +of approximately $197,000 in 2016 and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using +the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As +of December 31, 2016, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +Note 12: Business Segment Information +RPC’s reportable segments are the +same as its operating segments. RPC manages its business as either services offered on the well site with equipment and +personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under +Technical Services generate revenue based on equipment, personnel operating the equipment and the materials utilized to +provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics +and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenue +through one source, which is either a hard asset or a personnel resource. Selected overhead including +centralized support services and regulatory compliance are classified under Corporate. +Technical Services include RPC’s oil +and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. +The common drivers of operational and financial success of these service lines include diligent equipment maintenance, strong +logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of +these service to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment +decisions based on this operating segment as a whole across these various services. The principal markets for this segment include +the United States, including the Gulf of Mexico, the mid-continent, southwest, Rocky Mountain and Appalachian regions, and international +locations including primarily Argentina, Canada, Gabon, Bolivia, China, Mexico and the Middle East. Customers include major multi-national +and independent oil and gas producers, and selected nationally-owned oil companies. +Support Services include all of the +services that provide (i) equipment for customers’ use on the well site without RPC personnel and (ii) services that +are provided in support of customer operations off the well site such as class room and computer training, and other +consulting services. The primary drivers of operational success for equipment provided for customers’ use on the well +site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design +characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the +well site and competitive marketing of such services. The equipment and services offered include drill pipe and related +tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for +these services tends to be influenced primarily by customer drilling-related activity levels. The equipment and services +offered include drill pipe and related tools, pipe handling, inspection and storage services, and oilfield training services. +The principal markets for this segment include the United States, including the Gulf of Mexico, the mid-continent and +Appalachian regions, and selected international locations. Customers include domestic operations of major multi-national and +independent oil and gas producers, and selected nationally-owned oil companies. +62 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +The Company’s Chief Operating Decision +Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth +and maintenance capital expenditures and key initiatives based on operating segments outlined above . +The accounting policies of the reportable +segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of +its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are +reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. +Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices +for arm’s length transactions and are not material to operating results. +Summarized financial information concerning +RPC’s reportable segments for the years ended December 31, 2016, 2015 and 2014 are shown in the following table: +(in thousands) +Technical +Services +Support +Services +Corporate +Loss on disposition of +assets, net +Total +2016 +Revenues +$ 679,654 +$ 49,320 +$ — +$ — +$ 728,974 +Operating (loss) +(203,804 ) +(26,021 ) +(17,037 ) +7,920 +(238,942 ) +Capital expenditures +28,380 +2,928 +2,630 +— +33,938 +Depreciation and amortization +191,181 +25,606 +471 +— +217,258 +Identifiable assets +733,008 +76,876 +225,568 +— +1,035,452 +2015 +Revenues +$ 1,175,293 +$ 88,547 +$ — +$ — +$ 1,263,840 +Operating (loss) +(132,982 ) +(2,363 ) +(14,515 ) +(6,417 ) +(156,277 ) +Capital expenditures +155,361 +11,055 +1,010 +— +167,426 +Depreciation and amortization +237,778 +32,697 +502 +— +270,977 +Identifiable assets +976,761 +108,262 +152,071 +— +1,237,094 +2014 +Revenues +$ 2,180,457 +$ 156,956 +$ — +$ — +$ 2,337,413 +Operating profit (loss) +390,004 +42,510 +(16,113 ) +(15,472 ) +400,929 +Capital expenditures +342,932 +27,148 +1,422 +— +371,502 +Depreciation and amortization +198, 636 +31,578 +599 +— +230,813 +Identifiable assets +1,514,084 +157,688 +87,586 +— +1,759,358 +The following summarizes selected information +between the United States and all international locations combined for the years ended December 31, 2016, 2015 and 2014. The revenues +are presented based on the location of the use of the product or service. Assets related to international operations are less +than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2016 +2015 +2014 +(in thousands) +United States Revenues +$ 677,755 +$ 1,191,704 +$ 2,249,260 +International Revenues +51,219 +72,136 +88,153 +$ 728,974 +$ 1,263,840 +$ 2,337,413 +63 +Item 9. Changes in and Disagreements with Accountants on Accounting +and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures +— The Company maintains disclosure controls and procedures that are designed to ensure that information required to +be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2016 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal control +over financial reporting — Management is responsible for establishing and maintaining adequate internal control over +financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 33 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2016 and issued a report thereon +which is included on page 34 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive +officers will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders, in the section titled “Election +of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on +Page 14 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of +the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2017 Annual Meeting +of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit +Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that +applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers +and Related Party Transaction Policy. Both of these documents are available on the Company’s Web site at www.rpc.net. Copies +are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 520, N.E., Atlanta, +GA 30329. +RPC, Inc. intends to satisfy the disclosure +requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements +of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which +is provided above. +64 +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section +16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the +Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive +compensation will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders, in the sections titled “Compensation +Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and +Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated +herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and +Management and Related Stockholder Matters +Information concerning +security ownership will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders, in the sections “Capital +Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance Under +Equity Compensation Plans +The following table sets forth certain information +regarding equity compensation plans as of December 31, 2016. +Plan Category +(A) +Number of Securities +To +Be Issued Upon Exercise of +Outstanding Options, +Warrants and Rights +(B) +Weighted Average +Exercise Price of +Outstanding Options, Warrants and +Rights +(C) +Number of Securities +Remaining +Available for Future Issuance +Under Equity Compensation +Plans (Excluding Securities +Reflected in +Column (A)) +Equity compensation plans approved by securityholders +— +$ — +6,250,634 (1) +Equity compensation +plans not approved by securityholders +— +— +— +Total +— +$ — +6,250,634 +(1) All of the securities can be issued in the form of restricted +stock or other stock awards. +See Note 10 to the Consolidated Financial +Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders in the section titled “Director +Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees +and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC Proxy +Statement for its 2017 Annual Meeting of Stockholders. This information is incorporated herein by reference. +65 +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule +and Exhibits +1. Consolidated financial statements listed +in the accompanying Index to Consolidated Financial Statements and Schedule are filed +as part of this report. +2. The financial statement schedule listed +in the accompanying Index to Consolidated Financial Statements and Schedule is filed +as part of this report. +3. Exhibits listed in the accompanying Index +to Exhibits are filed as part of this report. The following such exhibits are management +contracts or compensatory plans or arrangements: +10.1 2004 Stock Incentive Plan (incorporated herein +by reference to Appendix B to the Registrant’s definitive Proxy Statement filed +on March 24, 2004). +10.6 Form of Time Lapse Restricted Stock Grant +Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November +2, 2004). +10.7 Form of Performance Restricted Stock Grant +Agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November +2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference +to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 +Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K +filed on March 2, 2007). +10.10 Performance-Based Incentive Cash Compensation Plan (incorporated +by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 Summary of Compensation Arrangements with Executive Officers +(incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, +2010). +10.14 Form of Time Lapse Restricted Stock Agreement (incorporated +herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 Summary of Compensation Arrangements with Non-Employee Directors +(incorporated herein by reference to Exhibit 10.15 to the Form 10-K filed on February +27, 2015). +10.17 2014 Stock Incentive Plan (incorporated herein by reference +to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, +2014). +10.20 Form of award agreement +under Performance-Based Incentive Cash Compensation Plan. +66 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to +exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference +to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference +to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated herein by reference to Exhibit 3.2 +to the Form 10-Q filed on November 3, 2014). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form +10-K for the fiscal year ended December 31, 1998). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s +definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by +and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Form 10-K filed +on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral +Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Form 10-K filed on February +13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and +Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Form 10-K filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products +Corporation (incorporated herein by reference to Exhibit 10.5 to the Form 10-K filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to +Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to +Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form +10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated +herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit +10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference +to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust +Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K +filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary +Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference +to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit +10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by +reference to Exhibit 10.15 to the Form 10-K filed on February 27, 2015). +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement +dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan +Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, +2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s +definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated +herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 +among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated +herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated June 30, 2016). +10.20 +Form of award agreement under Performance-Based Incentive +Cash Compensation Plan. +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +67 +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +68 +SIGNATURES +Pursuant to the requirements of Section 13 or +15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, +thereunto duly authorized. +RPC, Inc. +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2017 +Pursuant to the requirements of the Securities +Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities +and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2017 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Treasurer +(Principal Financial and Accounting Officer) +February 28, 2017 +The Directors of RPC (listed below) executed +a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +Amy Rollins Kreisler, Director +Gary W. Rollins, Director +Linda H. Graham, Director +Henry B. Tippie, Director +Bill J. Dismuke, Director +James B. Williams, Director +Larry L. Prince, Director +/s/ Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 28, 2017 +69 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following +documents are filed as part of this report. +FINANCIAL STATEMENTS +AND REPORTS +PAGE +Management’s Report on Internal Control +Over Financial Reporting +33 +Report of Independent Registered Public Accounting +Firm on Internal Control Over Financial Reporting +34 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +35 +Consolidated Balance Sheets as of December +31, 2016 and 2015 +36 +Consolidated Statements of Operations for +the three years ended December 31, 2016 +37 +Consolidated Statements of Comprehensive +(Loss) Income for the three years ended December 31, 2016 +38 +Consolidated Statements of Stockholders’ +Equity for the three years ended December 31, 2016 +39 +Consolidated Statements of Cash Flows for +the three years ended December 31, 2016 +40 +Notes to Consolidated Financial Statements +41 - 63 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +70 +Schedules not listed above have been omitted +because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +SCHEDULE II — VALUATION AND QUALIFYING +ACCOUNTS +For the years ended +December 31, 2016, 2015 and 2014 +(in thousands) +Balance at +Beginning +of Period +Charged to +Costs +and +Expenses +Net (Deductions) +Recoveries +Balance +at End of +Period +Year ended December 31, 2016 +Allowance for doubtful accounts +$ 10,605 +$ 6,021 +$ (14,073 )(1) +$ 2,553 +Deferred tax asset valuation allowance +$ 276 +$ 80 +$ — (2) +$ 356 +Year ended December 31, 2015 +Allowance for doubtful accounts +$ 15,351 +$ (2,958 ) +$ (1,788 )(1) +$ 10,605 +Deferred tax asset valuation allowance +$ 2 +$ 274 +$ — (2) +$ 276 +Year ended December 31, 2014 +Allowance for doubtful accounts +$ 13,497 +$ 2,280 +$ (426 )(1) +$ 15,351 +Deferred tax asset valuation allowance +$ 83 +$ — +$ (81 )(2) +$ 2 +(1) Net (deductions) recoveries in the allowance for doubtful accounts +principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or +decreased each year to reflect the state net operating losses that management believes +will not be utilized before they expire. +70 +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2016 +Revenues +$ 189,095 +$ 142,998 +$ 175,884 +$ 220,997 +Operating loss +$ (75,087 ) +$ (75,222 ) +$ (56,417 ) +$ (32,216 ) +Net loss +$ (32,511 ) +$ (48,686 ) +$ (38,942 ) +$ (21,107 ) +Net loss per share — basic (a) +$ (0.15 ) +$ (0.23 ) +$ (0.18 ) +$ (0.10 ) +Net loss per share — diluted +(a) +$ (0.15 ) +$ (0.23 ) +$ (0.18 ) +$ (0.10 ) +2015 +Revenues +$ 406,270 +$ 297,560 +$ 291,924 +$ 268,086 +Operating profit (loss) +$ 6,374 +$ (52,347 ) +$ (52,899 ) +$ (57,405 ) +Net income (loss) +$ 7,548 +$ (34,055 ) +$ (35,173 ) +$ (37,881 ) +Net income (loss) per share — basic (a) +$ 0.04 +$ (0.16 ) +$ (0.16 ) +$ (0.18 ) +Net income (loss) per share — +diluted (a) +$ 0.04 +$ (0.16 ) +$ (0.16 ) +$ (0.18 ) +(a) The sum of the (loss) income per share for the four quarters +may differ from annual amounts due to the required method of computing the weighted average shares for the respective periods. +71 \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/filing_metadata.csv b/raw/filings/0000742278/2016/0001571049-17-001715/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1bbf693610fcca117819ad24d8bfa8c97356e8c0 --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2017-02-28,2016-12-31,2017-02-28T20:40:18.000Z,0001571049-17-001715,t1700131_10k.htm,FORM 10-K,6090144,1,0,https://www.sec.gov/Archives/edgar/data/742278/000157104917001715/t1700131_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000157104917001715/,2016,2016,1 diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/item1.txt b/raw/filings/0000742278/2016/0001571049-17-001715/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..26c05d43a16dbc0dcd6bce9b737c092446acda30 --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/item1.txt @@ -0,0 +1,377 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized +in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for its operating +units: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services +and regulatory compliance are classified under Corporate. RPC is further organized into Technical Services and Support Services +which are its operating segments. As of December 31, 2016, RPC had approximately 2,500 employees. +2 +Business Segments +RPC manages its business as either +services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the +well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel +operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based +on the similarities of the operational characteristics and costs associated with providing the service. The businesses under +Support Services are primarily able to generate revenues through one source, which is either a hard +asset or a personnel resource. During 2016, less than one percent of RPC’s consolidated revenues were generated from +offshore operations in the U.S. Gulf of Mexico. We also estimate that 70 percent of our 2016 revenues were related to +drilling and production activities for oil, and 30 percent were related to drilling and production activities for natural +gas. +Technical Services include RPC’s oil +and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include +major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered +under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial +success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel +who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well +servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a +whole across these various services. The principal markets for this business segment include the United States, including the southwest, +mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. +Support Services include all of the +services that provide (i) equipment for customers’ use on the well site without RPC personnel and (ii) services that +are provided in support of customer operations off the well site such as classroom and computer training, and other +consulting services. The primary drivers of operational success for equipment provided for customers’ use on the well +site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design +characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the +well site and competitive marketing of such services. The equipment and services offered include drill pipe and related +tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for +these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this +segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and +project work in selected international locations in the last three years, including primarily Canada, Latin America and the +Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas producers, +and selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, +which accounted for approximately 46 percent of 2016 revenues, 54 percent of 2015 revenues and 57 percent of 2014 revenues are +provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide +these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. +Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping +service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. +Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives. +Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure +pumping services offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid +gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. +Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped +into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 23 percent of 2016 revenues, 18 percent of 2015 revenues and 15 percent of 2014 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation at the completion stage +of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for approximately 10 percent of revenues in 2016 and nine percent in 2015 and 2014, involve the injection of coiled +tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate +completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in +continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production +tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing +in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to +reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids +into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility +of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities +in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete +multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility +allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the +strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses +for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter +coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in +more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible +steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to +as hydraulic workover services), which accounted for approximately three percent of revenues in 2016, 2015 and 2014, involves +using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment +in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure +on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops +production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other +alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and +gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services +safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores +which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing +unit. +4 +Nitrogen . Nitrogen accounted for approximately +five percent of revenues in 2016, four percent of revenues in 2015 and three percent of revenues in 2014. There are a number of +uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside +of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in +various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which +production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing +medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because +it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure +pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids +used in fracturing or acidizing would damage a customer’s well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these +sources of supply are adequate. +Well Control . Cudd Energy Services specializes +in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. +In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, +expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company +has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds +to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the +most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. +In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations +can resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring +objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor +line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline +services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Fishing . Fishing involves the use of +specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for approximately three percent of revenues in 2016 and four percent of revenues in 2015 and 2014. The Company rents specialized +equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent +operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the +geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often +find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. +The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, +the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range +of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control School +provides industry and government accredited training for the oil and gas industry both in the United States and in limited international +locations. Well Control School provides training in various formats including conventional classroom training, interactive computer +training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and +lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 83 percent from +its peak in 1981. However, due to continuously enhanced technology, more wells are drilled during periods of strong industry +activity, and these wells are increasingly productive. For these reasons, the domestic production of natural gas rose to +record levels in the third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 reached its +highest level since the third quarter of 1971. Due to the decline in domestic drilling and completion activities, domestic +production of both natural gas and oil began to decline during the third and fourth quarters of 2015, although production +continues to remain high in comparison to historical levels. Oil and gas industry activity levels have historically been +volatile, experiencing multiple cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the +lowest U.S. domestic rig count in U.S. oilfield history. The rig count during the peak of the most recent cycle occurred at +the end of the third quarter of 2014, and began to decline sharply during the fourth quarter of 2014. The rig count continued +to decline in 2015 and 2016, until June of 2016 when it stabilized and began to increase. Early in 2017, the rig count had +recovered by approximately 87 percent from the historical low set during the second quarter of 2016, but was still +approximately 62 percent lower than the most recent cyclical peak in the third quarter of 2014. +6 +The fluctuations in domestic drilling activity +since the most recent peak in the third quarter of 2014 are consistent with global supply of and demand for oil, the domestic +supply of and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. +dollar on world currency markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the +price of oil fell by approximately 78 percent from its most recent cyclical peak in the third quarter of 2014. From its low price +in early 2016, the price of oil had risen by approximately 80 percent early in the first quarter of 2017. RPC believes that the +decrease in the price of oil during this period was caused by the actions of the Organization of the Petroleum Exporting Countries +(OPEC) cartel, increased supply from the domestic U.S. market, weak global demand, the strength of the U.S. dollar on global currency +markets and high storage levels of oil. The precipitous decline in the price of oil that took place between the third quarter +of 2014 and the second quarter of 2016 caused a significant decrease in oil-directed drilling activity. The price of natural gas +fell during this time as well, declining by approximately 42 percent from the beginning of 2015 to the second quarter of 2016. +Early in the first quarter of 2017, however, the price of natural gas had risen by approximately 77 percent from the low recorded +in the second quarter of 2016, and was approximately 19 percent higher than its price early in 2015. Early in 2017, the price +of oil was high enough to encourage increased drilling and production activity, but the price of natural gas had not reached levels +that were adequate to encourage natural gas-directed drilling activity in the U.S. domestic oilfield. In addition to oil and natural +gas, the price of natural gas liquids is a determinant of our customers’ activity levels, since it is produced in many of +the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable +to that of natural gas. During 2015 the average price of natural gas liquids decreased by approximately 56 percent compared to +2014, but during 2016 the average price of natural gas liquids increased by approximately six percent compared to 2015. Early +in the first quarter of 2017, the price of natural gas liquids had increased by approximately 65 percent compared to the average +price in 2016. The fluctuations in the prices of these commodities, and in particular, the extreme volatility in the price of +oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. Early +in the first quarter of 2017, the natural gas drilling rig count had risen by approximately 79 percent, although it remains very +low by historical standards. Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent +years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed +wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and in the fourth quarter +of 2015, the United States began to export natural gas for the first time. We anticipate that oil-directed drilling will continue +to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that natural gas-directed +drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural gas demand from +U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel or for other purposes. +We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons +generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we note that the techniques +used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides to +its customers. +Unconventional wells generate a higher +demand for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. +domestic drilling and reached a historical high of approximately 90 percent of total drilling during the first quarter of +2017. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require +additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the +well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require +tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, +these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and +services. +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately seven percent +of RPC’s consolidated revenues in 2016, six percent in 2015 and four percent in 2014. RPC’s allocation of growth capital +over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels +and expected financial returns. International revenues decreased 29 percent in 2016 compared to the prior year primarily due to +lower customer activity levels in Australia, Gabon, Equatorial Guinea, China and Argentina partially offset by increased activity +in Bolivia. During 2016, RPC provided snubbing, well control and oilfield training services in several countries including Gabon +and Australia. We also provided downhole motors and tools in Argentina, Canada, China and Oman, and rental tools in Equatorial +Guinea. We continue to focus on the selected development of international opportunities in these and other markets, although we +believe that it will continue to be less than ten percent of total revenues in 2017. +7 +RPC provides services to its international customers +through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including +the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term +perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic +operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to +have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting +the timing and duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for +further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. As the current industry downturn continues, +we believe that many financial investors who have provided capital to smaller oilfield service companies in the past several years +are seeking to liquidate their investments. This development, along with continued depressed financial results in our industry, +may make valuations for acquisition targets more attractive. We will continue to consider the acquisitions of existing businesses +but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is the lesser of $125 million +or a specified percentage of eligible accounts receivable less the amount of any outstanding letters of credit. There was no +outstanding balance on this credit facility as of December 31, 2016. Our capital structure is more conservative than that of +many of our peers. +Customers +Demand for RPC’s services and products +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2016, RPC provided oilfield services to several hundred +customers. Of these customers, there were no customers in 2016 and only one, Anadarko Petroleum Corporation (Anadarko) at 23 percent +of revenues in 2015, that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force +and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure +plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services +or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our services. +8 +Competition +RPC operates in highly competitive areas of +the oilfield services industry. We sell our products and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the past several years, a number of small oilfield services +companies as well as several of our publicly traded peers have become insolvent and either been forced to liquidate or undergo +bankruptcy proceedings. During the third and fourth quarters of 2016, however, the availability of capital and high public equity +valuations have allowed many insolvent companies to resume operations or continue operations as the result of a business combination. +As of the first quarter of 2017, RPC has not experienced increased competition from these entities, but we assume that the financial +capabilities of these competitors will increase competitive pressures in the future. Pricing for our services has been extremely +competitive over the past several years due to the severe industry downturn and the oversupply of equipment and crews operating +in the U.S. domestic oilfield. RPC believes that the principal competitive factors in the market areas that it serves are product +availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety +and technical proficiency, and price. +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, +Baker Hughes and Schlumberger Ltd. The industry also includes a number of publicly traded peers whose operations are more +similar to RPC, including Patterson-UTI Energy, Inc., Superior Energy Services, Weatherford International, Inc., Mammoth +Energy Services, Inc. and Keane Group, Inc., as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily of +oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high +demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC both owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana +that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For +additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal +and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker +safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such +laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will +be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws +and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we +currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and +ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations, +which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day as they are filed with the Securities and Exchange Commission. +9 \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/item13.txt b/raw/filings/0000742278/2016/0001571049-17-001715/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..ee854d035c64f60a85651ce25cba26fc75f61318 --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/item13.txt @@ -0,0 +1,7 @@ +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2017 Annual Meeting of Stockholders in the section titled “Director +Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/item9a.txt b/raw/filings/0000742278/2016/0001571049-17-001715/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a54047efa93017a65f0d4fb16538c6ce81c9af62 --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/item9a.txt @@ -0,0 +1,22 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures +— The Company maintains disclosure controls and procedures that are designed to ensure that information required to +be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2016 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal control +over financial reporting — Management is responsible for establishing and maintaining adequate internal control over +financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 33 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2016 and issued a report thereon +which is included on page 34 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/rp_note.txt b/raw/filings/0000742278/2016/0001571049-17-001715/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..d51bd2126c60a43d7d8c53998fd7c87b27f4479c --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/rp_note.txt @@ -0,0 +1,44 @@ +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products +Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then +distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products +entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $739,000 in 2016, $753,000 in 2015, and $663,000 in 2014. The Company’s +receivable (payable) due to (from) Marine Products for these services was $60,000 as of December 31, 2016 and $(11,000) as of +December 31, 2015. The Company’s directors are also directors of Marine Products and all of the executive officers are employees +of both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $890,000 in 2016, $1,127,000 in 2015 and $1,092,000 +in 2014. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are +subsidiaries of the Company) for such services and rent totaled $111,000 in 2016, $100,000 in 2015 and $84,000 in 2014. +61 +NOTES TO CONSOLIDATED +FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31 2016, 2015 and 2014 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain +companies under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. +The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution +by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, +LLC for a period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs +of approximately $197,000 in 2016 and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using +the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As +of December 31, 2016, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. \ No newline at end of file diff --git a/raw/filings/0000742278/2016/0001571049-17-001715/rpt_disclosure.txt b/raw/filings/0000742278/2016/0001571049-17-001715/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6fc015c179d613c80d39b33f9f440367dadb4fd --- /dev/null +++ b/raw/filings/0000742278/2016/0001571049-17-001715/rpt_disclosure.txt @@ -0,0 +1,8 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $739,000 in 2016. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2016, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $197,000 for the corporate aircraft. +During 2016, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2016, payments totaling approximately $895,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $111,000 in 2016. +26 +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2016 were reviewed, approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Code. \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/filing.txt b/raw/filings/0000742278/2017/0001144204-18-011709/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..83f5c6d732710c735faff8b93ab4e70725908cb4 --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/filing.txt @@ -0,0 +1,4762 @@ +10-K +1 +tv486693_10k.htm +10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +x +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +¨ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, +2017 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 520 +ATLANTA, GEORGIA 30329 +(404) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered +pursuant to Section 12(g) of the Act: NONE +Indicate +by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No +Indicate +by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ +Yes x No +Indicate +by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange +Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), +and (2) has been subject to such filing requirements for the past 90 days. Yes x +No ¨ +Indicate +by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive +data file required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the +preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x +No ¨ +Indicate +by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not +be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference +in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated +filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated +filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” +in Rule 12b-2 of the Exchange Act. (Check one): +Large +accelerated filer x Accelerated +filer ¨ Non-accelerated +filer ¨ Smaller +reporting company ¨ Emerging growth company ¨ +If an emerging +growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with +any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the registrant +is a shell company (as defined in Rule 12b-2 of the Exchange Act). +Yes ¨ +No x +The aggregate market value of RPC, Inc. +Common Stock held by non-affiliates on June 30, 2017, the last business day of the registrant’s most recently completed second +fiscal quarter, was $1,178,253,000 based on the closing price on the New York Stock Exchange on June 30, 2017 of $20.21 per share. +RPC, Inc. had 216,838,107 shares of Common +Stock outstanding as of February 16, 2018. +Documents Incorporated by Reference +Portions of the Proxy Statement for the +2018 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, +Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report +that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of +1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and +objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions +that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in +this report include without limitation statements regarding natural gas prices, production levels and drilling activities; our +belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity; our belief that the +long-term demand outlook for natural gas is favorable and that natural gas-directed drilling will increase over the long-term; +our continued belief in the long-term growth opportunities for our business; our expectation to continue to focus on the development +of international business opportunities in current and other international markets; our expectations regarding acquisition targets +in our industry; the adequacy of our insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and +financial condition; our expectations regarding payment of cash dividends to common stockholders; our belief that industry factors +will continue to depress natural gas directed drilling activity during the near-term; our belief that U.S. oilfield activity will +continue to increase during the near term; our belief that recovering commodity prices will have moderately positive implications +for our near-term activity levels; our belief that the U.S. domestic rig count will continue to recover moderately during the near +term; our belief regarding potential revenue related to uncompleted wells; our expectations regarding competition in our market; +our ability to maintain sufficient liquidity and a conservative capital structure; our expectations about contributions to the +defined benefit pension plan in 2018; our ability to fund capital requirements in the future; the estimated amount of our capital +expenditures and contractual obligations for future periods; our expectations regarding the costs of skilled labor and many of +the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of +new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated results of operations or +financial condition. +The words “may,” “will,” +“expect,” “believe,” “anticipate,” “project,” “estimate,” and similar +expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by +our management in light of its experience and its perception of historical trends, current conditions, expected future developments +and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of +future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking +statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ +from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range +of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in +the exploration, production and development of oil and gas properties throughout the United States, including the +southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC +acts as a holding company for the following legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson +Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC +is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2017, +RPC had approximately 3,500 employees. +2 +Business Segments +RPC manages its business as either services +offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site +(Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment +and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the +operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily +able to generate revenues through equipment or services offered off the well site. During 2017, less than two percent of RPC’s +consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. We also estimate that 70 percent +of our 2017 revenues were related to drilling and production activities for oil, and 30 percent were related to drilling and production +activities for natural gas. +Technical Services include RPC’s +oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected +nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. +The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical +processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services +to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions +based on this operating segment as a whole across these various services. The principal markets for this business segment include +the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected +international markets. +Support Services include all of the +services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in +support of customer operations off the well site such as classroom and computer training, and other consulting services. The +primary drivers of operational success for services and equipment provided off the well site without RPC personnel are +offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of +operational success for the other Support Services relate to meeting customer needs off the well site and competitive +marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe +handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services +tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include +the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in +selected international locations in the last three years, including primarily Canada, Latin America and the Middle East. +Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and +selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping +services, which accounted for approximately 62 percent of 2017 revenues, 46 percent of 2016 revenues and 54 percent of 2015 revenues +are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily +provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. +Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping +service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. +Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, +these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping +services offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into +the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 19 percent of 2017 revenues, 23 percent of 2016 revenues and 18 percent of 2015 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling +at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling +and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment +with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for approximately seven percent of revenues in 2017, 10 percent of revenues in 2016 and nine percent of revenues +in 2015, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in +well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter +of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can +be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal +advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during +such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional +pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields +due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are +also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple +entrances in a wellbore in order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish +this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in +this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be +conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved +fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, +thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are +several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply +are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for approximately two percent of revenues in 2017 and three percent of revenues +in 2016 and 2015, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing +and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole +equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing +the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications +at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing +segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required +to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer +reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe +conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for approximately +two percent of revenues in 2017, five percent of revenues in 2016 and four percent of revenues in 2015. There are a number of uses +for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the +oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various +drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production +has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium +for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is +a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping +service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used +in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services +are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use +various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, +and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process +is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for approximately two percent of revenues in 2017, three percent of revenues in 2016 and four percent of revenues in 2015. The +Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. +The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in +large part determined by the geological features of the production zone and the size of the well itself. As a result, operators +and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of +owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for +oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad +range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost +sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 79 percent from its peak in +1981. However, due to continuously enhanced rig and other completion technologies, more wells are drilled during periods of +strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of natural +gas rose to record levels in the third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 +reached its highest level since the third quarter of 1971. With the decline in domestic drilling and completion activities +beginning in early 2015, domestic production of both natural gas and oil began to decline during the third and fourth +quarters of 2015, although production continues to remain high in comparison to historical levels. Oil and gas industry +activity levels have historically been volatile, experiencing multiple cycles, including six down cycle troughs between 1981 +and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. oilfield history. The rig count during the peak of +the most recent cycle occurred at the end of the third quarter of 2014, and began to decline sharply during the fourth +quarter of 2014. The rig count continued to decline in 2015 and 2016, until June of 2016 when it stabilized and began to +increase. Early in 2018, the rig count had recovered by approximately 141 percent from the historical low set during the +second quarter of 2016, but was still approximately 51 percent lower than the cyclical peak in the third quarter of 2014. +Because of the increased efficiency of drilling +rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to +RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so +they are an important indicator of the demand for RPC’s services. From a cyclical peak of 21,355 wells completed during 2014, +well completions fell by 62.3 percent to 8,060 in 2016. During 2017, well completions in the U.S. +increased by 39.9 percent compared to 2016, but were still 47.2 percent lower than 2014 well completions. +6 +The fluctuations in domestic drilling activity +since the third quarter of 2014 peak are consistent with global supply of and demand for oil, the domestic supply of and demand +for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar on world currency +markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the price of oil fell by approximately +78 percent from the cyclical peak in the third quarter of 2014. From its low price in early 2016, the price of oil had risen approximately +122 percent by early in the first quarter of 2018. RPC believes that the increase in the price of oil since early 2016 is due to +increasing global demand, the moderation of global supply, and the belief that the actions of the Organization of the Petroleum +Exporting Countries (OPEC) to moderate that cartel’s production will be effective. The price of natural gas fell during this +time as well, declining by approximately 42 percent from the beginning of 2015 to the second quarter of 2016. Early in the first +quarter of 2018, however, the price of natural gas had risen by approximately 122 percent from the low recorded in the second quarter +of 2016, and was approximately 10 percent higher than its price at the same time in 2017. Early in 2018, the price of oil was high +enough to encourage increased drilling and production activity, but the price of natural gas had not reached levels that were adequate +to encourage natural gas-directed drilling activity in the U.S. domestic oilfield. In addition to oil and natural gas, the price +of natural gas liquids is a determinant of our customers’ activity levels, since it is produced in many of the shale resource +plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural +gas. During 2017 the average price of natural gas liquids increased by approximately 58 percent compared to 2016. Early in the +first quarter of 2018, the price of natural gas liquids had increased by approximately 18 percent compared to the average price +in 2017. The fluctuations in the prices of these commodities, and in particular, the extreme volatility in the price of oil, significantly +impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. Early +in the first quarter of 2018, the natural gas drilling rig count had risen by approximately 124 percent, although it remains very +low by historical standards. Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent +years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed +wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and for several years, +the United States has exported increasing volumes of natural gas to other countries. We anticipate that oil-directed drilling will +continue to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that natural +gas-directed drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural +gas demand from U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel +or for other purposes. We continue to believe in the long-term growth opportunities for our business due to the continued high +demand for hydrocarbons generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we +note that the techniques used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services +that RPC provides to its customers. +Unconventional wells generate a higher demand +for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling +and during the fourth quarter of 2017 and early in the first quarter of 2018, have reached a historical high of approximately 93 +percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, +they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. +Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and +drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types +of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately four percent +of RPC’s consolidated revenues in 2017, seven percent in 2016 and six percent in 2015. RPC’s allocation of growth capital +over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels +and expected financial returns. International revenues increased 9.1 percent in 2017 compared to the prior year primarily due to +higher customer activity levels in Canada, Argentina, Kuwait and Colombia, partially offset by decreased activity in Gabon and +Bolivia. During 2017, RPC provided snubbing services in Gabon. We also provided downhole motors and tools in Argentina, Canada, +China and Oman, and rental tools in Bolivia. We continue to focus on the selected development of international opportunities in +these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2018. +7 +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions +of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate +large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is the lesser of $125 million, or +a specified percentage of eligible accounts receivable, less the amount of any outstanding letters of credit. There was no outstanding +balance on this credit facility as of December 31, 2017. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2017, RPC provided oilfield services to several hundred +customers. Of these customers, there were no customers in 2017 or 2016 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales +force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital +expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering +services or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our services. +Competition +RPC operates in highly competitive areas +of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller +oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. +More recently, however, an improving industry environment and the positive outlook on the industry from the financial markets have +facilitated the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded +or newly formed companies will increase competitive pressures during the near term, as they seek to provide services to our existing +customers at lower prices, and hire experienced personnel from more established companies such as RPC. Pricing for our services +has improved significantly during 2017, but remains below the highest levels experienced during the most recent period of strong +industry activity in 2014. RPC believes that the principal competitive factors in the market areas that it serves are product availability +and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical +proficiency, and price. +8 +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker +Hughes, a GE Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations +are more similar to RPC, including Basic Energy Services, C&J Energy Services, Keane Group, Inc., Liberty Oilfield Services, +Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Service, Patterson-UTI Energy, Inc., ProPetro Holding +Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed +deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, +Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. +For additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent +to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations +which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Demand for our equipment and services is affected by the +volatility of oil and natural gas prices. +Oil and natural gas prices affect demand +throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on +the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration +and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +9 +The price of oil, a world-wide commodity, +is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well +as the actions of OPEC, an oil cartel which controls slightly less than 40 percent of global oil production. OPEC’s actions +have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the +oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, +producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged +low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our +financial condition and results of operations. +Reliance upon a large customer may adversely affect our +revenues and operating results. +At +times our business has had a concentration of one or more major customers. There were no customers that accounted for more than +10 percent of the Company’s revenues in 2017 and 2016. However, one of our customers accounted for 23 percent of revenues +in 2015. In addition, there was no customer as of December 31, 2017 and 2016 that accounted for more than 10 percent of accounts +receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss +or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse +impact upon our revenues and operating results. +Our concentration of customers in +one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased losses +for doubtful accounts. +Substantially all of our customers operate in the energy industry. +This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, +in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations +of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our +industry experiences may adversely affect our customers' operations which could cause us to experience increased losses for doubtful +accounts. +RPC’s success will depend on its key personnel, and +the loss of any key personnel may affect its revenues. +RPC’s success will depend +to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior +management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees +could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil +and gas industry in the future. +We operate in highly competitive areas of +the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and +our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity +in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry +competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in +the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and +price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able +to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to +be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition +candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions +and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result +in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations +and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired +businesses could have a material adverse effect on our results of operations and financial condition. +10 +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the +weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains +and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain +times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several +years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms +can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and +natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged +by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching +customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. +Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact +growth potential and profitability. +Our ability to be productive and profitable +will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, +impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result +in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, +our capacity and profitability could be diminished, and our growth potential could be impaired. +Our business has potential liability for litigation, personal +injury and property damage claims assessments. +Our operations involve the use of heavy equipment +and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result +in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation +may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in +large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships +with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe +is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates +we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable +to comply with regulations and environmental laws. +Our business is significantly affected by +stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level +of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws +and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be +adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations +for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. +We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup +costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled +to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances +in connection with our operations. We believe that our present operations substantially comply with applicable federal and state +pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no +material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict +whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for +noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively +affect our future financial results. +Compliance with federal and state regulations relating to +hydraulic fracturing and designation of economic development zones related to natural gas-directed drilling from shale formations +could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping +services. +RPC’s pressure pumping services +are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern +regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic +fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of +hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing +practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency +(EPA) has also undertaken a study of the environmental impact of hydraulic fracturing practices. In the second quarter of 2015, +the EPA issued a report which concluded that hydraulic fracturing had not caused a measureable impact on drinking water sources +in the U.S. While this conclusion and other conclusions from similar efforts are favorable for our industry, we are unable to predict +whether future scrutiny of RPC’s pressure pumping business and any resulting regulatory change will impact our business through +increased operational costs, operational delays, or a reduction in demand for hydraulic fracturing services. +11 +Our international operations could have a material adverse +effect on our business. +Our operations in various international +markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle +East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency +restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one +of these events could have a material adverse effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common +stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common +stock has varied significantly in the past. +Our management has a substantial ownership interest, and +public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled +Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The +Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall +Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls +in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not +comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors +and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 73 percent of RPC’s outstanding +shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors +and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This +concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company +at a premium. +Our management has a substantial ownership interest, and +the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock +to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which +could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. +Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect +the trading price of our common stock. +Provisions in RPC's +certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, +bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms +for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by +RPC’s Board of Directors more difficult or expensive. +Some of our equipment and several types +of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited +number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not +be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. +There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While +these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed +deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could +reduce our revenues and profits. +12 +We have used outside financing in prior +years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our +business requires a great deal of capital in order to maintain our equipment and increase our fleet of equipment to expand our +operations, and we have access to our credit facility to fund our necessary working capital and equipment requirements. Our credit +facility, as amended June 30, 2016, provides a borrowing base at the lesser of (a) $125 million or (b) the difference between (i) +a specified percentage (ranging from 70% to 80%) of eligible accounts receivable less (ii) the amount of any outstanding letters +of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital +resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise +additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional +financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through +the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating +activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand +our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future +revenues and profits. +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +RPC owns or leases approximately 120 offices +and operating facilities. The Company leases approximately 18,600 square feet of office space in Atlanta, Georgia that serves as +its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” +contained in Item 7. The lease agreement on the headquarters is effective through October 2020. RPC believes its current operating +facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities +used in our operations are as follows: +Owned +Locations +Broussard, Louisiana — Operations, +sales and equipment storage yards +Vilonia, Arkansas — Maintenance and +rebuild facilities +Elk City, Oklahoma — Operations, sales +and equipment storage yards +Houma, Louisiana — Administrative +office +Houston, Texas — Pipe storage terminal +and inspection sheds +Kilgore, Texas — Operations, sales +and equipment storage yards +Odessa, Texas — Operations, sales +and equipment storage yards +Rock Springs, Wyoming — Operations, +sales and equipment storage yards +Vernal, Utah — Operations, sales and +equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Leased +Locations +Canton, Pennsylvania — Operations, +sales and equipment storage yards +Hobbs, New Mexico — Pumping services +facility +Oklahoma City, Oklahoma — Operations, +sales and administrative office +San Antonio, Texas — Operations, sales +and equipment storage yards +Seminole, Oklahoma — Pumping services +facility +The Woodlands, Texas — Operations, +sales and administrative office +Washington, Pennsylvania — Operations, +sales and equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings +primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these +risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance +will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its +business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management +believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s +business or financial condition. +13 +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) +of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 +to this Form 10-K. +Item 4A. Executive Officers of the Registrant +Each of the executive officers of RPC +was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual +meeting of stockholders or until his earlier removal by the Board of Directors or his resignation. The following +table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +R. Randall Rollins (1) +86 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +73 +4/22/03 +President and Chief Executive Officer +Ben M. Palmer (3) +57 +7/8/96 +Vice President, Chief Financial Officer and Corporate Secretary +(1) R. Randall Rollins began working for Rollins, Inc. (consumer services) in 1949. Mr. Rollins +has served as Chairman of the Board of RPC since the spin-off of RPC from Rollins, Inc. in 1984. He has served as Chairman of +the Board of Marine Products Corporation (boat manufacturing) since it was spun off from RPC in 2001 and as Chairman of the +Board of Rollins, Inc. since October 1991. He is also a director of Dover Downs Gaming and Entertainment, Inc. and Dover +Motorsports, Inc. +(2) Richard A. Hubbell has been the President of RPC since +1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation +since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +(3) Ben M. Palmer has been the Vice President and Chief Financial +Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since +it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation +in July 2017. +14 +PART II +Item 5. Market for Registrant’s Common Equity, Related +Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed +for trading on the New York Stock Exchange under the symbol RES. As of February 16, 2018 there were 216,838,107 shares of +common stock outstanding and approximately 22,600 beneficial holders of our common stock. The following table sets forth the +high and low trading prices of RPC’s common stock and dividends paid for each quarter in the years ended December 31, +2017 and 2016: +2017 +2016 +Quarter +High +Low +Dividends +High +Low +Dividends +First +$ 23.32 +$ 16.63 +$ — +$ 15.51 +$ 9.73 +$ — +Second +21.28 +17.03 +— +16.84 +13.12 +— +Third +24.99 +17.70 +0.06 +16.92 +13.50 +— +Fourth +27.07 +21.18 +0.14 +22.28 +16.48 +0.05 +On January 23, 2018, RPC’s Board of +Directors approved a 43 percent increase to the regular cash dividend from $0.07 per share to $0.10 per share payable March 9, +2018 to stockholders of record at the close of business on February 9, 2018. Subject to industry conditions and RPC’s +earnings, financial condition, and other relevant factors, the Company expects to continue to pay regular quarterly cash dividends +to common stockholders. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated +purchases in the fourth quarter of 2017 are outlined below. +Period +Total Number +of Shares +(or Units) +Purchased +Average Price +Paid Per Share +(or Unit) +Total Number of +Shares (or Units) +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Number (or +Approximate +Dollar +Value) of Shares (or +Units) +that May Yet Be +Purchased Under the +Plans +or Programs (1) +October 1, 2017 to October 31, 2017 +2,465 +(2) +$ 24.52 +— +975,265 +November 1, 2017 to November 30, 2017 +— +— +— +975,265 +December 1, 2017 to December 31, 2017 +— +— +— +975,265 +Totals +2,465 +$ 24.52 +— +975,265 +(1) The Company has a stock buyback program initially adopted in 1998 and subsequently amended in +2013 that authorizes the repurchase of up to 31,578,125 shares. There were no shares repurchased as part of this program +during the fourth quarter of 2017. As of December 31, 2017, there are 975,265 shares available to be repurchased under the +current authorization. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase +by 10,000,000 shares. Currently the program does not have a predetermined expiration date. +(2) Represents shares repurchased by the Company in connection +with taxes related to vesting of restricted shares. +Performance Graph +The following graph shows a five-year +comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, +as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph +are the Russell 1000 Index (“Russell 1000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), +and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company +has voluntarily chosen to provide both an industry and a peer group index. +15 +The Company was a component of the Russell +1000 during 2017. The Russell 1000 is a stock index representing large capitalization U.S. stocks with high historical growth in +revenues and earnings. The components of the index had a weighted average market capitalization in 2017 of $178 billion, and a +median market capitalization of $10.5 billion. The Russell 1000 was chosen because it represents companies with comparable market +capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that +provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company +is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same +or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., +Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. The companies included in the Peer Group have been weighted according to each respective issuer's stock +market capitalization at the beginning of each year. +16 +Item 6. Selected Financial Data +The following table summarizes certain selected +financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. +The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial +Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere in +this document. +Statements of Operations Data: +Years Ended December 31, +2017 +2016 +2015 +2014 +2013 +(in thousands, except employee and per share amounts) +Revenues +$ 1,595,227 +$ 728,974 +$ 1,263,840 +$ 2,337,413 +$ 1,861,489 +Cost of revenues +1,050,809 +607,888 +986,144 +1,493,082 +1,178,412 +Selling, general and administrative expenses +159,194 +150,690 +156,579 +197,117 +183,139 +Depreciation and amortization +163,537 +217,258 +270,977 +230,813 +213,128 +(Gain) loss on disposition of assets, net +(4,530 ) +(7,920 ) +6,417 +15,472 +9,371 +Operating profit (loss) +226,217 +(238,942 ) +(156,277 ) +400,929 +277,439 +Interest expense +(426 ) +(681 ) +(2,032 ) +(1,431 ) +(1,822 ) +Interest income +1,494 +467 +83 +19 +408 +Other income (expense), net +5,531 +(204 ) +5,185 +(131 ) +245 +Income (loss) before income taxes +232,816 +(239,360 ) +(153,041 ) +399,386 +276,270 +Income tax provision (benefit) (1) +70,305 +(98,114 ) +(53,480 ) +154,193 +109,375 +Net income (loss) (1) +$ 162,511 +$ (141,246 ) +$ (99,561 ) +$ 245,193 +$ 166,895 +Earnings (loss) per share : (1) +Basic +$ 0.75 +$ (0.66 ) +$ (0.47 ) +$ 1.14 +$ 0.77 +Diluted +$ 0.75 +$ (0.66 ) +$ (0.47 ) +$ 1.14 +$ 0.77 +Dividends paid per share +$ 0.200 +$ 0.050 +$ 0.155 +$ 0.420 +$ 0.400 +Other Data: +Operating profit (loss) margin percent +14.2 % +(32.8 )% +(12.4 )% +17.2 % +14.9 % +Net cash provided by operating activities +$ 133,704 +$ 101,704 +$ 473,792 +$ 322,757 +$ 365,624 +Net cash used for investing activities +(104,386 ) +(21,339 ) +(157,583 ) +(355,349 ) +(207,654 ) +Net cash (used for) provided by financing activities +(70,103 ) +(13,726 ) +(260,785 ) +33,664 +(163,433 ) +Capital expenditures +$ 117,509 +$ 33,938 +$ 167,426 +$ 371,502 +$ 201,681 +Employees at end of period +3,500 +2,500 +3,100 +4,500 +3,900 +Balance Sheet Data at Year End: +Accounts receivable, net +$ 377,853 +$ 169,166 +$ 232,187 +$ 634,730 +$ 437,132 +Working capital +494,775 +377,589 +384,744 +612,616 +436,873 +Property, plant and equipment, net +443,928 +497,986 +688,335 +849,383 +726,307 +Total assets +1,147,224 +1,035,452 +1,237,094 +1,759,358 +1,383,860 +Long-term debt +— +— +— +224,500 +53,300 +Total stockholders’ equity +$ 911,697 +$ 806,799 +$ 952,281 +$ 1,078,382 +$ 968,702 +(1) The indicated Statement of Operations data for 2017 includes +the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and +Jobs Act enacted during the fourth quarter of 2017. +17 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +The following discussion should be read +in conjunction with “Selected Financial Data” and the Consolidated Financial Statements included elsewhere in this +document. See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) +provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in +exploration, production and development of oil and gas properties throughout the United States, including the southwest, +mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The +Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas +properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies +are: +- To focus our management resources on and invest our capital +in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond +quickly to volatile industry conditions and business activity levels. +- To maintain an efficient, low-cost capital structure which +includes an appropriate use of debt financing. +- To maintain high asset utilization which leads to increased +revenues and leverage of direct and overhead costs, while also ensuring that increased maintenance resulting from high utilization +does not interfere with customer performance requirements or jeopardize safety. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of certain high-demand +raw materials used in our operations, both in order to conduct our operations and to enhance our competitive position. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance +between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our +common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies +and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual +results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization +of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, +general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to +those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price +of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial +results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall +economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and +production activities. +Current industry conditions are characterized +by oil prices which have risen from a low of approximately $29 per barrel in the first quarter of 2016 to approximately $65 per +barrel in the first quarter of 2018. As a result of this significant increase in the price of oil, as well as improvements in the +prices of natural gas and natural gas liquids, the U.S. domestic rig count has risen from an historic low of 404 in the second +quarter of 2016 to 975 early in the first quarter of 2018. We believe that there are several reasons for the increase in the price +of oil during the past two years. One catalyst for the improvement in the price of oil relates to the announcement by the OPEC +cartel during the fourth quarter of 2016 that it would impose production quotas on its member countries in order to support the +price of oil on the world market. In addition, global demand for oil appears to be growing, and global production and inventories +do not appear to be excessive. RPC believes that oil production in the United States has also become an increasingly important +determinant of global oil prices, because the United States grew to be the world’s largest producer of oil during the second +quarter of 2015. +18 +Following its recent peak, U.S. oil production fell by approximately +13 percent as of the third quarter of 2016. Since that time, however, improving drilling and completion activity have caused U.S. +domestic oil production to rise, and as of the most recent monthly reported statistics, current U.S. oil production has increased +to a level that is approximately 17 percent higher than the cyclical low production recorded during the third quarter of 2016, +and approximately four percent higher than the prior cyclical peak production in the second quarter of 2015. The recent increase +in U.S. oil production forces us to be cautious regarding the potential for materially higher oil prices during the near term. +Customer activities directed towards natural gas drilling and production have been weak for several years, with the U.S. domestic +natural gas rig count during the first quarter of 2016 falling to the lowest level ever recorded. The U.S. domestic natural gas +rig count had increased from this historic low by approximately 124 percent early in the first quarter of 2018, but remains low +by historical standards. We believe that customer activities directed towards drilling for natural gas have been weak because of +the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed +shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. We believe that +these factors will continue to depress natural gas-directed drilling during the near term. From a low of $1.72 per Mcf during the +second quarter of 2016, the price of natural gas had risen to $3.30 per Mcf early in the first quarter of 2018. We believe that +the price of natural gas remains too low to encourage our customers to conduct exploration and production activities directed exclusively +towards natural gas. +In 2017, the Company’s strategy +of utilizing equipment in unconventional basins has continued. During 2017, we made capital expenditures totaling $117.5 million +primarily for new revenue-producing equipment and capitalized maintenance of our existing equipment. +Revenues during 2017 totaled $1.6 billion, +an increase of 118.8 percent compared to 2016 primarily as a result of higher activity levels and improved pricing for our services, +higher service intensity, and activation of previously idled revenue-producing equipment. Cost of revenues increased $442.9 million +in 2017 compared to the prior year due to higher materials and supplies expenses, employment costs, maintenance expenses and fuel +costs, all of which were driven by higher activity levels. As a percentage of revenues, cost of revenues decreased due to leverage +of higher revenues over direct employment costs and improved pricing for our services. Selling, general and administrative expenses +as a percentage of revenues decreased to 10.0 percent in 2017 compared to 20.7 percent in 2016 due to the leverage of higher revenues +over primarily fixed expenses. +Income before income taxes was $232.8 million +for 2017 compared to a loss before income taxes of $239.4 million in 2016. Net income for 2017 was $162.5 million, or $0.75 earnings +per share compared to a net loss of $141.2 million, or $0.66 loss per share in 2016. Net income in 2017 includes a discrete tax +benefit of $19.3 million, or $0.09 per share, related to the implementation of the recently enacted Tax Cuts and Jobs Act. +Cash flows from operating activities increased +to $133.7 million in 2017 compared to $101.7 million in 2016 primarily due to higher earnings partially offset by unfavorable changes +in working capital. As of December 31, 2017, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic +oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,931 during the third quarter of 2014. Between +the third quarter of 2014 and the second quarter of 2016, the drilling rig count fell by approximately 79 percent. During the second +quarter of 2016, the U.S. domestic drilling rig count reached the lowest level ever recorded. The principal catalyst for this steep +rig count decline was the decrease in the price of oil in the world markets, which began in the second quarter of 2014. The price +of oil began to fall at that time due to the perceived oversupply of oil, weak global demand growth, and the strength of the U.S. +dollar on world currency markets. During the second quarter of 2016, the price of oil and the U.S. domestic rig count began to +increase, and increased steadily throughout the remainder of 2016 and through the first quarter of 2018. As of the beginning of +the first quarter of 2018, the U.S. domestic rig count was approximately 141 percent higher than the historically low rig count +reported during the second quarter of 2016. +RPC monitors rig count efficiency and +well completions because the majority of our services are directed toward well completion. Improvements in drilling rig efficiencies +have increased the number of potential well completions for a given drilling rig count; therefore, the statistics regarding well +completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions +in the U.S. domestic market fell from 21,355 in 2014 to 8,060 in 2016. Well completions increased to 11,277 in 2017 and continued +to increase early in the first quarter of 2018. RPC believes that U.S. oilfield well completion activity will continue to increase +moderately during the near term. +19 +The current and projected prices of oil, +natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. During the first two quarters +of 2016, the prices of oil and natural gas remained at low levels that discouraged our customers from undertaking most of their +potential exploration and production activities. The prices of oil and natural gas increased during the third and fourth quarters +of 2016 and throughout 2017. We believe that the price of oil has risen to a level that provides adequate financial returns to +our customers and encourages increased drilling and production activities in many domestic oil-producing basins. However, the price +of natural gas has not risen to a level that encourages our customers to increase their drilling and production activities. The +average price of natural gas liquids increased by 57.9 percent during 2017 as compared to the prior year. Prevailing commodity +prices early in the first quarter of 2018 have moderately positive implications for RPC’s near-term activity levels. +The majority of the U.S. domestic rig +count remains directed towards oil. At the beginning of the first quarter of 2018, approximately 80 percent of the U.S. domestic +rig count was directed towards oil, consistent with the prior year. We believe that oil-directed drilling will remain the majority +of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near +term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing +natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +We continue to monitor the market for +our services and the competitive environment during 2018. The U.S. domestic rig count has increased sharply since the historical +low recorded during the second quarter of 2016, which has increased demand and pricing for our services. We are encouraged by the +fact that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment and +raw materials. Furthermore, we note that some wells in the U.S. domestic market have been drilled but not completed, and that the +number of drilled but not completed wells has increased by more than 80 percent since the beginning of 2014. We believe that many +of our customers have started to complete these wells, and that they provide potential revenue for RPC’s completion-directed +services during the near term. Finally, we are encouraged by our belief that many of our competitors have not maintained their +equipment to a level that allows them to provide reliable, consistent services to their customers. +We believe that pricing for services to +the industry has reached a level that provides financial returns that will allow the industry to maintain its fleet of revenue-producing +equipment and hire additional personnel to operate idle equipment. We note that these improved financial returns have allowed previously +insolvent service companies to resume operations and add equipment, and that a number of smaller competitors have completed initial +or secondary public equity offerings over the past year, which may facilitate their access to capital. While we believe that demand +for revenue-producing service capacity will continue to exceed supply during the near term, we are monitoring the actions of our +competitors and the formation of new competitors very carefully. One of our responses to such competitive threats is to undertake +relatively moderate fleet expansions, thus preserving our capital strength and liquidity. RPC did not increase the size of its +fleet of revenue-producing equipment during 2017, although in the third quarter of 2017 we placed orders for new revenue-producing +equipment to be delivered during the second quarter of 2018. +RPC also monitors the financial stability +of our customers, because many of them rely on the debt and equity markets as a source of capital to conduct their operations, +and if these sources of capital do not continue, our customers may have to curtail their drilling and completion operations. Our +consistent response to the industry's persistent uncertainty is to maintain sufficient liquidity and a conservative capital structure +and monitor our discretionary spending. We intend to maintain a financial structure that includes little or no debt during the +near term. An additional benefit of our financial liquidity is that we were able to take advantage of is our ability to maintain +our equipment during the recent industry downturn, which allowed us to benefit immediately when industry activity levels increased +and we were able to return our idle revenue-producing equipment to service quickly and at minimal cost. +RPC believes that the current macroeconomic +environment as well as the near-term outlook regarding commodity prices and the types of services required by our customers in +the current oilfield completion operating environment holds positive indications for our revenues, earnings and operating cash +flows during 2018. In addition, we expect that the recently enacted Tax Cuts and Jobs Act will have a meaningful positive impact +on our financial results through increased earnings and operating cash flow in 2018. We believe that our projected lower tax rates +will further enhance our ability to improve RPC’s shareholder returns through profitable growth, dividends and share repurchases. +20 +Results of Operations +Years Ended December 31, +2017 +2016 +2015 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ 1,595,227 +$ 728,974 +$ 1,263,840 +Revenues by business segment: +Technical +$ 1,538,351 +$ 679,654 +$ 1,175,293 +Support +56,876 +49,320 +88,547 +Consolidated operating profit (loss) +$ 226,217 +$ (238,942 ) +$ (156,277 ) +Operating profit (loss) by business segment: +Technical +$ 251,476 +$ (203,804 ) +$ (132,982 ) +Support +(12,228 ) +(26,021 ) +(2,363 ) +Corporate expenses +(17,561 ) +(17,037 ) +(14,515 ) +Gain (loss) on disposition of assets, net +4,530 +7,920 +(6,417 ) +Net income (loss) (1) +$ 162,511 +$ (141,246 ) +$ (99,561 ) +Earnings (loss) per share — diluted (1) +$ 0.75 +$ (0.66 ) +$ (0.47 ) +Percentage of cost of revenues to revenues +66 % +83 % +78 % +Percentage of selling, general and administrative expenses to revenues +10 % +21 % +12 % +Percentage of depreciation and amortization expenses to revenues +10 % +30 % +21 % +Effective income tax rate (1) +30.2 % +41.0 % +34.9 % +Average U.S. domestic rig count +877 +509 +982 +Average natural gas price (per thousand cubic feet (mcf)) +$ 2.99 +$ 2.52 +$ 2.58 +Average oil price (per barrel) +$ 50.84 +$ 43.49 +$ 48.77 +(1) The indicated Statement of Operations data for 2017 includes +the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and +Jobs Act enacted during the fourth quarter of 2017. +Year Ended December 31, 2017 Compared to Year Ended December +31, 2016 +Revenues. Revenues in 2017 increased +$866.3 million or 118.8 percent compared to 2016. The Technical Services segment revenues in 2017 increased $858.7 million or 126.3 +percent compared to the prior year. The increase is due primarily to improved pricing, higher service intensity and activity levels +and a larger active fleet of revenue-producing equipment as compared to prior year, particularly within our pressure pumping service. The Support Services segment revenues in 2017 increased $7.6 million or 15.3 +percent compared to 2016 due primarily to improved activity levels and pricing in the rental tool service line, which is the largest +service line within this segment. Technical Services reported an operating profit during 2017 compared to an operating loss in +the prior year, while Support Services reported a smaller operating loss in 2017 compared to the prior year. The average price +of oil increased 16.9 percent while the average price of natural gas increased 18.8 percent during 2017 compared to the prior year. +The average domestic rig count during 2017 was 72.2 percent higher than 2016. International revenues, which increased from $51.2 +million in 2016 to $55.8 million in 2017, were three percent of consolidated revenues in 2017 compared to seven percent of consolidated +revenues in 2016. International revenues increased primarily due to higher customer activity levels in Canada and Argentina in +2017, partially offset by lower activity in Gabon and Bolivia compared to the prior year. Our international revenues are impacted +by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues +in 2017 was $1.1 billion compared to $607.9 million in 2016, an increase of $442.9 million or 72.9 percent due to higher materials +and supplies expenses, employment costs, maintenance and repairs expenses and fuel costs, all of which were driven by higher activity +levels. As a percentage of revenues, cost of revenues decreased due to leverage of higher revenues over direct employment costs +and improved pricing for our services. +21 +Selling, general and administrative +expenses. Selling, general and administrative expenses increased 5.6 percent to $159.2 million in 2017 compared to $150.7 million +in 2016. These expenses increased due to higher compensation costs, primarily incentive compensation, as well as other expenses +consistent with higher activity levels and improved profitability. Selling, general and administrative expenses as a percentage +of revenues decreased to 10.0 percent of revenues in 2017 compared to 20.7 percent of revenues in 2016 due to the leverage of higher +revenues over primarily fixed expenses. +Depreciation and amortization. Depreciation +and amortization were $163.5 million in 2017, a decrease of $53.7 million, compared to $217.3 million in 2016 due to lower capital +expenditures in the prior year. As a percentage of revenues, depreciation and amortization decreased in 2017 compared to 2016 primarily +due to higher revenues. +Gain on disposition of assets, net. Gain +on disposition of assets, net was $4.5 million in 2017 compared to $7.9 million in 2016. RPC recorded a gain on disposition of +assets of $4.0 million during the fourth quarter of 2016 resulting from the sale of operating equipment related to its oilfield +pipe inspection service. The remaining gain on disposition of assets, net in 2016 and 2017 is comprised of gains or losses related +to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other +income, net was $5.5 million in 2017 compared to other expense, net of $204 thousand in 2016. Income recorded in 2017 +include a favorable settlement of $2.0 million associated with the resolution of a sales tax matter, as well as a property +insurance recovery of $1.9 million. +Interest expense and interest income. +Interest expense decreased to $0.4 million in 2017 compared to $0.7 million in 2016. Interest expense in 2017 and 2016 principally +consists of fees on the unused portion of the credit facility. Interest income increased to $1.5 million in 2017 compared to $467 +thousand in 2016 due to higher investable cash balances. +Income tax provision (benefit). +The income tax provision was $70.3 million in 2017 compared to an income tax benefit of $98.1 million in 2016. The effective +tax rate was 30.2 percent in 2017 compared to 41.0 percent in 2016. The income tax provision for 2017 includes a discrete benefit +of $19.3 million, due to the implementation of the recently enacted “Tax Cuts and Jobs Act.” The income tax benefit +in 2016 includes a discrete tax benefit of $15.7 million recorded in connection with the favorable resolution of an open income +tax matter. +Net income (loss) and diluted earnings +(loss) per share . Net income was $162.5 million in 2017, or $0.75 earnings per diluted share, compared to a net loss of $141.2 +million in 2016, or $0.66 loss per diluted share. This improvement in earnings per share was due to higher profitability as average +shares outstanding was essentially unchanged. +Year Ended December 31, 2016 Compared to Year Ended December +31, 2015 +Revenues. Revenues in 2016 decreased +$534.9 million or 42.3 percent compared to 2015. The Technical Services segment revenues for 2016 decreased $495.6 million or 42.2 +percent compared to the prior year due primarily to lower activity levels and pricing as compared to prior year, particularly within +our pressure pumping service, which is the largest service within this segment. The Support Services segment revenues in 2016 decreased +$39.2 million or 44.3 percent compared to 2015 due primarily to lower pricing and activity levels in the majority of our services +within this segment. Both the Technical and Support Services continued to report operating losses due to lower levels of revenues, +partially offset by cost control efforts undertaken throughout the Company and lower depreciation and amortization expenses. The +average price of oil decreased 10.8 percent while the average price of natural gas decreased 2.4 percent during 2016 compared to +the prior year. The average domestic rig count during 2016 was 48.2 percent lower than 2015. International revenues, which decreased +from $72.1 million in 2015 to $51.2 million in 2016, were seven percent of consolidated revenues in 2016 compared to six percent +of consolidated revenues in 2015. International revenues decreased primarily due to lower customer activity levels in Australia, +Gabon, Equatorial Guinea, China and Argentina in 2016, partially offset by increased activity in Bolivia compared to the prior +year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues +in 2016 was $607.9 million compared to $986.1 million in 2015, a decrease of $378.3 million or 38.4 percent, due to lower activity +levels coupled with reduced personnel headcount and incentive compensation. As a percentage of revenues, cost of revenues increased +in 2016 compared to 2015 due to inefficiencies resulting from lower activity levels coupled with continued low pricing for our +services. +Selling, general and administrative +expenses. Selling, general and administrative expenses decreased 3.8 percent to $150.7 million in 2016 compared to $156.6 +million in 2015. These expenses decreased due to lower total employment costs due to headcount reductions, as well as other expense +reduction efforts partially offset by an increase in bad debt expense and professional fees. The Company recorded a contingent +professional fee of $2.0 million during the first quarter of 2016 in connection with the resolution of an open income tax matter. +As a percentage of revenues, these costs increased during 2016 compared to 2015 due to increases in bad debt expense and professional +fees previously noted as well as significantly lower revenues. +22 +Depreciation and amortization. Depreciation +and amortization were $217.3 million in 2016, a decrease of $53.7 million, compared to $271.0 million in 2015 due to lower capital +expenditures during the last two years. As a percentage of revenues, depreciation and amortization increased in 2016 compared to +2015 due to significantly lower revenues. +Gain (loss) on disposition of assets, +net. Gain on disposition of assets, net was $7.9 million in 2016 compared to a loss on disposition of assets, net of $6.4 million +in 2015. RPC recorded a gain on disposition of assets of $4.0 million during the fourth quarter of 2016 resulting from the sale +of operating equipment related to its oilfield pipe inspection service. The remaining gain (loss) on disposition of assets, net +in 2016 and 2015 was comprised of gains or losses related to various property and equipment dispositions or sales to customers +of lost or damaged rental equipment. +Other (expense) income, net. Other +expense, net was $204 thousand in 2016 compared to other income, net of $5.2 million in 2015. Proceeds from a legal settlement +totaling $6.3 million were recorded during 2015. +Interest expense and interest income. +Interest expense decreased to $0.7 million in 2016 compared to $2.0 million in 2015. Interest expense in 2016 declined in comparison +to the prior year because interest expense in 2015 included the accelerated amortization of loan fees totaling $0.6 million associated +with RPC’s voluntary reduction of its syndicated credit facility. The 2016 expense principally consisted of fees on the unused +portion of the credit facility. Interest income increased to $467 thousand in 2016 compared to $83 thousand in 2015 due to increases +in investable cash balances. +Income tax benefit. The income +tax benefit was $98.1 million in 2016 compared to $53.5 million in 2015. The effective tax rate was 41.0 percent in 2016 compared +to 34.9 percent in 2015. The income tax benefit in 2016 included a discrete tax benefit of $15.7 million recorded in connection +with the favorable resolution of an open income tax matter. +Net loss and diluted loss per share . +Net loss was $141.2 million in 2016, or $0.66 loss per diluted share, compared to a net loss of $99.6 million in 2015, or $0.47 +loss per diluted share. The increase in loss per share was due to lower profitability as average shares outstanding was essentially +unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents +were $91.1 million as of December 31, 2017, $131.8 million as of December 31, 2016 and $65.2 million as of December 31, 2015. +The following table sets forth the historical +cash flows for the years ended December 31: +(in thousands) +2017 +2016 +2015 +Net cash provided by operating activities +$ 133,704 +$ 101,704 +$ 473,792 +Net cash used for investing activities +(104,386 ) +(21,339 ) +(157,583 ) +Net cash (used for) provided by financing activities +(70,103 ) +(13,726 ) +(260,785 ) +2017 +Cash provided by operating +activities in 2017 increased by $32.0 million compared to the prior year. This increase is due primarily to an increase in +net income of $303.8 million, and an increase in other long-term liabilities of $15.6 million primarily related to the +favorable resolution of an income tax matter in 2016. These changes were partially offset by net unfavorable changes in working +capital of $234.7 million coupled with a decrease in depreciation and amortization expenses of $54.5 million. The net +unfavorable change in working capital was primarily due to unfavorable changes of $273.4 million in accounts receivable and +$26.6 million in inventories due to higher business activity levels, $5.7 million in prepaid expenses and other current +assets, and $10.4 in accrued expenses due to the timing of services performed. This unfavorable change was partially offset +by favorable changes in working capital of $35.4 million in accounts payable, $23.3 million in income taxes receivable/ +payable, net and $15.9 million in accrued payroll and related expenses consistent with higher business activity levels +coupled with the timing of payments and receipts of tax refunds. +23 +Cash used for investing activities in +2017 increased by $83.0 million, compared to 2016, primarily because of higher capital expenditures in response to improved industry +conditions. +Cash used for financing activities in +2017 increased by $56.4 million primarily as a result of higher cash dividends to common stockholders consistent with improved +financial results, and increased repurchases of the Company’s common stock on the open market and for taxes related to the +vesting of certain restricted shares. +2016 +Cash provided by operating activities +in 2016 decreased by $372.1 million compared to the same period in the prior year. This decrease was due primarily to net unfavorable +changes in working capital of $237.0 million coupled with an increase in net losses of $41.7 million, a decrease in depreciation +and amortization expenses of $54.4 million, a decrease in (gains) and losses on sale of assets of $14.3 million and a decrease +in long-term liabilities of $15.7 million primarily related to the positive resolution of an income tax matter. The net unfavorable +change in working capital was primarily due to unfavorable changes of $337.0 million in accounts receivable due to a less significant +decline in business activity levels in 2016 compared to 2015, and $6.4 million decrease in inventory consistent with lower business +activity levels. This unfavorable change was partially offset by favorable changes of $56.2 million in accounts payable, $28.6 +million in accrued payroll and related expenses, $6.1 million in income taxes payable/ receivable, net, $5.0 million in prepaid +expenses and other current assets and $4.2 million in accrued state, local and other taxes consistent with lower business activity +levels coupled with the timing of payments. +Cash used for investing activities in +2016 decreased by $136.2 million, compared to 2015, primarily as a result of significantly lower capital expenditures in response +to weaker industry conditions. +Cash used for financing activities in +2016 decreased by $247.1 million primarily as a result of lower net loan repayments as there has been no outstanding borrowings +since the fourth quarter of 2015 coupled with lower common stock dividends during 2016 compared to the same period in the prior +year. The Company reduced its common stock dividend during the first quarter of 2015 and then temporarily suspended its regular +quarterly common stock dividend beginning in the second quarter of 2015. The Company paid a special year-end cash dividend of $0.05 +per share to common stockholders in the fourth quarter of 2016. +Financial Condition and +Liquidity +The Company’s financial condition +as of December 31, 2017 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our +overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The +Company currently has a $125 million revolving credit facility that matures in January 2019. The facility contains customary terms +and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On June +30, 2016, the Company amended the revolving credit facility to establish a borrowing base to be the lesser of $125 million, or +a specified percentage of eligible accounts receivable, less the amount of any outstanding letters of credit. As of December 31, +2017, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance +programs and contract bids totaled $19.6 million; therefore, a total of $105.4 million of the facility was available. For additional +information with respect to RPC’s facility, see Note 6 of the Notes to Consolidated Financial Statements. +The Company’s decisions about the amount +of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings +under our facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide +the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity +levels. In addition, the Company's decisions about the amount of cash to be used for investing and financing activities may also +be influenced by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities. +The Company is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $117.5 million +in 2017, and we currently expect capital expenditures to be approximately $260 million in 2018. We expect that a majority of these +expenditures in 2018 will be directed towards new revenue-producing equipment and capitalized maintenance of our existing equipment. +The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, +and equipment delivery schedules. +24 +The Company’s Retirement Income Plan, +a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. +During 2017, the Company did not contribute to the pension plan and although not required, Company management will evaluate contributing +to the pension plan during 2018. +The Company has a stock +buyback program, initially adopted in 1998 and subsequently amended in 2013, that authorizes the repurchase of up to +31,578,125 shares. There were 1,074,889 shares purchased on the open market by the Company during 2017, and 975,265 shares +remain available to be repurchased under the current authorization as of December 31, 2017. On +February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10 million shares. The +Company may repurchase outstanding common shares periodically based on market conditions and our capital +allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a +predetermined expiration date. +On January 23, 2018, the Board of Directors +declared a 43 percent increase to the regular cash dividend from $0.07 per share to $0.10 per share payable March 9, 2018 to stockholders +of record at the close of business on February 9, 2018. Subject to industry conditions and RPC’s earnings, financial +condition, and other relevant factors, the Company expects to continue to pay regular quarterly cash dividends to common stockholders. +Contractual Obligations +The Company’s obligations and commitments +that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other +long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, +2017: +Contractual Obligations +Payments due by period +(in thousands) +Total +Less than +1 year +1-3 +years +3-5 +years +More than +5 years +Long-term debt obligations +$ +— +$ +— +$ +— +$ +— +$ +— +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +39,762 +12,607 +15,504 +8,742 +2,909 +Purchase obligations (2) +114,431 +111,056 +3,375 +— +— +Other long-term liabilities +(3) +6,768 +5,106 +1,663 +— +— +Total contractual obligations +$ +160,961 +$ +128,769 +$ +20,542 +$ +8,742 +$ +2,909 +(1) Operating leases include agreements for various office locations, office equipment, and certain +operating equipment. +(2) Includes agreements to purchase raw materials, goods or services that have been approved and +that specify all significant terms (pricing, quantity, and timing). As part of the normal course of business the Company occasionally +enters into purchase commitments to manage its various operating needs. +(3) Includes expected cash payments for long-term liabilities reflected on the balance sheet where +the timing of the payments is known. These amounts include incentive compensation. These amounts exclude pension obligations with +uncertain funding requirements and deferred compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities +measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets +and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued +using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no +assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities +measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive Retirement Plan (“SERP”) +investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent +appraisals and market based comparable data or on net asset values calculated by the fund or when not publicly available. +25 +Inflation +The Company purchases its equipment and +materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation +in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, +increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, +especially if employment in the general economy increases. In addition, activity increases can cause increases in the costs of +certain materials and key equipment components used to provide services to the Company’s customers. Since oilfield activity +began to increase in the second quarter of 2016, the Company has experienced upward pressure on the price of labor due to the shortage +of skilled employees as well as increases in the prices of certain raw materials used in providing our services. During the third +quarter of 2017, the Company experienced temporary price increases and shortages of certain raw materials due to supply disruptions +caused by several hurricanes in the Gulf Coast and Southeastern United States. Thus far in this period of increasing activity, +the Company has successfully increased pricing for our services to compensate for these price increases, although no assurance +can be given that the Company will continue to be able to do so in the future. +Off Balance Sheet Arrangements +The Company does not have any material off +balance sheet arrangements. +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition +Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, +including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from +the Company (or from corporations that are subsidiaries of the Company) for such services were $849,000 in 2017, $739,000 in +2016, and $753,000 in 2015. The Company’s receivable due from Marine Products for these services was $47,000 as of +December 31, 2017 and $60,000 as of December 31, 2016. Many of the Company’s directors are also directors of Marine +Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,372,000 in 2017, $890,000 in 2016 and $1,127,000 +in 2015. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $104,000 in 2017, $111,000 in 2016 and $100,000 in 2015. +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $197,000 +in 2017 and 2016, and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2017, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +26 +Critical Accounting Policies +The consolidated financial statements are +prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by +management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical +experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. +Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee +of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher +degree of judgment and complexity: +Allowance for doubtful accounts — +Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United +States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined +using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit +evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability +to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility +in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. +Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible +and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the +required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period +to period. Recoveries were insignificant in 2017 and 2016 and $1.0 million in 2015. We record specific provisions when we become +aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration +in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the +realizability of the receivable would be further adjusted, either upward or downward. +The estimated allowance for doubtful accounts +is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical +write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic +and political environment of the related country and region. In addition to reserves established for specific customers, we establish +general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management +judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues have +ranged from (0.2) percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages +by 0.50 percentage points as of December 31, 2017 would have resulted in a change of approximately $1.9 million to the allowance +for doubtful accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The effective +income tax rates were 30.2 percent in 2017, 41.0 percent in 2016 and 34.9 percent in 2015. Our effective tax rates vary due to +changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which our earnings and deductions +are realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. +As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. The effective tax rate for 2017 +includes beneficial adjustments related to the Tax Cuts and Jobs Act, enacted on December 22, 2017. +We establish a valuation allowance against +the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized +through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, +if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the +applicable portion of the previously provided valuation allowance. We have considered future market growth, forecasted earnings, +future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies +in determining the need for a valuation allowance. +We calculate our current and deferred +tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns +filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the +third quarter of the subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are +determined based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in +effect in the year the differences are expected to reverse. The newly enacted Tax Cuts and Jobs Act required the revaluation +of our deferred tax assets and liabilities to reflect the change in Federal income tax rates from 35 percent to +21 percent. The Company’s net deferred tax liability as of December 31, 2017, has been reduced through a +discrete income tax provision adjustment of $19.3 million related to this rate change. +27 +The amount of income taxes we pay is subject +to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the +potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable +outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated +tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. +Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +Insurance expenses —The Company +self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle +and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based +valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of +these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments +occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range +of exposure for these claims. As of December 31, 2017, the Company estimates the range of exposure to be from $13.8 million to +$17.7 million. The Company has recorded liabilities at December 31, 2017 of $15.7 million which represents management’s best +estimate of probable loss. +Depreciable life of assets — +RPC’s net property, plant and equipment at December 31, 2017 was $443.9 million representing 38.7 percent of the Company’s +consolidated assets. Depreciation and amortization expenses for the year ended December 31, 2017 were $163.5 million. Management +judgment is required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation +and amortization expense. +Property, plant and equipment are reported +at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives +of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed by +the Company and is determined by management based on many factors including historical experience with similar assets. Assets are +monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted accordingly. +We did not make any changes to the estimated lives of assets resulting in a material impact in 2017 or 2016. +Defined +benefit pension plan – In 2002, the Company ceased all future benefit accruals under +the defined benefit plan, although the Company remains obligated to provide employees benefits earned through March 2002. The +Company accounts for the defined benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) +ASC 715, “Compensation – Retirement Benefits” and engages an outside actuary to calculate its obligations and +costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including +the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as +necessary. +The Company chooses an expected rate of return +on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views +of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized +over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s +assumption for the expected return on plan assets was seven percent for 2017, 2016 and 2015. +The discount rate reflects the current rate +at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes +a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the +life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same +time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to +all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate +bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 4.00 percent as of December +31, 2017 compared to 4.45 percent as of December 31, 2016 and 4.70 percent in 2015. +As set forth in Note 10 to the Company’s +financial statements, included among the asset categories for the Plan’s investments are real estate and alternative/ opportunistic/ +special fund investments comprised of real estate funds and private equity funds. These investments are measured at net asset +value and are valued using significant non-observable inputs which do not have a readily determinable fair value. These valuations +are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation +of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments +and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +28 +As of December 31, 2017, the defined benefit +plan was under-funded and the recorded change within accumulated other comprehensive loss increased stockholders’ equity +by approximately $0.5 million after tax. Holding all other factors constant, a change in the discount rate used to measure +plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of approximately $1.3 million to the +net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense +of $0.4 million in 2017, $0.7 million in 2016 and $0.4 million in 2015. Based on the under-funded status of the defined benefit +plan as of December 31, 2017, the Company expects to recognize pension expense of $4 thousand in 2018. Holding all other factors +constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase +or decrease in pension expense of approximately $.02 million in 2018. Holding all other factors constant, a change in the discount +rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of approximately +$11 thousand in 2018. +Recent Accounting Pronouncements +The Financial Accounting Standards Board +(FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update (ASU) No. +2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Current requirements are to measure inventory at +the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximated +normal profit margin. These amendments allow inventory to be measured at lower of cost or net realizable value and eliminates the +market requirement. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable +costs of completion, disposal, and transportation. The Company adopted these provisions in the first quarter of 2017 on a prospective +basis. The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements. +ASU No. 2016-09, Compensation — +Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments simplify several aspects +of the accounting for share-based payment award transactions, requiring excess tax benefits and deficiencies to be recognized as +a component of income tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies to be presented +as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate +expected forfeitures or to account for them as they occur. The Company will continue to estimate expected forfeitures. The Company +adopted these provisions in the first quarter of 2017 on a prospective basis. See Notes on Stock-Based Compensation and Income +Taxes for the effect of adoption on the financial statements. +Recently Issued Accounting Pronouncements Not Yet Adopted: +To be adopted in 2018: +REVENUE RECOGNITION: +In May 2014, the Financial Accounting +Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers +(Topic 606). The provisions of this ASU require entities to recognize revenue to depict transfer of promised goods or services +to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods +or services. The standard creates a five step model that requires companies to exercise judgment when considering the terms of +a contract and all relevant facts and circumstances. The standard allows for either a full retrospective adoption in which the +standard is applied to all of the periods presented, or a modified retrospective adoption in which the standard is applied only +to the most current period presented in the financial statements with a cumulative-effect adjustment reflected in retained earnings. +The standard also requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, +timing and uncertainty of revenue and cash flows arising from contracts with customers. This new revenue recognition standard will +be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. +29 +Current Status of implementation: +The Company has completed a comprehensive +review of a representative sample of contracts with customers encompassing both of our reportable segments and all of our major +service lines. As part of planning for the adoption of this new accounting standard, the Company has prepared technical accounting +memorandums, drafted new formal accounting policies, evaluated the impact the standard will have on our control environment, and +is currently working on refining required disclosures. The Company adopted the standard on January 1, 2018 using the modified +retrospective method and the cumulative-effect adjustment to retained earnings upon adoption is not material since most of the +Company’s services are primarily short-term in nature. However, the revenue specific disclosures beginning in 2018 +will be significantly expanded. +OTHER PRONOUNCEMENTS: +ASU No. 2016-01, Financial Instruments +– Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments +make targeted improvements to existing U.S. GAAP and affects accounting for equity investments and financial instruments and liabilities +and related disclosures. The amendments are effective starting in the first quarter of 2018, with early adoption permitted for +certain provisions. The Company does not expect the adoption of these provisions to have a material impact on its consolidated +financial statements. +ASU No. 2016-15, Statement of Cash +Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance in the presentation +and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt +extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance +claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method +investees. The amendments are effective starting in the first quarter of 2018 with early adoption permitted. The amendments should +be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively +for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The +Company does not expect the adoption of these provisions to have a material impact on its consolidated financial statements. +ASU No. 2016-16, Income Taxes (Topic +740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments require an entity to recognize the income tax consequences +of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for +an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of the amendments +are intellectual property and property, plant, and equipment. The amendments do not include new disclosure requirements; however, +existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity +transfer of an asset other than inventory. The amendments are effective starting in the first quarter of 2018 with early adoption +permitted. The amendments are required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly +to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of these provisions +to have a material impact on its consolidated financial statements. +ASU No. 2017-01, Business Combinations +(Topic 805): Clarifying the Definition of a Business . The amendments are intended to help companies and other organizations +evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of +a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments provide +a more robust framework to use in determining when a set of assets and activities is a business. They also provide more consistency +in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments +are effective beginning in the first quarter of 2018 with early application permitted under certain circumstances. The Company +expects to adopt these provisions as it completes future acquisitions and plans to evaluate the impact of adoption on its consolidated +financial statements as acquisitions are completed. +ASU No. 2017-09, Compensation - Stock +Compensation (Topic 718): Scope of Modification Accounting. The provisions are applicable when there are changes to the terms +or conditions of a share-based payment award. The amendments require an entity to apply modification accounting for the effects +of changes to the terms and conditions of a share-based payment award unless certain conditions including fair value, vesting conditions +and classification are met. The amendments are effective beginning in the first quarter of 2018 with early application permitted +under certain circumstances. The Company does not expect the adoption of these provisions to have a material impact on its consolidated +financial statements. +30 +To be adopted in 2019 and later: +ASU No. 2016-02, Leases (Topic 842). +Under the new guidance, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their +leases (other than leases that meet the definition of a short-term lease), at the commencement of the lease term. The liability +will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as +for initial direct costs. The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including +interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors +(for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing +at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and +lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting these +provisions on its consolidated financial statements. +ASU No. 2016-13, Financial Instruments +- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments require the credit losses +on available-for-sale debt securities and purchased financial assets with credit deterioration should presented as an allowance +rather than a write-down. It also allows recording of credit loss reversals in current period net income. The amendments are effective +starting in the first quarter of 2020 with early application permitted a year earlier. The Company is currently evaluating the +impact of adopting these provisions on its consolidated financial statements. +ASU No. 2017-04, Intangibles - Goodwill +and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the +amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by +comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount +by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the +total amount of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment +tests beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests +performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on +its consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about +Market Risk +The Company is subject to interest rate +risk exposure through borrowings on its revolving credit facility. As of December 31, 2017, there are no outstanding interest-bearing +advances on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market +risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in +U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +31 +MANAGEMENT’S REPORT ON INTERNAL +CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of +RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, +Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets +are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce +financial statements in accordance with accounting principles generally accepted in the United States of America. The internal +control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified +personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable +laws and regulations. +There are inherent +limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide +only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can +provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, +the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be +considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision +and with the participation of our management, including our principal executive officer and principal financial officer, we conducted +an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December +31, 2017 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained +effective internal control over financial reporting as of December 31, 2017. +The independent registered +public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December +31, 2017, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, +included in this report on page 34. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +Ben M. Palmer +President and Chief Executive Officer +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2018 +32 +REPORT OF INDEPENDENT REGISTERED PUBLIC +ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the +internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as +of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, +in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established +in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated +financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 28, 2018 expressed +an unqualified opinion on those financial statements. +Basis for opinion +The Company’s +management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness +of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial +Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on +our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company +in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission +and the PCAOB. +We conducted our +audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable +assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit +included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, +testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such +other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our +opinion. +Definition and limitations of internal control over +financial reporting +A company’s +internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. +A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance +of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; +(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance +with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely +detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +Because of its inherent +limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation +of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, +or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2018 +33 +REPORT OF INDEPENDENT REGISTERED PUBLIC +ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the +accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as +of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ +equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule (collectively +referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material +respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash +flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted +in the United States of America. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s +internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report +dated February 28, 2018 expressed an unqualified opinion. +Basis for opinion +These financial statements +are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial +statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities +and Exchange Commission and the PCAOB. +We conducted our +audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable +assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included +performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, +and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting +the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and +significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe +that our audits provide a reasonable basis for our opinion. +/s/ GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2018 +34 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2017 +2016 +ASSETS +Cash and cash equivalents +$ 91,050 +$ 131,835 +Accounts receivable, net +377,853 +169,166 +Inventories +114,866 +108,316 +Income taxes receivable +40,243 +57,174 +Prepaid expenses +8,992 +6,718 +Other current assets +7,131 +5,848 +Current assets +640,135 +479,057 +Property, plant and equipment, net +443,928 +497,986 +Goodwill +32,150 +32,150 +Other assets +31,011 +26,259 +Total assets +$ 1,147,224 +$ 1,035,452 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ 103,462 +$ 70,536 +Accrued payroll and related expenses +23,577 +12,130 +Accrued insurance expenses +5,299 +4,099 +Accrued state, local and other taxes +8,655 +3,094 +Income taxes payable +3,224 +4,929 +Other accrued expenses +1,143 +6,680 +Current liabilities +145,360 +101,468 +Long-term accrued insurance expenses +10,376 +9,537 +Long-term pension liabilities +35,635 +32,864 +Deferred income taxes +39,437 +81,466 +Other long-term liabilities +4,719 +3,318 +Total liabilities +235,527 +228,653 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $0.10 par value, 349,000,000 shares authorized, 216,543,552 and 217,489,402 shares issued and outstanding in 2017 and 2016, respectively +21,654 +21,749 +Capital in excess of par value +— +— +Retained earnings +906,745 +803,152 +Accumulated other comprehensive loss +(16,702 ) +(18,102 ) +Total stockholders’ equity +911,697 +806,799 +Total liabilities and stockholders’ equity +$ 1,147,224 +$ 1,035,452 +The accompanying notes are an integral part of these +statements. +35 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2017 +2016 +2015 +REVENUES +$ 1,595,227 +$ 728,974 +$ 1,263,840 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +1,050,809 +607,888 +986,144 +Selling, general and administrative expenses +159,194 +150,690 +156,579 +Depreciation and amortization +163,537 +217,258 +270,977 +(Gain) loss on disposition of assets, net +(4,530 ) +(7,920 ) +6,417 +Operating profit (loss) +226,217 +(238,942 ) +(156,277 ) +Interest expense +(426 ) +(681 ) +(2,032 ) +Interest income +1,494 +467 +83 +Other (expense) income, net +5,531 +(204 ) +5,185 +Income (loss) before income taxes +232,816 +(239,360 ) +(153,041 ) +Income tax provision (benefit) +70,305 +(98,114 ) +(53,480 ) +Net income (loss) +$ 162,511 +$ (141,246 ) +$ (99,561 ) +EARNINGS (LOSS) PER SHARE +Basic +$ 0.75 +$ (0.66 ) +$ (0.47 ) +Diluted +$ 0.75 +$ (0.66 ) +$ (0.47 ) +Dividends paid per share +$ 0.200 +$ 0.050 +$ 0.155 +The accompanying notes are an integral part of these +statements. +36 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE +(LOSS) INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2017 +2016 +2015 +NET INCOME (LOSS) +$ 162,511 +$ (141,246 ) +$ (99,561 ) +OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES: +Pension adjustment +1,033 +(788 ) +1,531 +Foreign currency translation +391 +652 +(1,801 ) +Unrealized (loss) gain on securities, net reclassification adjustments +(24 ) +3 +134 +COMPREHENSIVE INCOME (LOSS) +$ 163,911 +$ (141,379 ) +$ (99,697 ) +The accompanying notes are an integral part of these +statements. +37 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ +EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Three Years Ended +Common Stock +Excess of +Retained +Comprehensive +December 31, 2017 +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2014 +216,539 +$ 21,654 +$ — +$ 1,074,561 +$ (17,833 ) +$ 1,078,382 +Stock issued for stock incentive plans, net +791 +79 +9,802 +— +— +9,881 +Stock purchased and retired +(339 ) +(34 ) +(11,212 ) +7,153 +— +(4,093 ) +Net loss +— +— +— +(99,561 ) +— +(99,561 ) +Pension adjustment, net of taxes +— +— +— +— +1,531 +1,531 +Foreign currency translation +— +— +— +— +(1,801 ) +(1,801 ) +Unrealized gain on securities, net of taxes +— +— +— +— +134 +134 +Dividends declared +— +— +— +(33,602 ) +— +(33,602 ) +Excess tax benefits for share-based payments +— +— +1,410 +— +— +1,410 +Balance, December 31, 2015 +216,991 +21,699 +— +948,551 +(17,969 ) +952,281 +Stock issued for stock incentive plans, net +796 +80 +9,508 +— +— +9,588 +Stock purchased and retired +(298 ) +(30 ) +(9,935 ) +6,708 +— +(3,257 ) +Net loss +— +— +— +(141,246 ) +— +(141,246 ) +Pension adjustment, net of taxes +— +— +— +— +(788 ) +(788 ) +Foreign currency translation +— +— +— +— +652 +652 +Unrealized gain on securities, net of taxes and reclassification adjustment +— +— +— +— +3 +3 +Dividends declared +— +— +— +(10,861 ) +— +(10,861 ) +Excess tax benefits for share-based payments +— +— +427 +— +— +427 +Balance, December 31, 2016 +217,489 +21,749 +— +803,152 +(18,102 ) +806,799 +Stock issued for stock incentive plans, net +420 +42 +11,048 +— +— +11,090 +Stock purchased and retired +(1,365 ) +(137 ) +(11,048 ) +(15,599 ) +— +(26,784 ) +Net income +— +— +— +162,511 +— +162,511 +Pension adjustment, net of taxes +— +— +— +— +1,033 +1,033 +Foreign currency translation +— +— +— +— +391 +391 +Unrealized loss on securities, net of taxes and reclassification adjustment +— +— +— +— +(24 ) +(24 ) +Dividends declared +— +— +— +(43,319 ) +— +(43,319 ) +Balance, December 31, 2017 +216,544 +$ 21,654 +$ — +$ 906,745 +$ (16,702 ) +$ 911,697 +The accompanying notes are an integral part of these +statements. +38 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2017 +2016 +2015 +OPERATING ACTIVITIES +Net income (loss) +$ 162,511 +$ (141,246 ) +$ (99,561 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +166,558 +221,038 +275,413 +Stock-based compensation expense +11,090 +10,218 +9,960 +(Gain) loss on disposition of assets, net +(4,530 ) +(7,920 ) +6,417 +Deferred income tax benefit +(42,609 ) +(34,209 ) +(33,013 ) +Excess tax benefits for share-based payments +- +(427 ) +(1,410 ) +(Increase) decrease in assets: +Accounts receivable +(208,642 ) +64,715 +401,753 +Income taxes receivable +16,931 +(5,355 ) +(20,867 ) +Inventories +(6,275 ) +20,294 +26,667 +Prepaid expenses +(2,272 ) +2,244 +161 +Other current assets +(1,222 ) +2 +(2,881 ) +Other non-current assets +(4,779 ) +(1,851 ) +1,768 +Increase (decrease) in liabilities: +Accounts payable +29,176 +(6,250 ) +(62,446 ) +Income taxes payable +(1,705 ) +(2,710 ) +6,695 +Accrued payroll and related expenses +11,408 +(4,540 ) +(33,143 ) +Accrued insurance expenses +1,200 +(197 ) +(1,336 ) +Accrued state, local and other taxes +5,561 +256 +(3,983 ) +Other accrued expenses +(5,335 ) +5,017 +(180 ) +Pension liabilities +4,398 +(1,385 ) +1,021 +Long-term accrued insurance expenses +839 +(1,811 ) +1,249 +Other long-term liabilities +1,401 +(14,179 ) +1,508 +Net cash provided by operating activities +133,704 +101,704 +473,792 +INVESTING ACTIVITIES +Capital expenditures +(117,509 ) +(33,938 ) +(167,426 ) +Proceeds from sale of assets +13,123 +12,599 +9,843 +Net cash used for investing activities +(104,386 ) +(21,339 ) +(157,583 ) +FINANCING ACTIVITIES +Payment of dividends +(43,319 ) +(10,861 ) +(33,602 ) +Borrowings from notes payable to banks +— +— +613,300 +Repayments of notes payable to banks +— +— +(837,800 ) +Debt issue costs for notes payable to banks +— +(35 ) +— +Excess tax benefits for share-based payments +— +427 +1,410 +Cash paid for common stock purchased and retired +(26,784 ) +(3,257 ) +(4,093 ) +Net cash used for financing activities +(70,103 ) +(13,726 ) +(260,785 ) +Net (decrease) increase in cash and cash equivalents +(40,785 ) +66,639 +55,424 +Cash and cash equivalents at beginning of year +131,835 +65,196 +9,772 +Cash and cash equivalents at end of year +$ 91,050 +$ 131,835 +$ 65,196 +The accompanying notes are an integral part of these +statements. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis +of Presentation +The consolidated financial statements include +the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany +accounts and transactions have been eliminated. +Nature of Operations +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States of America, including the southwest, mid-continent, Gulf +of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include +Technical Services such as pressure pumping services, coiled tubing services, snubbing services (also referred to as hydraulic +workover services), nitrogen services, and firefighting and well control, and Support Services such as the rental of drill pipe +and other specialized oilfield equipment and oilfield training and consulting. +Common Stock +RPC is authorized to issue 349,000,000 +shares of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by +the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted +to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution +or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for +distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 +shares of preferred stock, $0.10 par value. As of December 31, 2017, there were no shares of preferred stock issued. The Board +of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class +without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable +laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other +class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights +and rights on liquidation. +Dividends +On January 23, 2018, the Board of Directors +declared a 43 percent increase to the regular quarterly cash dividend from $0.07 per share to $0.10 per share payable March 9, +2018 to stockholders of record at the close of business on February 9, 2018. Subject to industry conditions and RPC’s +earnings, financial condition, and other relevant factors, the Company expects to continue to pay regular quarterly cash dividends +to common stockholders. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in +conformity with accounting principles generally accepted in the United States of America requires management to make estimates +and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities +at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results +could differ from those estimates. +Significant estimates are used in the determination +of the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC’s revenues are generated principally +from providing equipment and services. Revenues are recognized when the services are rendered and collectibility is reasonably +assured. Revenues from equipment and services are based on fixed or determinable priced purchase orders or contracts with the customer +and do not include the right of return. Rates for equipment and services are priced on a per day, per unit of measure, per man +hour or similar basis. Sales tax charged to customers is presented on a net basis within the consolidated statements of operations +and excluded from revenues. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Concentration of Credit Risk +Substantially all of the Company’s +customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, +either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The +Company provided oilfield services to several hundred customers during each of the last three years. There were no customers that +accounted for more than 10 percent of the Company’s revenues in 2017 and 2016; and one customer accounted for 23 percent +of revenues in 2015. Additionally, there were no customers that accounted for more than 10 percent of accounts receivable as of +December 31, 2017 and 2016. +Cash and Cash Equivalents +Highly liquid investments with original maturities +of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, +at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, +and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating +services. +Investments +Investments classified as available-for-sale +securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component +of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, +declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are +included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2017 and 2016, +and an immaterial realized loss during 2015. Securities that are held in the non-qualified Supplemental Executive Retirement Plan +(“SERP”) are classified as trading. See Note 10 for further information regarding the SERP. The change in fair value +of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements +of operations. +Management determines the appropriate classification +of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts +receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended +based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are +considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts +due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance +for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, +current economic conditions, and in the case of international customers, judgments about the economic and political environment +of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines +that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, which consist principally of +(i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment +used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are +recorded at the lower of cost and net realizable value. Cost is determined using first-in, first-out (“FIFO”) +method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, +less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities +on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, +market conditions, production requirements and technological developments. +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Property, Plant and Equipment +Property, +plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided +on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed +using the following useful lives: operating equipment, 3 to 20 years; buildings and leasehold improvements, 15 to 39 years or the +life of the lease; furniture and fixtures, 5 to 7 years; software, 5 years; and vehicles, 3 to 5 years. The cost of assets retired +or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year +of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, +and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset +in good working order constitute repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived +assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows +estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the +values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. During 2015, RPC recorded +immaterial write-downs on certain equipment to comply with the Company’s policy to store and maintain key equipment in an +efficient manner. +Goodwill +Goodwill represents the excess of the +purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reportable segment +was as follows: +Years Ended December 31, +2017 +2016 +(in thousands) +Technical Services +$ 30,992 +$ 30,992 +Support Services +1,158 +1,158 +Goodwill +$ 32,150 +$ 32,150 +Goodwill is reviewed annually, or more +frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit +below its carrying amount, for impairment. In 2017 and 2016, the Company performed a quantitative impairment test by estimating +the fair value of each of its reporting units using a discounted cash flow analysis based on management’s short-term and +long-term forecast of operating results. The discounted cash flow analysis for each reporting unit includes assumptions regarding +discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected +future cash flows. Based on the analysis, the Company concluded that the fair value of its reporting units exceeded their carrying +amount and therefore no impairment of goodwill occurred for the years ended December 31, 2017 and 2016. The Company completed +a comprehensive qualitative assessment of the various factors that impact goodwill for the year ended December 31, 2015, and concluded +it is more likely than not that the fair value of its reporting units exceeded their carrying amounts as of the annual test date +and therefore no impairment of its goodwill occurred for the year ended December 31, 2015. +Advertising +Advertising expenses are charged to expense +during the period in which they are incurred. Advertising expenses totaled $1,696,000 in 2017, $1,296,000 in 2016, and $2,058,000 +in 2015. +Insurance Expenses +RPC self-insures, up to certain policy-specified +limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee +health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims +are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based +on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year +in the future is classified as long-term accrued insurance expenses. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Income Taxes +Deferred tax liabilities and assets +are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates +in effect for the year in which the differences are expected to reverse. The newly enacted Tax Cuts and Jobs Act required the +revaluation of our deferred tax assets and liabilities to reflect the change in Federal income tax rates from 35 percent to +21 percent. The Company’s net deferred tax liability as of December 31, 2017, has been reduced through a discrete +income tax provision adjustment of $19.3 million related to this rate change. The Company establishes a +valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than +not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension +plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to +2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under +the defined benefit pension plan. See Note 10 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records +the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares +acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value +is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, discloses the excess +over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ +equity. +Earnings per Share +Basic and diluted earnings (loss) per +share are computed by dividing net income (loss) by the weighted average number of shares outstanding during the respective periods. +In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and +are therefore considered participating securities. However, in periods of net loss, participating securities are excluded from +the weighted average shares outstanding since such inclusion would be anti-dilutive. See Note 10 for further information on restricted +stock granted to employees. +Restricted shares of common stock (participating +securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In thousands except per share data ) +2017 +2016 +2015 +Net income (loss) available for stockholders +$ 162,511 +$ (141,246 ) +$ (99,561 ) +Less: Adjustments for earnings/ loss attributable to participating securities +(2,102 ) +(147 ) +(240 ) +Net income (loss) used in calculating earnings (loss) per share +$ 160,409 +$ (141,393 ) +$ (99,801 ) +Weighted average shares outstanding (including participating securities) +217,194 +217,509 +213,632 +Adjustment for participating securities +(2,891 ) +(3,282 ) +(3,359 ) +Shares used in calculating basic and diluted earnings (loss) per share +214,303 +214,227 +210,273 +Fair Value of Financial Instruments +The Company’s financial instruments +consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value +of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature +of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments +held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. +All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 8 for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized +for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected +to vest on a straight-line basis over the requisite service period of the award. See Note 10 for additional information. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Recent Accounting Pronouncements +The Financial Accounting Standards Board +(FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Pronouncements: +Accounting Standards Update (ASU) No. +2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Current requirements are to measure inventory at +the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximated +normal profit margin. These amendments allow inventory to be measured at lower of cost or net realizable value and eliminates the +market requirement. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable +costs of completion, disposal, and transportation. The Company adopted these provisions in the first quarter of 2017 on a prospective +basis. The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements. +ASU No. 2016-09, Compensation — +Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments simplify several aspects +of the accounting for share-based payment award transactions, requiring excess tax benefits and deficiencies to be recognized as +a component of income tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies to be presented +as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate +expected forfeitures or to account for them as they occur. The Company will continue to estimate expected forfeitures. The Company +adopted these provisions in the first quarter of 2017 on a prospective basis. See Notes on Stock-Based Compensation and Income +Taxes for the effect of adoption on the financial statements. +Recently Issued Accounting Pronouncements Not Yet Adopted: +To be adopted in 2018: +REVENUE RECOGNITION: +In May 2014, the Financial Accounting +Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers +(Topic 606). The provisions of this ASU require entities to recognize revenue to depict transfer of promised goods or services +to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods +or services. The standard creates a five step model that requires companies to exercise judgment when considering the terms of +a contract and all relevant facts and circumstances. The standard allows for either a full retrospective adoption in which the +standard is applied to all of the periods presented, or a modified retrospective adoption in which the standard is applied only +to the most current period presented in the financial statements with a cumulative-effect adjustment reflected in retained earnings. +The standard also requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, +timing and uncertainty of revenue and cash flows arising from contracts with customers. This new revenue recognition standard will +be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. +Current Status of implementation: +The Company has completed a comprehensive +review of a representative sample of contracts with customers encompassing both of our reportable segments and all of our major +service lines. As part of planning for the adoption of this new accounting standard, the Company has prepared technical accounting +memorandums, drafted new formal accounting policies, evaluated the impact the standard will have on our control environment, and +is currently working on refining required disclosures. The Company adopted the standard on January 1, 2018 using the modified +retrospective method and the cumulative-effect adjustment to retained earnings upon adoption is not material since most of the +Company’s services are primarily short-term in nature. However, the revenue specific disclosures beginning in 2018 +will be significantly expanded. +OTHER PRONOUNCEMENTS: +ASU No. 2016-01, Financial Instruments +– Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments +make targeted improvements to existing U.S. GAAP and affects accounting for equity investments and financial instruments and liabilities +and related disclosures. The amendments are effective starting in the first quarter of 2018, with early adoption permitted for +certain provisions. The Company does not expect the adoption of these provisions to have a material impact on its consolidated +financial statements. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +ASU No. 2016-15, Statement of Cash +Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance in the presentation +and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt +extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance +claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method +investees. The amendments are effective starting in the first quarter of 2018 with early adoption permitted. The amendments should +be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively +for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The +Company does not expect the adoption of these provisions to have a material impact on its consolidated financial statements. +ASU No. 2016-16, Income Taxes (Topic +740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments require an entity to recognize the income tax consequences +of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for +an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of the amendments +are intellectual property and property, plant, and equipment. The amendments do not include new disclosure requirements; however, +existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity +transfer of an asset other than inventory. The amendments are effective starting in the first quarter of 2018 with early adoption +permitted. The amendments are required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly +to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of these provisions +to have a material impact on its consolidated financial statements. +ASU No. 2017-01, Business Combinations +(Topic 805): Clarifying the Definition of a Business . The amendments are intended to help companies and other organizations +evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of +a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments provide +a more robust framework to use in determining when a set of assets and activities is a business. They also provide more consistency +in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments +are effective beginning in the first quarter of 2018 with early application permitted under certain circumstances. The Company +expects to adopt these provisions as it completes future acquisitions and plans to evaluate the impact of adoption on its consolidated +financial statements as acquisitions are completed. +ASU No. 2017-09, Compensation - Stock +Compensation (Topic 718): Scope of Modification Accounting. The provisions are applicable when there are changes to the terms +or conditions of a share-based payment award. The amendments require an entity to apply modification accounting for the effects +of changes to the terms and conditions of a share-based payment award unless certain conditions including fair value, vesting conditions +and classification are met. The amendments are effective beginning in the first quarter of 2018 with early application permitted +under certain circumstances. The Company does not expect the adoption of these provisions to have a material impact on its consolidated +financial statements. +To be adopted in 2019 and later: +ASU No. 2016-02, Leases (Topic 842). +Under the new guidance, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their +leases (other than leases that meet the definition of a short-term lease), at the commencement of the lease term. The liability +will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as +for initial direct costs. The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including +interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors +(for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing +at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and +lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting these +provisions on its consolidated financial statements. +ASU No. 2016-13, Financial Instruments +- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments require the credit losses +on available-for-sale debt securities and purchased financial assets with credit deterioration should presented as an allowance +rather than a write-down. It also allows recording of credit loss reversals in current period net income. The amendments are effective +starting in the first quarter of 2020 with early application permitted a year earlier. The Company is currently evaluating the +impact of adopting these provisions on its consolidated financial statements. +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +ASU No. 2017-04, Intangibles - Goodwill +and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the +amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by +comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount +by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the +total amount of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment +tests beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests +performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on +its consolidated financial statements. +Note 2: Accounts Receivable +Accounts receivable, net consists of the +following: +December 31, +2017 +2016 +(in thousands) +Trade receivables: +Billed +$ 296,588 +$ 122,216 +Unbilled +68,494 +39,223 +Other receivables +17,242 +10,280 +Total +382,324 +171,719 +Less: allowance for doubtful accounts +(4,471 ) +(2,553 ) +Accounts receivable, net +$ 377,853 +$ 169,166 +Trade receivables relate to revenues +generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit +worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within +one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as +well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Changes in the Company’s allowance +for doubtful accounts are as follows: +Years Ended December 31, +2017 +2016 +(in thousands) +Beginning balance +$ 2,553 +$ 10,605 +Bad debt expense (reduction) +1,441 +6,021 +Accounts written-off +(105 ) +(14,101 ) +Recoveries +582 +28 +Ending balance +$ 4,471 +$ 2,553 +Note 3: Inventories +Inventories are $114,866,000 at December +31, 2017 and $108,316,000 at December 31, 2016 and consist of raw materials, parts and supplies. The reserve for obsolete and slow +moving inventory is $3,875,000 at December 31, 2017 and $3,052,000 at December 31, 2016. +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Note 4: Property, Plant and Equipment +Property, plant and equipment are presented +at cost net of accumulated depreciation and consist of the following: +December 31, +2017 +2016 +(in thousands) +Land +$ 19,991 +$ 19,070 +Buildings and leasehold improvements +138,072 +142,741 +Operating equipment +1,419,670 +1,432,007 +Computer software +23,017 +22,050 +Furniture and fixtures +7,656 +8,056 +Vehicles +494,833 +469,570 +Construction in progress +— +— +Gross property, plant and equipment +2,103,239 +2,093,494 +Less: accumulated depreciation +(1,659,311 ) +(1,595,508 ) +Net property, plant and equipment +$ 443,928 +$ 497,986 +Depreciation expense was $166.9 million +in 2017, $220.6 million in 2016, and $274.4 million in 2015, and includes amounts recorded as costs of revenues. There were no +capital leases outstanding as of December 31, 2017 and December 31, 2016. The Company had accounts payable for purchases of property +and equipment of $7.1 million as of December 31, 2017, $3.4 million as of December 31, 2016, and $2.4 million as of December 31, +2015. +Note 5: Income Taxes +On December 22, 2017, the President +signed into law the Tax Cuts and Jobs Act (“the Act”), which took effect on January 1, 2018. Some notable +provisions of the Act include a reduction of the corporate Federal income tax rate from 35 percent to 21 percent, a one-time +transition tax on un-repatriated foreign earnings and profits, adjustments to deductible compensation paid to our executive +officers, and 100 percent bonus depreciation on capital expenditures. Under the accounting rules, companies are required to +recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the +new legislation is enacted. As a result, for the year ended December 31, 2017, the Company recorded a discrete tax benefit +adjustment of $19.3 million from revaluing the Company’s net deferred tax liabilities. The Company also evaluated +the impact of the Act on un-repatriated earnings and profits of our foreign subsidiaries and determined the tax to be +negligible. We believe the adjustments resulting from these components of the Act to be complete as of December 31, 2017. +However, the Company has not completed +its accounting for the income tax effects of the Act as it pertains to the deduction for executive compensation, including the +impact for compensation that is paid pursuant to a binding contract that would have been deductible under the prior rules. Due +to the complexity of this provision, additional time is needed to further analyze our executive compensation program, exceptions +under the binding contract rule, the impact of vesting of restricted stock grants, dividends, and bonuses. Additionally, due to +the volume of property, plant and equipment that may be impacted by the Act, we have included a provisional adjustment in our accounting +for tax reform, until additional testing and review of assets that qualify for immediate expensing under the new rules can be performed. +The ultimate impact of the Act may differ +from the recorded amounts due to changes in our interpretations and assumptions, as well as additional regulatory guidance that +may be issued. We expect to complete the accounting for tax reform with the completion of our 2017 Federal income tax return, expected +to be complete by the third quarter of 2018. +Also in 2017, the Company adopted the +amendments of ASU 2016-09 that required excess tax benefits and deficiencies related to the vesting of restricted stock to be recognized +as a component of income tax expense rather than in equity. This resulted in a beneficial discrete adjustment of approximately +$2.8 million to the provision for income taxes in 2017. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +The following table lists the components +of the provision (benefit) for income taxes: +Years ended December 31, +2017 +2016 +2015 +(in thousands) +Current provision (benefit): +Federal +$ 95,995 +$ (43,993 ) +$ (24,727 ) +State +13,966 +(24,479 ) +(3,638 ) +Foreign +2,953 +4,567 +7,898 +Deferred provision (benefit): +Federal +(39,710 ) +(31,505 ) +(31,178 ) +State +(2,899 ) +(2,704 ) +(1,835 ) +Total income tax provision (benefit) +$ 70,305 +$ (98,114 ) +$ (53,480 ) +Reconciliation between the federal statutory +rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2017 +2016 +2015 +Federal statutory rate +35.0 % +35.0 % +35.0 % +State income taxes, net of federal benefit +1.9 +1.3 +- +Tax credits +(0.7 ) +0.1 +0.3 +Non-deductible expenses +2.0 +(0.7 ) +(1.3 ) +Change in contingencies +- +6.6 +— +Adjustments related to the Act +(8.3 ) +Other +0.3 +(1.3 ) +0.9 +Effective tax rate +30.2 % +41.0 % +34.9 % +Significant components of the Company’s +deferred tax assets and liabilities are as follows: +December 31, +2017 +2016 +(in thousands) +Deferred tax assets: +Self-insurance +$ 4,660 +$ 5,907 +Pension +8,730 +11,995 +State net operating loss carryforwards +4,048 +1,455 +Bad debt +1,149 +991 +Accrued payroll +1,117 +857 +Stock-based compensation +3,612 +5,847 +Foreign tax credits +3,592 +- +All others +1,681 +2,483 +Valuation allowance +(3,994 ) +(356 ) +Gross deferred tax assets +24,595 +29,179 +Deferred tax liabilities: +Depreciation +(53,119 ) +(95,606 ) +Goodwill amortization +(6,450 ) +(9,340 ) +Basis differences in consolidated limited liability company +(4,102 ) +(5,281 ) +Basis differences in joint ventures +(355 ) +(396 ) +All others +(6 ) +(22 ) +Gross deferred tax liabilities +(64,032 ) +(110,645 ) +Net deferred tax liabilities +(39,437 ) +$ (81,466 ) +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +As of December 31, 2017, undistributed +earnings of the Company's foreign subsidiaries totaled $8.4 million. In accordance with the Act, the Company has calculated the +impact of a deemed repatriation of these earnings, and has concluded that additional U.S. income taxes upon full repatriation would +be negligible. Accordingly, no U.S. federal and state income taxes have been provided thereon. Under the Act, distribution of these +earnings in the form of dividends or otherwise would be subject to withholding taxes payable to the foreign countries. The Company's +current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception +of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective +through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2017, the Company has +net operating loss carryforwards related to state income taxes of $79.1 million (gross) that will expire between 2018 and 2035. +As of December 31, 2017, the Company has a valuation allowance of $347 thousand, representing the tax-affected amount of loss carryforwards +that the Company does not expect to utilize, against the corresponding deferred tax asset. +Additionally, as of December 31, 2017, +the Company has foreign tax credits totaling $3,591 thousand and capital loss carryforwards of $56 thousand that are not expected +to be utilized, and has a full valuation allowance against the corresponding deferred tax assets. +Total net income tax (refunds) payments +were $98.0 million in 2017, $(42.4) million in 2016, and $(7.9) million in 2015. +The Company and its subsidiaries are subject +to U.S. federal and state income taxes in multiple jurisdictions. In many cases our uncertain tax positions are related to tax +years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2014 through +2017 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an +open year. +In March 2017, the Internal Revenue Service +(IRS) initiated an examination of the Company’s Federal Income Tax Returns for the years 2013 through 2015. As of December +31, 2017, the IRS has not proposed any adjustments with respect to the examination. +The Company’s subsidiaries are also +subject to foreign income taxes in certain jurisdictions. In November 2016, the Canadian Revenue Agency (“CRA”) initiated +an examination of the Company’s Canadian subsidiary for the periods 2013 through 2015. As of December 12, 2017, the CRA concluded +its examination with minimal adjustments. +As of December 31, 2017 and 2016, our +liability for unrecognized tax benefits related primarily to state income taxes did not change and remained at $2,215,000, and +is recognized as a component of other long-term liabilities in the accompanying consolidated balance sheet. The liability, if recognized, +would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2017 +2016 +Balance at January 1 +$ 2,215,000 +$ 26,152,000 +Additions based on tax positions related to the current year +- +- +Additions for tax positions of prior years +- +- +Reductions for tax positions of prior years +- +(23,937,000 ) +Balance at December 31 +$ 2,215,000 +$ 2,215,000 +The Company’s policy is to record +interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2017 +and 2016 were $193 thousand and $76 thousand, respectively. +It is reasonably possible that the amount +of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. +These changes may result from, among other things, state tax settlements under voluntary disclosure agreements, or conclusions +of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time. +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Note 6: Long-Term Debt +The Company has a revolving credit facility +with Banc of America Securities, LLC, SunTrust Robinson Humphrey, Inc., and Regions Capital Markets as Joint Lead Arrangers and +Joint Book Managers, and a syndicate of four other lenders. The facility has a general term of five years ending January 17, +2019 and provides for a line of credit of up to $125 million, including a $50 million letter of credit subfacility, and a $35 million +swingline subfacility. The revolving credit facility contains customary terms and conditions, including restrictions on indebtedness, +dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional +guarantee by the Company's 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets +of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. +On June 30, 2016, the Company amended the +revolving credit facility to (1) establish a borrowing base to be the lesser of (a) $125 million or (b) the difference between +(i) a specified percentage (ranging from 70% to 80%) of eligible accounts receivable less (ii) the amount of any outstanding letters +of credit, (2) secure payment obligations under the credit facility with a security interest in the consolidated accounts receivable, +and (3) replace the financial covenants related to minimum leverage and debt service coverage ratios with a covenant to maintain +a minimum tangible net worth of not less than $700 million. As of December 31, 2017, the Company was in compliance with this covenant. +Revolving loans under the amended revolving +credit facility bear interest at one of the following two rates at the Company’s election: +· the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank +of America’s publicly announced “prime rate,” and (c) the Eurodollar Rate plus 1.00%; in each case plus a margin +that ranges from 0.125% to 1.125% based on a quarterly consolidated leverage ratio calculation; or +· the Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a +margin ranging from 1.125% to 2.125%, based upon a quarterly debt covenant calculation. +In addition, the Company pays an annual +fee ranging from 0.225% to 0.325%, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit +facility. +The Company has incurred loan origination +fees and other debt related costs associated with the revolving credit facility in the aggregate of $3.0 million. These costs, +net of amounts written off as a result of a reduction in the size of the revolving credit facility in 2016, are being amortized +to interest expense over the remaining term of the five-year loan, and the remaining net balance of $123,000 at December 31, 2017 +is classified as part of non-current other assets. +On January 4, 2016, the Company entered +into a separate one year $35 million uncommitted letter of credit facility with Bank of America, N.A. Under the terms of the letter +of credit facility, the Company paid 0.75% per annum on outstanding letters of credit. This letter of credit facility expired on +January 3, 2017. All letters of credit are currently issued under RPC’s $125 million credit facility. Letters of credit outstanding +totaled $19.6 million as of December 31, 2017 and $19.1 million as of December 31, 2016. +As of December 31, 2017, RPC had no outstanding +borrowings under the revolving credit facility. Interest incurred and paid on the credit facility, interest capitalized related +to facilities and equipment under construction, and the related weighted average interest rates were as follows for the periods +indicated: +Years Ended December 31, +2017 +2016 +2015 +(in thousands except interest rate data) +Interest incurred +$ 415 +$ 449 +$ 1,913 +Capitalized interest +$ — +$ — +$ 534 +Interest paid (net of capitalized interest) +$ 181 +$ 284 +$ 1,169 +Weighted average interest rate +— % +— % +2.2 % +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Note 7: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income +consists of the following (in thousands): +Pension +Adjustment +Unrealized +Gain (Loss) On +Securities +Foreign +Currency +Translation +Total +Balance at December 31, 2015 +$ (14,715 ) +$ 36 +$ (3,290 ) +$ (17,969 ) +Change during 2016: +Before-tax amount +(2,039 ) +5 +652 +(1,382 ) +Tax (expense) benefit +744 +(2 ) +— +742 +Reclassification adjustment, net of taxes: +Realized loss on securities +— +— +— +— +Amortization of net loss (1) +507 +— +— +507 +Total activity in 2016 +(788 ) +3 +652 +(133 ) +Balance at December 31, 2016 +$ (15,503 ) +$ 39 +$ (2,638 ) +$ (18,102 ) +Change during 2017: +Before-tax amount +776 +(38 ) +391 +1,129 +Tax (expense) benefit +(283 ) +14 +— +(269 ) +Reclassification adjustment, net of taxes: +Realized loss on securities +— +— +— +— +Amortization of net loss (1) +540 +— +— +540 +Total activity in 2017 +1,033 +(24 ) +391 +1,400 +Balance at December 31, 2017 +$ (14,470 ) +$ 15 +$ (2,247 ) +$ (16,702 ) +(1) Reported as part of selling, general and administrative expenses. +Note 8: Fair Value Disclosures +The various inputs used to measure assets +at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s +assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, +quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which +all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the +full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that +market participants would use. +The following table summarizes the valuation +of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2017 and 2016: +Fair Value Measurements at December 31, 2017 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ 270 +$ 270 +$ — +$ — +Investments measured at net asset value - trading securities +$ 23,463 +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Fair Value Measurements at December 31, 2016 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ 264 +$ 264 +$ — +$ — +Investments measured at net asset value - trading securities +$ 18,367 +The Company determines the fair value +of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing +price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the +number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the +SERP assets, as described in Note 10, and are recorded primarily at their net cash surrender values, calculated using their net +asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition +to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between +levels at the beginning of quarterly reporting periods. For the year ended December 31, 2017 there were no significant transfers +in or out of levels 1, 2 or 3. +Under the Company’s revolving credit +facility, there was no balance outstanding at December 31, 2017 and 2016. Outstanding balances based on the quote from the lender +(level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable +interest rates as described in Note 6. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial +instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the +short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial +instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 9: Commitments and Contingencies +Lease Commitments - Minimum annual +rentals, principally for noncancelable real estate and equipment leases with terms in excess of one year, in effect at December +31, 2017, are summarized in the following table: +(in thousands) +2018 +$ 11,555 +2019 +9,365 +2020 +6,139 +2021 +4,787 +2022 +3,955 +Thereafter +2,909 +Total rental commitments +$ 38,710 +Total rental expense, including short-term +rentals, charged to operations was $17,112,000 in 2017, $15,723,000 in 2016, and $20,658,000 in 2015. +Income Taxes - The amount of income +taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company +has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could +result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other taxes. +Litigation - RPC is a party to +various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal +injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the +nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future +legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot +be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that +the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s +business or financial condition. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Note 10: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income +Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees +with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation +as an adopting employer. +The Company’s projected benefit +obligation exceeds the fair value of the plan assets under its pension plan by $8.3 million and thus the plan was under-funded +as of December 31, 2017. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized +in RPC’s consolidated balance sheets: +December 31, +2017 +2016 +(in thousands) +Accumulated benefit obligation at end of year +$ 46,397 +$ 44,315 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ 44,315 +$ 42,894 +Service cost +— +— +Interest cost +1,932 +2,006 +Amendments +— +— +Actuarial loss +2,206 +1,371 +Benefits paid +(2,056 ) +(1,956 ) +Projected benefit obligation at end of year +$ 46,397 +$ 44,315 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ 34,745 +$ 30,937 +Actual return on plan assets +5,361 +1,464 +Employer contribution +— +4,300 +Benefits paid +(2,056 ) +(1,956 ) +Fair value of plan assets at end of year +$ 38,050 +$ 34,745 +Funded status at end of year +$ (8,347 ) +$ (9,570 ) +December 31, +2017 +2016 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss +$ 22,762 +$ 24,412 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ 22,762 +$ 24,412 +The accumulated benefit obligation for +the Retirement Income Plan at December 31, 2017 and 2016 has been disclosed above. The Company uses a December 31 measurement date +for this qualified plan. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Amounts recognized in the consolidated +balance sheets consist of: +December 31, +2017 +2016 +(in thousands) +Funded status of the Retirement Income Plan +$ (8,347 ) +$ (9,570 ) +SERP liability +(27,288 ) +(23,294 ) +Long-term pension liabilities +$ (35,635 ) +$ (32,864 ) +RPC’s funding policy is to contribute +to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. Amounts +contributed to the plan totaled $4,300,000 in 2016 and no contributions were made in 2017. +The components of net periodic benefit +cost of the Retirement Income Plan are summarized as follows: +Years ended December 31, +2017 +2016 +2015 +(in thousands) +Service cost for benefits earned during the period +$ — +$ — +$ — +Interest cost on projected benefit obligation +1,932 +2,006 +1,898 +Expected return on plan assets +(2,356 ) +(2,131 ) +(2,259 ) +Amortization of net loss +851 +799 +790 +Net periodic benefit plan cost +$ 427 +$ 674 +$ 429 +The Company recognized pre-tax (increases) +decreases to the funded status in accumulated other comprehensive loss of $(1,650,000) in 2017, $1,240,000 in 2016, and $(2,411,000) +in 2015. There were no previously unrecognized prior service costs as of December 31, 2017, 2016 and 2015. The pre-tax amounts +recognized in accumulated other comprehensive loss for the years ended December 31, 2017, 2016 and 2015 are summarized as follows: +(in thousands) +2017 +2016 +2015 +Net (gain) loss +$ (799 ) +$ 2,039 +$ (1,621 ) +Amortization of net loss +(851 ) +(799 ) +(790 ) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ (1,650 ) +$ 1,240 +$ (2,411 ) +The amounts in accumulated other comprehensive +loss expected to be recognized as components of net periodic benefit cost in 2018 are as follows: +(in thousands) +2018 +Amortization of net loss +$ 775 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ 775 +The weighted average assumptions as of +December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2017 +2016 +2015 +Projected Benefit Obligation: +Discount rate +4.00 % +4.45 % +4.70 % +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.45 % +4.70 % +4.15 % +Expected return on plan assets +7.00 % +7.00 % +7.00 % +Rate of compensation increase +N/A +N/A +N/A +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +The Company’s expected return on +assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes +a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation +strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested +to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical +returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, +the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +The plan’s weighted average asset +allocation at December 31, 2017 and 2016 by asset category along with the target allocation for 2018 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2018 +2017 +2016 +Asset Category +Cash and cash equivalents +0% - 3.0% +2.8 % +3.3 % +Fixed income securities +15% +- 25.0% +23.8 % +25.3 % +Domestic equity securities +0% +- 40.0% +42.4 % +25.5 % +International equity securities +0% +- 20.0% +20.7 % +20.8 % +Investments measured at net asset value +0% +- 12.0% +10.3 % +25.1 % +Total +100.0 % +100.0 % +The Company’s overall investment +strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit +payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments +in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, +mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and +private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, +the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk +in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset +class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual +market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this +target allocation. Although not required, Company management will evaluate contributing to the pension plan during 2018. +Some of our assets, primarily our private +equity and real estate funds, do not have readily determinable market values given the specific investment structures involved +and the nature of the underlying investments. For plan asset reporting as of December 31, 2017, publicly traded asset pricing was +used where possible. For assets without readily determinable values, estimates were derived from investment manager statements +combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued +based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant +non-observable inputs which do not have a readily determinable fair value. These assets have been excluded from the fair value +hierarchy applied retrospectively based on accounting guidance. The valuations are subject to judgments and assumptions of the +funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate +these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included +in the funds’ financial statements for reasonableness. +The following tables present our plan assets +using the fair value hierarchy as of December 31, 2017 and 2016. The fair value hierarchy has three levels based on the reliability +of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy. +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Fair Value Hierarchy as of December 31, 2017: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1 ) +$ 1,084 +$ 1,084 +$ — +Fixed Income Securities +(2 ) +9,064 +— +9,064 +Domestic Equity Securities +(3 ) +16,103 +5,930 +10,173 +International Equity Securities +(4 ) +7,889 +— +7,889 +Total Assets in the Fair Value Hierarchy +$ 34,140 +$ 7,014 +$ 27,126 +Investments measured at Net Asset Value +3,910 +Investments at Fair Value +$ 38,050 +Fair Value Hierarchy as of December 31, 2016: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1 ) +$ 1,154 +$ 1,154 +$ — +Fixed Income Securities +(2 ) +8,804 +— +8,804 +Domestic Equity Securities +(3 ) +8,865 +4,469 +4,396 +International Equity Securities +(4 ) +7,215 +— +7,215 +Total Assets in the Fair Value Hierarchy +$ 26,038 +$ 5,623 +$ 20,415 +Investments measured at Net Asset Value +8,707 +Investments at Fair Value +$ 34,745 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market +funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, +base spreads and reported trades. +(3) Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in +their respective markets. +(4) International equity securities are valued using a market approach based on the quoted market prices of identical instruments +in their respective markets. +The Company estimates that the future +benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2018 +$ 2,543 +2019 +2,614 +2020 +2,659 +2021 +2,748 +2022 +2,788 +2023-2027 +14,490 +Supplemental Executive Retirement Plan (SERP) +The Company +permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested +primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. +The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in +COLI policies consisted of $51.0 million in variable life insurance policies as of December 31, 2017 and $47.7 million as of December +31, 2016. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by +the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash +surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s +credit rating was A+. +The Company +classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $23,463,000 as +of December 31, 2017 and $18,367,000 as of December 31, 2016. The SERP assets are reported in other assets on the balance sheet. +The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations +as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled +$3,156,000 in 2017, $966,000 in 2016, and $(519,000) in 2015. The SERP liability is recorded on the balance sheet in long-term +pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general +and administrative expenses in the consolidated statements of operations. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +401(k) Plan +RPC sponsors a defined contribution 401(k) +plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees +to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution +imposed by the Internal Revenue Code. RPC matches 50 percent of each employee’s contributions that do not exceed six percent +of the employee’s compensation, as defined by the plan. Employees vest in the RPC contributions after three years of service. +The charges to expense for the Company’s contributions to the 401(k) plan were $4,509,000 in 2017, $3,250,000 in 2016, and +$4,796,000 in 2015. +Stock Incentive Plans +The Company has issued stock options and +restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. +The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common +stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance +of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. +As of December 31, 2017, 5,788,992 shares were available for grant. +The Company recognizes compensation expense +for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these +awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the +time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based +payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) +are classified as a financing activity in the accompanying consolidated statements of cash flows. +Pre-tax stock-based employee compensation +expense was $11,090,000 in 2017 ($7,042,000 after tax), $10,218,000 in 2016 ($6,488,000 after tax), and $9,960,000 in 2015 ($6,325,000 +after tax). +Stock Options +Stock options are granted at an exercise +price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock +options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the +fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in +10 years, except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, +which expire in five years. +The Company estimates the fair value of +stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to +employees since 2003 and there are none outstanding. There were no stock options exercised during 2017, 2016 or 2015 and there +are no stock options outstanding as of December 31, 2017. +Restricted Stock +The Company has granted employees time lapse +restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse +restricted shares issued vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive +dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides +that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. +Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially vests based +on duration of service), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2017: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2017 +3,217,075 +$ 12.91 +Granted +563,065 +21.66 +Vested +(900,051 ) +13.34 +Forfeited +(143,724 ) +14.25 +Non-vested shares at December 31, 2017 +2,736,365 +$ 14.50 +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2016: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2016 +3,312,175 +$ 13.17 +Granted +920,100 +10.77 +Vested +(891,245 ) +11.58 +Forfeited +(123,955 ) +13.41 +Non-vested shares at December 31, 2016 +3,217,075 +$ 12.91 +The fair value of restricted share awards +is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net +of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value +per share of these restricted stock awards was $21.66 for 2017, $10.77 for 2016 and $12.30 for 2015. The total fair value of shares +vested was $19,480,000 during 2017, $9,751,000 during 2016 and $12,727,000 during 2015. +Pursuant to the adoption of ASU 2016-09 +in 2017, the classification of excess tax benefits realized from tax compensation deductions in excess of compensation expense +have been reflected as follows: +· $2,803,000 for 2017 has been recorded as a discrete income tax adjustment and classified within operating activities as part +of net income in the consolidated statements of cash flows; and +· $427,000 for 2016 and $1,410,000 for 2015 were credited to capital in excess of par value and classified within financing activities +as an inflow in addition to being disclosed as an outflow within operating activities in the consolidated statements of cash flows. +Other Information +As of December 31, 2017, total unrecognized +compensation cost related to non-vested restricted shares was $39,779,000 which is expected to be recognized over a weighted-average +period of 3.3 years. +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition +Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, +including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from +the Company (or from corporations that are subsidiaries of the Company) for such services were $849,000 in 2017, $739,000 in +2016, and $753,000 in 2015. The Company’s receivable due from Marine Products for these services was $47,000 as of +December 31, 2017 and $60,000 as of December 31, 2016. Many of the Company’s directors are also directors of Marine +Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,372,000 in 2017, $890,000 in 2016 and $1,127,000 +in 2015. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $104,000 in 2017, $111,000 in 2016 and $100,000 in 2015. +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent +each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $197,000 +in 2017 and 2016, and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2017, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +Note 12: Business Segment and Entity wide Disclosures +RPC’s reportable segments are +the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical +Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and +are closely aligned with completion and production activities of the customers. Support Services is comprised of service +lines which generate revenue from services and equipment offered off the well site and are closely aligned with the +customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are +classified as Corporate. +Technical Services consists primarily +of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered +under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be +closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based +on this operating segment as a whole across these various services. +Support Services consist primarily of +drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. +The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision +Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth +and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +Segment Revenues: +RPC’s operating segment revenues +by major service lines are shown in the following table: +(in thousands) +2017 +2016 +2015 +Technical Services: +Pressure Pumping +$ 993,538 +$ 336,550 +$ 676,415 +Downhole Tools +294,606 +169,754 +229,902 +Coiled Tubing +109,462 +70,511 +112,923 +Nitrogen +38,961 +37,172 +53,488 +Snubbing +23,838 +18,903 +38,912 +All other +77,946 +46,764 +63,653 +Total Technical Services +$ 1,538,351 +$ 679,654 +$ 1,175,293 +Support Services: +Rental Tools +$ 30,264 +$ 21,443 +$ 45,126 +All other +26,612 +27,877 +43,421 +Total Support Services +$ 56,876 +$ 49,320 +$ 88,547 +Total Revenues +$ 1,595,227 +$ 728,974 +$ 1,263,840 +The accounting policies of the reportable +segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of +its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are +reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. +Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices +for arm’s length transactions and are not material to operating results. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +Summarized financial information concerning +RPC’s reportable segments for the years ended December 31, 2017, 2016 and 2015 are shown in the following table: +(in thousands) +Technical +Services +Support +Services +Corporate +Gain (loss) +on disposition of +assets, net +Total +2017 +Revenues +$ 1,538,351 +$ 56,876 +$ — +$ — +$ 1,595,227 +Operating profit (loss) +251,476 +(12,228 ) +(17,561 ) +4,530 +226,217 +Capital expenditures +106,131 +9,949 +1,429 +— +117,509 +Depreciation and amortization +145,507 +17,570 +460 +— +163,537 +Identifiable assets +896,803 +75,568 +174,853 +— +1,147,224 +2016 +Revenues +$ 679,654 +$ 49,320 +$ — +$ — +$ 728,974 +Operating (loss) profit +(203,804 ) +(26,021 ) +(17,037 ) +7,920 +(238,942 ) +Capital expenditures +28,380 +2,928 +2,630 +— +33,938 +Depreciation and amortization +191,181 +25,606 +471 +— +217,258 +Identifiable assets +733,008 +76,876 +225,568 +— +1,035,452 +2015 +Revenues +$ 1,175,293 +$ 88,547 +$ — +$ — +$ 1,263,840 +Operating loss +(132,982 ) +(2,363 ) +(14,515 ) +(6,417 ) +(156,277 ) +Capital expenditures +155,361 +11,055 +1,010 +— +167,426 +Depreciation and amortization +237,778 +32,697 +502 +— +270,977 +Identifiable assets +976,761 +108,262 +152,071 +— +1,237,094 +The following summarizes revenues for the +United States and separately for all international locations combined for the years ended December 31, 2017, 2016 and 2015. The +revenues are presented based on the location of the use of the equipment or services. Assets related to international operations +are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2017 +2016 +2015 +(in thousands) +United States Revenues +$ 1,539,462 +$ 677,755 +$ 1,191,704 +International Revenues +55,765 +51,219 +72,136 +$ 1,595,227 +$ 728,974 +$ 1,263,840 +60 +Item 9. Changes in and Disagreements with Accountants on +Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2017 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 33 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2017 and issued a report thereon which +is included on page 34 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive +officers will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders, in the section titled “Election +of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on +Page 14 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee +of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2018 Annual Meeting +of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit +Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct +that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers +and Related Party Transaction Policy. Both of these documents are available on the Company’s Web site at www.rpc.net. Copies +are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 520, N.E., Atlanta, +GA 30329. +RPC, Inc. intends to satisfy the disclosure +requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements +of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which +is provided above. +61 +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section +16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s +Proxy Statement for its 2018 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive +compensation will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders, in the sections titled “Compensation +Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and +Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated +herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners +and Management and Related Stockholder Matters +Information concerning +security ownership will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders, in the sections “Capital +Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance +Under Equity Compensation Plans +The following table sets forth certain +information regarding equity compensation plans as of December 31, 2017. +Plan category +(A) +Number of Securities To +Be Issued Upon Exercise +of Outstanding Options, +Warrants and Rights +(B) +Weighted Average +Exercise Price of +Outstanding Options, +Warrants and Rights +(C) +Number of Securities Remaining +Available for Future Issuance +Under Equity Compensation +Plans (Excluding Securities +Reflected in Column (A)) +Equity compensation plans approved by securityholders +— +$ — +5,778,992 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ — +5,778,992 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 10 to the Consolidated Financial +Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant +fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC +Proxy Statement for its 2018 Annual Meeting of Stockholders. This information is incorporated herein by reference. +62 +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement +Schedule and Exhibits +1. Consolidated +financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this +report. +2. The financial statement +schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this report. +3. Exhibits +listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts +or compensatory plans or arrangements: +10.1 2004 +Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed +on March 24, 2004). +10.6 Form of Time Lapse +Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated +herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit +10.14 to the Form 10-K filed on March 2, 2007). +10.10 Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, +2006). +10.11 Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form +10-K filed on March 3, 2010). +10.14 Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May +2, 2012). +10.15 Summary of Compensation Arrangements with Non-Employee Directors. +10.17 2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement +filed on March 17, 2014). +10.20 Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit +10.20 to the Form 10-K filed on February 28, 2017). +63 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2017). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by +and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine +Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine +Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine +Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine +Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors. +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, +N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to +Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +64 +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +65 +SIGNATURES +Pursuant to the requirements of Section 13 +or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, +thereunto duly authorized. +RPC, Inc. +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2018 +Pursuant to the requirements of the Securities +Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities +and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer (Principal Executive Officer) +February 28, 2018 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) +February 28, 2018 +The Directors of RPC (listed below) executed +a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +Amy Rollins Kreisler, Director +Gary W. Rollins, Director +Bill J. Dismuke, Director +Henry B. Tippie, Director +Larry L. Prince, Director +James B. Williams, Director +/s/ Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 28, 2018 +66 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following +documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +32 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +33 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +34 +Consolidated Balance Sheets as of December 31, 2017 and 2016 +35 +Consolidated Statements of Operations for the three years ended December 31, 2017 +36 +Consolidated Statements of Comprehensive (Loss) Income for the three years ended December 31, 2017 +37 +Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2017 +38 +Consolidated Statements of Cash Flows for the three years ended December 31, 2017 +39 +Notes to Consolidated Financial Statements +40 - 60 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +67 +Schedules not listed above have been omitted +because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +SCHEDULE II — VALUATION AND QUALIFYING +ACCOUNTS +For the years ended +December 31, 2017, 2016 and 2015 +(in thousands) +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Net (Deductions) +Recoveries +Balance +at End of +Period +Year ended December 31, 2017 +Allowance for doubtful accounts +$ 2,553 +$ 1,441 +$ 477 (1) +$ 4,471 +Deferred tax asset valuation allowance +$ 356 +$ 3,638 (2) +$ — +$ 3,994 +Reserve for obsolete or slow moving inventory +$ 3,052 +$ 5,869 +$ (5,046 ) (3) +$ 3,875 +Year ended December 31, 2016 +Allowance for doubtful accounts +$ 10,605 +$ 6,021 +$ (14,073 ) (1) +$ 2,553 +Deferred tax asset valuation allowance +$ 276 +$ 80 (2) +$ — +$ 356 +Reserve for obsolete or slow moving inventory +$ 2,588 +$ 6,401 +$ (5,937 ) (3) +$ 3,052 +Year ended December 31, 2015 +Allowance for doubtful accounts +$ 15,351 +$ (2,958 ) +$ (1,788 ) (1) +$ 10,605 +Deferred tax asset valuation allowance +$ 2 +$ 274 (2) +$ — +$ 276 +Reserve for obsolete or slow moving inventory +$ 651 +$ 2,272 +$ (335 ) (3) +$ 2,588 +(1) Net (deductions) recoveries in the allowance for doubtful accounts principally reflect the write-off of previously reserved +accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state net operating losses, +foreign tax credits and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or +disposal of previously reserved inventory. +67 +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2017 +Revenues +$ 298,119 +$ 398,810 +$ 470,999 +$ 427,299 +Operating profit +$ 1,574 +$ 67,002 +$ 97,357 +$ 60,284 +Net income (b) +$ 3,634 +$ 43,840 +$ 57,334 +$ 57,703 +Net income per share — basic (a) (b) +$ 0.02 +$ 0.20 +$ 0.26 +$ 0.27 +Net income per share — diluted (a) (b) +$ 0.02 +$ 0.20 +$ 0.26 +$ 0.27 +2016 +Revenues +$ 189,095 +$ 142,998 +$ 175,884 +$ 220,997 +Operating loss +$ (75,087 ) +$ (75,222 ) +$ (56,417 ) +$ (32,216 ) +Net loss +$ (32,511 ) +$ (48,686 ) +$ (38,942 ) +$ (21,107 ) +Net loss per share — basic (a) +$ (0.15 ) +$ (0.23 ) +$ (0.18 ) +$ (0.10 ) +Net loss per share — diluted (a) +$ (0.15 ) +$ (0.23 ) +$ (0.18 ) +$ (0.10 ) +(a) The sum of the income (loss) per share for the four quarters may differ from annual amounts due to the required method of +computing the weighted average shares for the respective periods. +(b) The indicated Statement of Operations data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or +$0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. +68 \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/filing_metadata.csv b/raw/filings/0000742278/2017/0001144204-18-011709/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..9db7ac4e6c33b7f5c7f7c87bff4791a98b47c30e --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2018-02-28,2017-12-31,2018-02-28T20:21:05.000Z,0001144204-18-011709,tv486693_10k.htm,10-K,6307714,1,0,https://www.sec.gov/Archives/edgar/data/742278/000114420418011709/tv486693_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000114420418011709/,2017,2017,1 diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/item1.txt b/raw/filings/0000742278/2017/0001144204-18-011709/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..726afc696ba7de24ce0a6c4edeea08f41e3ab25e --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/item1.txt @@ -0,0 +1,379 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range +of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in +the exploration, production and development of oil and gas properties throughout the United States, including the +southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC +acts as a holding company for the following legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson +Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC +is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2017, +RPC had approximately 3,500 employees. +2 +Business Segments +RPC manages its business as either services +offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site +(Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment +and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the +operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily +able to generate revenues through equipment or services offered off the well site. During 2017, less than two percent of RPC’s +consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. We also estimate that 70 percent +of our 2017 revenues were related to drilling and production activities for oil, and 30 percent were related to drilling and production +activities for natural gas. +Technical Services include RPC’s +oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected +nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. +The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical +processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services +to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions +based on this operating segment as a whole across these various services. The principal markets for this business segment include +the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected +international markets. +Support Services include all of the +services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in +support of customer operations off the well site such as classroom and computer training, and other consulting services. The +primary drivers of operational success for services and equipment provided off the well site without RPC personnel are +offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of +operational success for the other Support Services relate to meeting customer needs off the well site and competitive +marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe +handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services +tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include +the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in +selected international locations in the last three years, including primarily Canada, Latin America and the Middle East. +Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and +selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping +services, which accounted for approximately 62 percent of 2017 revenues, 46 percent of 2016 revenues and 54 percent of 2015 revenues +are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily +provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. +Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping +service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. +Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, +these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping +services offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into +the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for approximately 19 percent of 2017 revenues, 23 percent of 2016 revenues and 18 percent of 2015 +revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes +to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling +at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling +and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment +with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for approximately seven percent of revenues in 2017, 10 percent of revenues in 2016 and nine percent of revenues +in 2015, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in +well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter +of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can +be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal +advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during +such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional +pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields +due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are +also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple +entrances in a wellbore in order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish +this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in +this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be +conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved +fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, +thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are +several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply +are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for approximately two percent of revenues in 2017 and three percent of revenues +in 2016 and 2015, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing +and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole +equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing +the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications +at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing +segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required +to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer +reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe +conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for approximately +two percent of revenues in 2017, five percent of revenues in 2016 and four percent of revenues in 2015. There are a number of uses +for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the +oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various +drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production +has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium +for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is +a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping +service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used +in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services +are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use +various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, +and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process +is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for approximately two percent of revenues in 2017, three percent of revenues in 2016 and four percent of revenues in 2015. The +Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. +The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in +large part determined by the geological features of the production zone and the size of the well itself. As a result, operators +and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of +owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for +oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad +range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 12 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost +sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 79 percent from its peak in +1981. However, due to continuously enhanced rig and other completion technologies, more wells are drilled during periods of +strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of natural +gas rose to record levels in the third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 +reached its highest level since the third quarter of 1971. With the decline in domestic drilling and completion activities +beginning in early 2015, domestic production of both natural gas and oil began to decline during the third and fourth +quarters of 2015, although production continues to remain high in comparison to historical levels. Oil and gas industry +activity levels have historically been volatile, experiencing multiple cycles, including six down cycle troughs between 1981 +and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. oilfield history. The rig count during the peak of +the most recent cycle occurred at the end of the third quarter of 2014, and began to decline sharply during the fourth +quarter of 2014. The rig count continued to decline in 2015 and 2016, until June of 2016 when it stabilized and began to +increase. Early in 2018, the rig count had recovered by approximately 141 percent from the historical low set during the +second quarter of 2016, but was still approximately 51 percent lower than the cyclical peak in the third quarter of 2014. +Because of the increased efficiency of drilling +rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to +RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so +they are an important indicator of the demand for RPC’s services. From a cyclical peak of 21,355 wells completed during 2014, +well completions fell by 62.3 percent to 8,060 in 2016. During 2017, well completions in the U.S. +increased by 39.9 percent compared to 2016, but were still 47.2 percent lower than 2014 well completions. +6 +The fluctuations in domestic drilling activity +since the third quarter of 2014 peak are consistent with global supply of and demand for oil, the domestic supply of and demand +for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar on world currency +markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the price of oil fell by approximately +78 percent from the cyclical peak in the third quarter of 2014. From its low price in early 2016, the price of oil had risen approximately +122 percent by early in the first quarter of 2018. RPC believes that the increase in the price of oil since early 2016 is due to +increasing global demand, the moderation of global supply, and the belief that the actions of the Organization of the Petroleum +Exporting Countries (OPEC) to moderate that cartel’s production will be effective. The price of natural gas fell during this +time as well, declining by approximately 42 percent from the beginning of 2015 to the second quarter of 2016. Early in the first +quarter of 2018, however, the price of natural gas had risen by approximately 122 percent from the low recorded in the second quarter +of 2016, and was approximately 10 percent higher than its price at the same time in 2017. Early in 2018, the price of oil was high +enough to encourage increased drilling and production activity, but the price of natural gas had not reached levels that were adequate +to encourage natural gas-directed drilling activity in the U.S. domestic oilfield. In addition to oil and natural gas, the price +of natural gas liquids is a determinant of our customers’ activity levels, since it is produced in many of the shale resource +plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural +gas. During 2017 the average price of natural gas liquids increased by approximately 58 percent compared to 2016. Early in the +first quarter of 2018, the price of natural gas liquids had increased by approximately 18 percent compared to the average price +in 2017. The fluctuations in the prices of these commodities, and in particular, the extreme volatility in the price of oil, significantly +impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented +over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, +and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, +the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. Early +in the first quarter of 2018, the natural gas drilling rig count had risen by approximately 124 percent, although it remains very +low by historical standards. Although the demand for natural gas has remained stable, the price of natural gas has fallen in recent +years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed +wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, +unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree, and for several years, +the United States has exported increasing volumes of natural gas to other countries. We anticipate that oil-directed drilling will +continue to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that natural +gas-directed drilling will increase due to the lack of natural gas production from oil-directed drilling and increased natural +gas demand from U.S. exports of natural gas and changes in demand due to increased use of natural gas as a transportation fuel +or for other purposes. We continue to believe in the long-term growth opportunities for our business due to the continued high +demand for hydrocarbons generally and the growing production of oil in the domestic U.S. market in particular. Furthermore, we +note that the techniques used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services +that RPC provides to its customers. +Unconventional wells generate a higher demand +for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling +and during the fourth quarter of 2017 and early in the first quarter of 2018, have reached a historical high of approximately 93 +percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, +they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. +Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and +drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types +of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for approximately four percent +of RPC’s consolidated revenues in 2017, seven percent in 2016 and six percent in 2015. RPC’s allocation of growth capital +over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels +and expected financial returns. International revenues increased 9.1 percent in 2017 compared to the prior year primarily due to +higher customer activity levels in Canada, Argentina, Kuwait and Colombia, partially offset by decreased activity in Gabon and +Bolivia. During 2017, RPC provided snubbing services in Gabon. We also provided downhole motors and tools in Argentina, Canada, +China and Oman, and rental tools in Bolivia. We continue to focus on the selected development of international opportunities in +these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2018. +7 +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions +of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate +large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is the lesser of $125 million, or +a specified percentage of eligible accounts receivable, less the amount of any outstanding letters of credit. There was no outstanding +balance on this credit facility as of December 31, 2017. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2017, RPC provided oilfield services to several hundred +customers. Of these customers, there were no customers in 2017 or 2016 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales +force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital +expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering +services or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our services. +Competition +RPC operates in highly competitive areas +of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller +oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. +More recently, however, an improving industry environment and the positive outlook on the industry from the financial markets have +facilitated the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded +or newly formed companies will increase competitive pressures during the near term, as they seek to provide services to our existing +customers at lower prices, and hire experienced personnel from more established companies such as RPC. Pricing for our services +has improved significantly during 2017, but remains below the highest levels experienced during the most recent period of strong +industry activity in 2014. RPC believes that the principal competitive factors in the market areas that it serves are product availability +and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical +proficiency, and price. +8 +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker +Hughes, a GE Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations +are more similar to RPC, including Basic Energy Services, C&J Energy Services, Keane Group, Inc., Liberty Oilfield Services, +Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Service, Patterson-UTI Energy, Inc., ProPetro Holding +Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed +deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, +Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. +For additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent +to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations +which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/item13.txt b/raw/filings/0000742278/2017/0001144204-18-011709/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..0df29fdde916c69b7cbd5f76f1e4e7ecdd045a2b --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/item13.txt @@ -0,0 +1,7 @@ +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2018 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/item9a.txt b/raw/filings/0000742278/2017/0001144204-18-011709/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a29828f9dc5b5ec1ba1e2344ba80fdfb8aa290af --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/item9a.txt @@ -0,0 +1,22 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2017 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 33 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2017 and issued a report thereon which +is included on page 34 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/rp_note.txt b/raw/filings/0000742278/2017/0001144204-18-011709/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..8951be39d6b2c7c8487aa4e6b225d73a074fc6f8 --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/rp_note.txt @@ -0,0 +1,43 @@ +Note 11: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition +Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, +including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from +the Company (or from corporations that are subsidiaries of the Company) for such services were $849,000 in 2017, $739,000 in +2016, and $753,000 in 2015. The Company’s receivable due from Marine Products for these services was $47,000 as of +December 31, 2017 and $60,000 as of December 31, 2016. Many of the Company’s directors are also directors of Marine +Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,372,000 in 2017, $890,000 in 2016 and $1,127,000 +in 2015. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $104,000 in 2017, $111,000 in 2016 and $100,000 in 2015. +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2017, 2016 and 2015 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent +each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $197,000 +in 2017 and 2016, and $186,000 in 2015 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2017, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. \ No newline at end of file diff --git a/raw/filings/0000742278/2017/0001144204-18-011709/rpt_disclosure.txt b/raw/filings/0000742278/2017/0001144204-18-011709/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba3aa72e97473e60aefbd2c7c50fa082fdfd20b3 --- /dev/null +++ b/raw/filings/0000742278/2017/0001144204-18-011709/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $849,000 in 2017. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2017, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $197,000 for the corporate aircraft. +During 2017, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2017, payments totaling approximately $1,372,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $104,000 in 2017. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of +27 +interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2017 were reviewed, approved and/or ratified by the Nominating and Governance Committee in accordance with the Code. \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/filing.txt b/raw/filings/0000742278/2018/0001144204-19-011175/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..0cb9acbdaf33da02dd37fe0b0930d23d81f1a268 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/filing.txt @@ -0,0 +1,4786 @@ +10-K +1 +tv514318_10k.htm +FORM 10-K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +x +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +¨ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, +2018 +Commission File No. 1-8726 +RPC, +INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 520 +ATLANTA, GEORGIA 30329 +(404) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered +pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the +registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No +Indicate +by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ +Yes x No +Indicate +by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange +Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), +and (2) has been subject to such filing requirements for the past 90 days. Yes x +No ¨ +Indicate +by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant +to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that +the registrant was required to submit such files). Yes x No +¨ +Indicate +by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be +contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference +in Part III of this Form 10-K or any amendment to this Form 10-K. x +Indicate by check mark whether the registrant +is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of +“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 +of the Exchange Act. (Check one): +Large accelerated filer x +Accelerated filer ¨ +Non-accelerated filer ¨ +Smaller reporting company ¨ +Emerging growth company ¨ +If an emerging +growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with +any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ +Indicate by check mark whether the +registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x +The aggregate market value of RPC, Inc. +Common Stock held by non-affiliates on June 30, 2018, the last business day of the registrant’s most recently completed second +fiscal quarter, was $814,644,000 based on the closing price on the New York Stock Exchange on June 29, 2018 of $14.57 per share. +RPC, Inc. had 215,210,657 shares of Common +Stock outstanding as of February 15, 2019. +Documents Incorporated by Reference +Portions of the Proxy Statement for the +2019 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, +Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that are not historical +facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking +statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs +and expectations regarding future demand for our equipment and services and other events and conditions that may influence the +oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include without +limitation statements regarding natural gas prices, production levels and drilling activities; our belief that oil-directed drilling +will continue to represent the majority of the total drilling rig activity; our belief that the long-term demand outlook for natural +gas is favorable and that natural gas-directed drilling will increase over the long-term; our continued belief in the long-term +growth opportunities for our business; our expectation to continue to focus on the development of international business opportunities +in current and other international markets; our expectations regarding acquisition targets in our industry; the adequacy of our +insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our belief that +industry factors will continue to depress natural gas directed drilling activity during the near-term; our belief that U.S. oilfield +activity will remain at its current level or decline during the near-term; our belief that the price of oil early in the first +quarter of 2019 carries negative implications for RPC’s near-term activity level, revenues and earnings; our belief that +oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage +of U.S. domestic drilling in the near-term; our belief that indications early in 2019 are that the rig count will decline during +the near-term; the fact that drilling and completion activities continue to be highly service-intensive and require a large amount +of equipment and raw materials carries favorable implications for our activity levels; our belief that operators will complete +many of previously drilled but not completed wells in the near-term and that this may provide potential revenue for our completion-directed +services; higher industry efficiencies have caused the market for several oil completion services including pressure pumping to +be oversupplied and that this development carries negative consequences for pricing of our services, utilization of our equipment +and our financial results during the near-term; our belief that newly acquired and ordered equipment will provide acceptable financial +returns when placed in service; our plans to undertake moderate fleet expansions which will allow us to maintain a strong balance +sheet; our belief that declining activity levels may reduce the costs of providing our services and reduce logistical constraints; our expectations about contributions to the defined benefit pension +plan in 2019; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual +obligations for future periods; our expectations to continue to pay regular quarterly cash dividends; our expectations regarding +the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical +accounting policies; the effect of new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated +results of operations or financial condition. +The words “may,” “will,” +“expect,” “believe,” “anticipate,” “project,” “estimate,” and similar +expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by +our management in light of its experience and its perception of historical trends, current conditions, expected future developments +and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of +future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking +statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ +from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +2 +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following +legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized +support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support +Services which are its operating segments. As of December 31, 2018, RPC had approximately 3,600 employees. +Business Segments +RPC manages its business as either services +offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site +(Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment +and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the +operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily +able to generate revenues through equipment or services offered off the well site. During 2018, approximately three percent of +RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2018, we also estimate +that 85 percent of our revenues were related to drilling and production activities for oil, while 15 percent of revenues were related +to drilling and production activities for natural gas. +Technical Services include RPC’s +oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected +nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. +The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical +processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services +to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions +based on this operating segment as a whole across these various services. The principal markets for this business segment include +the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected +international markets. +Support Services include all of the services +that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer +operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational +success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand +equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate +to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include +rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting +services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal +markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian +regions and project work in selected international locations in the last three years, including primarily Canada, Latin America +and the Middle East. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals +and selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping +services, which accounted for 55 percent of 2018 revenues, 62 percent of 2017 revenues and 46 percent of 2016 revenues are provided +to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these +services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure +pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service +offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal +materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these +items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services +offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into +the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for 25 percent of 2018 revenues, 19 percent of 2017 revenues and 23 percent of 2016 revenues. TTS +provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators +and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion +stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for six percent of revenues in 2018, seven percent of revenues in 2017 and 10 percent of revenues in 2016, involve +the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations +and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches +manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing +production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing +coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the +ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to +direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size +and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion +activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in +order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation +because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. +At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well +effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques +and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing +them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers +of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for one percent of revenues in 2018, two percent of revenues in 2017 and three +percent of revenues in 2016, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production +tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace +downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without +removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform +many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails +high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience +and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional +completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited +range than drill pipe conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for three +percent of revenues in 2018, two percent of revenues in 2017 and five percent of revenues in 2016. There are a number of uses for +nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. +For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling +applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. +It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing +service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium +and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, +because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or +acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services +are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use +various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, +and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process +is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for three percent of revenues in 2018, two percent of revenues in 2017 and three percent of revenues in 2016. The Company rents +specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling +and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined +by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors +often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of +assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in +Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad +range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 13 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources +of oil internationally, the drilling rig count in the U.S. has declined by approximately 77 percent from its peak in 1981. However, +due to continuously enhanced rig and other technologies, more wells are drilled during periods of strong industry activity, and +these wells are increasingly productive. For these reasons, the domestic production of natural gas rose to record levels in the +third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 reached its highest level since the third +quarter of 1971. With the decline in domestic drilling and completion activities beginning in early 2015, domestic production of +both natural gas and oil began to decline during the third and fourth quarters of 2015, although production continues to remain +high in comparison to historical levels. Oil and gas industry activity levels have historically been volatile, experiencing multiple +cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. +oilfield history. The rig count during the peak of the most recent cycle occurred at the end of the third quarter of 2014, and +began to decline sharply during the fourth quarter of 2014. The rig count continued to decline in 2015 and 2016, until June of +2016 when it stabilized and began to increase. Early in 2019, the rig count had recovered by approximately 159 percent from the +historical low set during the second quarter of 2016, but was still approximately 46 percent lower than the cyclical peak in the +third quarter of 2014. +6 +Because of the increased efficiency of drilling +rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to +RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so +they are an important indicator of the demand for RPC’s services. As reported by the U.S. Energy Information Administration +during the first quarter of 2019, annual well completions fell from a cyclical peak of 21,370 in 2014 to 8,106 in 2016. Between +2016 and 2018, annual well completions increased by 6,456 or 79.7 percent. In spite of the increase in well completions during +the past two years, annual well completions in 2018 were 31.9 percent lower than the 2014 cyclical peak. +The fluctuations in domestic drilling +activity since the third quarter of 2014 peak are consistent with global supply of and demand for oil, the domestic supply of +and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar +on world currency markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the price +of oil fell by approximately 78 percent from the cyclical peak in the third quarter of 2014. From its low price in early +2016, the price of oil had risen approximately 155 percent to its recent cyclical peak early in the fourth quarter of 2018. +Between this cyclical peak and early in the first quarter of 2019, the price of oil fell by approximately 28 percent. RPC +believes that the increase in the price of oil between 2016 and 2018 was due to increasing global demand and a perceived +moderation of global supply, and that the recent decline in the price of oil was due to a change in sentiment regarding +supply and demand. The average price of natural gas increased by approximately 6.4 percent during 2018 as compared with 2017 +and early in the first quarter of 2019, the price of natural gas was approximately 18 percent lower than the price at +the end of 2018. RPC does not believe that the current price of natural gas is sufficient to encourage natural gas-directed +drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In +addition to oil and natural gas, the price of natural gas liquids plays a minor role in determining our customers’ +activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various +natural gas liquids has increased to a level comparable to that of natural gas. During 2018 the average price of natural gas +liquids increased by approximately 15 percent compared with 2017. Early in the first quarter of 2019, the price of natural +gas liquids increased by approximately 29 percent compared to the average price in 2018. During 2018, the price of oil +was high enough to encourage increased drilling and production activity, but the unexpected and significant drop in the price +of oil during the fourth quarter of 2018 has caused many of RPC’s customers to delay or curtail their drilling and +completion plans for the near term. The fluctuations in the prices of these commodities, and in particular, the extreme +volatility in the price of oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling +rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural +gas began to decline, and by early in the first quarter of 2015 had fallen to approximately 18 percent of total +drilling activity. In absolute terms, the natural gas drilling rig count in the third quarter of 2016 was the lowest natural +gas drilling rig count ever recorded. During 2018 and early into the first quarter of 2019, the natural gas drilling rig +count as a percentage of the total rig count remained steady at approximately 18 percent of total drilling. Although the +demand for natural gas has remained stable, the price of natural gas has fallen in recent years due to increased domestic +reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. In spite of these +unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign +imports of natural gas do not compete with domestic production to a meaningful degree, and for several years, the United +States has exported increasing volumes of natural gas to other countries. We anticipate that oil-directed drilling will +continue to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that +natural gas-directed drilling will increase due to the lack of natural gas production from oil-directed drilling +and increased natural gas demand from U.S. exports of natural gas in addition to changes in demand due to increased use of +natural gas as a transportation fuel or for other purposes. We continue to believe in the long-term growth opportunities for +our business due to the continued high demand for hydrocarbons generally and the growing production of oil in the domestic +U.S. market in particular. Furthermore, we note that the techniques used to extract oil and natural gas in the U.S. +domestic market increasingly require the types of services that RPC provides to its customers. +Unconventional wells generate a higher demand +for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling +and during the fourth quarter of 2018 and early in the first quarter of 2019, have reached a historical high of approximately 94 +percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, +they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. +Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and +drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types +of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +7 +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for five percent of RPC’s +consolidated revenues in 2018, four percent in 2017 and seven percent in 2016. RPC’s allocation of growth capital over the +last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and +expected financial returns. International revenues increased 61.9 percent in 2018 compared to the prior year primarily due to higher +customer activity levels in Argentina and to a lesser extent, Mexico and Pakistan, partially offset by lower activity in +Gabon. During 2018, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Oman, as +well as rental tools in Pakistan. We also provided snubbing services in Gabon. We continue to focus on the selected development +of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent +of total revenues in 2019. +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 13 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions +of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate +large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is $125 million less the amount of +any outstanding letters of credit. There was no outstanding balance on this credit facility as of December 31, 2018. Our capital +structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2018, RPC provided oilfield services to several hundred +customers. Of these customers, there was no customer in 2018 or 2017 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales +force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital +expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering +services or equipment and providing services or delivering equipment, there is no significant sales backlog. +8 +Competition +RPC operates in highly competitive areas +of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller +oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. +During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated +the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded or newly +formed companies increased competitive pressures during the near term, since they began to provide services to our +existing customers at lower prices, and hired experienced personnel from more established companies such as RPC. Pricing for our +services improved significantly during 2017, but began to decline during the fourth quarter of 2017 and throughout 2018. RPC believes +that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment +and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker +Hughes, a GE Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations +are more similar to RPC, including Basic Energy Services, C&J Energy Services, Keane Group, Inc., Liberty Oilfield Services, +Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Service, Patterson-UTI Energy, Inc., ProPetro Holding +Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed +deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, +Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. +For additional information with respect to RPC’s lease commitments, see Note 10 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent +to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations +which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +9 +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Demand for our equipment and services is affected by the +volatility of oil and natural gas prices. +Oil and natural gas prices affect demand +throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on +the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration +and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, +is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well +as the actions of OPEC, an oil cartel which controls slightly less than 40 percent of global oil production. OPEC’s actions +have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the +oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, +producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged +low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our +financial condition and results of operations. +Reliance upon a large customer may adversely affect our +revenues and operating results. +At times our business has had a concentration +of one or more major customers. There was no customer that accounted for more than 10 percent of the Company’s revenues +in 2018, 2017 or 2016. In addition, there was no customer as of December 31, 2018 or 2017 that accounted for more than 10 percent +of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk +that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate +adverse impact upon our revenues and operating results. +Our business depends on capital spending by our customers, +many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability +to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital +depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current +and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. +These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their +operations, RPC’s financial results would be negatively impacted. +Our business depends on capital spending by our customers, +many of whom rely on outside financing to fund their operations. +Many oil and gas companies do not generate +sufficient operating cash flow to cover their capital expenditures. Because of this deficiency, many of our customers rely on their +ability to raise equity capital and debt financing from capital markets in order to continue their operations. Their ability to +raise outside capital to fund their operations depends upon, among other things, the availability of capital, near-term operating +prospects of oil and gas companies, current and projected prices of oil and natural gas, and attractiveness of competing investments +for available investment capital. These factors are outside of our control, and in the event that our customers cannot continue +to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and +the loss of any key personnel may affect its revenues. +RPC’s +success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the +services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing +and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +10 +We may be unable to compete in the highly competitive oil +and gas industry in the future. +We operate in highly competitive areas of +the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and +our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity +in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry +competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in +the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and +price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able +to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to +be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition +candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions +and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result +in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations +and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired +businesses could have a material adverse effect on our results of operations and financial condition. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the +weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains +and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain +times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several +years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms +can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and +natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged +by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching +customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. +Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact +growth potential and profitability. +Our ability to be productive and profitable +will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, +impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result +in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, +our capacity and profitability could be diminished, and our growth potential could be impaired. +Our business has potential liability for litigation, personal +injury and property damage claims assessments. +Our operations involve the use of heavy equipment +and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result +in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation +may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result +in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships +with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe +is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates +we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +11 +Our operations may be adversely affected if we are unable +to comply with regulations and environmental laws. +Our business is significantly affected by +stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level +of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws +and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be +adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations +for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. +We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup +costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled +to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances +in connection with our operations. We believe that our present operations substantially comply with applicable federal and state +pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no +material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict +whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for +noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively +affect our future financial results. +Compliance with federal and state regulations relating to +hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for +our pressure pumping services. +RPC’s pressure pumping services +are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern +regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic +fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of +hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing +practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency +(EPA) has also undertaken a study of the environmental impact of hydraulic fracturing practices. In the second quarter of 2015, +the EPA issued a report which concluded that hydraulic fracturing had not caused a measureable impact on drinking water sources +in the U.S. While this conclusion and other conclusions from similar efforts are favorable for our industry, we are unable to predict +whether future scrutiny of RPC’s pressure pumping business and any resulting regulatory change will impact our business through +increased operational costs, operational delays, or a reduction in demand for hydraulic fracturing services. +Our international operations could have a material adverse +effect on our business. +Our operations in various international markets +including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are +subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes +in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have +a material adverse effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common +stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common +stock has varied significantly in the past. +Our management has a substantial ownership interest, and +public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled +Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The +Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall +Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls +in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not +comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors +and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 74 percent of RPC’s outstanding +shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors +and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This +concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company +at a premium. +Our management has a substantial ownership interest, and +the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock +to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which +could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. +Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect +the trading price of our common stock. +12 +Provisions in RPC's +certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, +bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms +for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by +RPC’s Board of Directors more difficult or expensive. +Some of our equipment and several types +of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited +number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not +be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. +There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While +these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed +deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could +reduce our revenues and profits. +We have used outside financing in prior +years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our +business requires a great deal of capital in order to maintain our equipment and increase our fleet of equipment to expand our +operations, and we have access to our credit facility to fund our necessary working capital and equipment requirements. Our credit +facility, as amended July 26, 2018, provides a borrowing base of $125 million less the amount of any outstanding letters of credit, +and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources +become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional +funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing +sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance +of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities +or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet +of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues +and profits. +Our operations are subject to cyber-attacks that could have +a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are +increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including data +storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are +subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove to be insufficient, we +could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or +confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations, and +increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and +our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These +risks could have a material adverse effect on our business, consolidated results of operations and consolidated +financial condition. +Item 1B. Unresolved Staff Comments +None. +Item 2. Properties +RPC owns or leases approximately 120 offices +and operating facilities. The Company leases approximately 18,600 square feet of office space in Atlanta, Georgia that serves as +its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” +contained in Item 7. As of December 31, 2018, the lease agreement on the headquarters is effective through October 2020. Effective +January 2019, the Company signed a new lease agreement for the office space at its headquarters that has substantially similar +terms as the previous lease and extends the term of the lease from October 2020 to May 2031. RPC believes its current operating +facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities +used in our operations are as follows: +13 +Owned +Locations +Broussard, Louisiana — Operations, +sales and equipment storage yards +Elk City, Oklahoma — Operations, sales +and equipment storage yards +Houma, Louisiana — Administrative +office +Houston, Texas — Pipe storage terminal +and inspection sheds +Kilgore, Texas — Operations, sales +and equipment storage yards +Odessa, Texas — Operations, sales +and equipment storage yards +Rock Springs, Wyoming — Operations, +sales and equipment storage yards +Vernal, Utah — Operations, sales and +equipment storage yards +Vilonia, Arkansas — Maintenance and +rebuild facilities +Williston, North Dakota — Operations, +sales and equipment storage yards +Leased +Locations +Hobbs, New Mexico — Pumping services +facility +Midland, Texas — Operations, sales +and equipment storage yards +Montgomery, Pennsylvania — Operations, +sales and administrative office +Oklahoma City, Oklahoma — Operations, +sales and administrative office +San Antonio, Texas — Operations, sales +and equipment storage yards +Seminole, Oklahoma — Pumping services +facility +The Woodlands, Texas — Operations, +sales and administrative office +Washington, Pennsylvania — Operations, +sales and equipment storage yards +Williston, North Dakota — Operations, +sales and equipment storage yards +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings +primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these +risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance +will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its +business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management +believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s +business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) +of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 +to this Form 10-K. +Item 4A. Executive Officers of the Registrant +Each of the executive officers of RPC +was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual +meeting of stockholders or until his earlier removal by the Board of Directors or his resignation. The following table lists the +executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +R. Randall Rollins (1) +87 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +74 +4/22/03 +President and Chief Executive Officer +Ben M. Palmer (3) +58 +7/8/96 +Vice President, Chief Financial Officer and Corporate Secretary +(1) R. Randall Rollins began working for Rollins, Inc. (consumer +services) in 1949. Mr. Rollins has served as Chairman of the Board of RPC since the spin-off of RPC from Rollins, Inc. in 1984. +He has served as Chairman of the Board of Marine Products Corporation (boat manufacturing) since it was spun off from RPC in 2001 +and as Chairman of the Board of Rollins, Inc. since October 1991. He is also a director of Dover Downs Gaming and Entertainment, +Inc. and Dover Motorsports, Inc. +14 +(2) Richard A. Hubbell has been the President of RPC since +1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation +since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +(3) Ben M. Palmer has been the Vice President and Chief Financial +Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since +it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation +in July 2017. +PART II +Item 5. Market for Registrant’s Common Equity, Related +Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for +trading on the New York Stock Exchange under the symbol RES. As of February 15, 2019 there were 215,210,657 shares of common stock +outstanding and approximately 24,000 beneficial holders of our common stock. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated +purchases in the fourth quarter of 2018 are outlined below. +Period +Total Number of +Shares +(or Units) +Purchased +Average Price +Paid Per Share +(or Unit) +Total Number of +Shares (or Units) +Purchased as Part +of Publicly +Announced Plans +or Programs +Maximum Number (or +Approximate Dollar +Value) of Shares (or +Units) that May Yet Be +Purchased Under the +Plans or Programs (1) +October 1, 2018 to October 31, 2018 +778 (1) +(2) +$ 14.51 +300 +9,072,553 +November 1, 2018 to November 30, 2018 +100,000 (1) +13.67 +100,000 +8,972,553 +December 1, 2018 to December 31, 2018 +129,010 (1) +(2) +11.34 +128,784 +8,843,769 +Totals +229,788 +$ 12.36 +229,084 +8,843,769 +(1) The Company has a stock buyback program initially adopted +in 1998 and subsequently amended in 2013 and 2018 that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, +the Board of Directors increased the number of shares authorized for repurchase by 10,000,000 shares. There were 229,084 shares +repurchased as part of this program during the fourth quarter of 2018. As of December 31, 2018, there are 8,843,769 shares available +to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +(2) Shares purchased by the Company in addition to those purchased as part of publicly announced +plans or programs, represent shares repurchased in connection with taxes related to the vesting of certain restricted +shares. +Performance Graph +The following graph shows a five-year +comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, +as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph +are the Russell 1000 Index (“Russell 1000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), +and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company +has voluntarily chosen to provide both an industry and a peer group index. +The Company was a component of the Russell +1000 during 2018. The Russell 1000 is a stock index representing large capitalization U.S. stocks with high historical growth in +revenues and earnings. The components of the index had a weighted average market capitalization in 2018 of $193 billion, and a +median market capitalization of $9.9 billion. The Russell 1000 was chosen because it represents companies with comparable market +capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that +provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company +is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same +or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., +Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. The companies included in the Peer Group have +been weighted according to each respective issuer's stock market capitalization at the beginning of each year. +15 +16 +Item 6. Selected Financial Data +The following table summarizes certain selected financial data +of the Company. The historical information may not be indicative of the Company’s future results of operations. The information +set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and +Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere in this document. +Statements of Operations Data: +Years Ended December 31, +2018 +2017 +2016 +2015 +2014 +(in thousands, except employee and per share amounts) +Revenues +$ 1,721,005 +$ 1,595,227 +$ 728,974 +$ 1,263,840 +$ 2,337,413 +Cost of revenues +1,183,048 +1,050,809 +607,888 +986,144 +1,493,082 +Selling, general and administrative expenses +168,151 +159,194 +150,690 +156,579 +197,117 +Depreciation and amortization +163,120 +163,537 +217,258 +270,977 +230,813 +(Gain) loss on disposition of assets, net +(3,344 ) +(4,530 ) +(7,920 ) +6,417 +15,472 +Operating profit (loss) +210,030 +226,217 +(238,942 ) +(156,277 ) +400,929 +Interest expense +(489 ) +(426 ) +(681 ) +(2,032 ) +(1,431 ) +Interest income +2,426 +1,494 +467 +83 +19 +Other income (expense), net +9,313 +5,531 +(204 ) +5,185 +(131 ) +Income (loss) before income taxes +221,280 +232,816 +(239,360 ) +(153,041 ) +399,386 +Income tax provision (benefit) (1) +45,878 +70,305 +(98,114 ) +(53,480 ) +154,193 +Net income (loss) (1) +$ 175,402 +$ 162,511 +$ (141,246 ) +$ (99,561 ) +$ 245,193 +Earnings (loss) per share : (1) +Basic +$ 0.82 +$ 0.75 +$ (0.66 ) +$ (0.47 ) +$ 1.14 +Diluted +$ 0.82 +$ 0.75 +$ (0.66 ) +$ (0.47 ) +$ 1.14 +Dividends paid per share +$ 0.47 +$ 0.200 +$ 0.050 +$ 0.155 +$ 0.420 +Other Data: +Operating profit (loss) margin percent +12.2 % +14.2 % +(32.8 )% +(12.4 )% +17.2 % +Net cash provided by operating activities +$ 389,009 +$ 133,704 +$ 101,704 +$ 473,792 +$ 322,757 +Net cash used for investing activities +(219,727 ) +(104,386 ) +(21,339 ) +(157,583 ) +(355,349 ) +Net cash (used for) provided by financing activities +(144,070 ) +(70,103 ) +(13,726 ) +(260,785 ) +33,664 +Capital expenditures +$ 242,610 +$ 117,509 +$ 33,938 +$ 167,426 +$ 371,502 +Employees at end of period +3,600 +3,500 +2,500 +3,100 +4,500 +Balance Sheet Data at Year End: +Accounts receivable, net +$ 323,533 +$ 377,853 +$ 169,166 +$ 232,187 +$ 634,730 +Working capital +475,701 +494,775 +377,589 +384,744 +612,616 +Property, plant and equipment, net +517,982 +443,928 +497,986 +688,335 +849,383 +Total assets +1,199,580 +1,147,224 +1,035,452 +1,237,094 +1,759,358 +Long-term debt +— +— +— +— +224,500 +Total stockholders’ equity +$ 950,419 +$ 911,697 +$ 806,799 +$ 952,281 +$ 1,078,382 +(1) The indicated data for 2017 includes +the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act +enacted during the fourth quarter of 2017. +17 +Item 7. Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +The following discussion should be read +in conjunction with “Selected Financial Data” and the Consolidated Financial Statements included elsewhere in this +document. See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) provides a +broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated +by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance +production or perform maintenance on existing wells. +Our key business and financial strategies +are: +- To focus our management resources on and invest our capital +in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond +quickly to volatile industry conditions and business activity levels. +- To maintain an efficient, low-cost capital structure +which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing +revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and +low financial returns experienced during times of low customer pricing for our services. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of certain high-demand +raw materials used in our operations, both in order to conduct our operations and to enhance our competitive position. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance +between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our +common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies +and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual +results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization +of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, +general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to +those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price +of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial +results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall +economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and +production activities. +18 +Current industry conditions are +characterized by oil prices which have fallen from a cyclical peak of $75 per barrel in the fourth quarter of 2018 to $54 per +barrel in the first quarter of 2019. In spite of this significant decrease in the price of oil, the U.S. domestic rig count +and well completion counts have not fallen significantly during the fourth quarter of 2018 and into the first quarter of +2019. However, many of our customers indicate that they are curtailing or delaying their drilling and completion plans early +in 2019, and we believe that this will have a negative impact on RPC’s revenues and earnings during the near term. One +catalyst for the recent decrease in the price of oil relates to global supply and demand for the commodity. Early in 2019, a +potential slowdown in economic growth is perceived to be a catalyst for lower oil prices, a factor which is exacerbated by +continued growth in oil production, particularly in the United States. RPC believes that oil production in the United States +has also become an increasingly important determinant of global oil prices, because the United States grew to be the +world’s largest producer of oil during the second quarter of 2016. Following its recent peak, U.S. oil production fell +by 25 percent as of the third quarter of 2017. Since that time, however, improving drilling and completion activity have +caused U.S. domestic oil production to rise, and as of the most recent monthly reported statistics, current U.S. oil +production has increased to a level that is 42 percent higher than the cyclical low production recorded during the third +quarter of 2016. During the fourth quarter of 2018, U.S. oil production rose to its highest level on record. We believe that +record U.S. oil production is a catalyst for lower oil prices during the near term. Customer activities directed towards +natural gas drilling and production have been weak for several years, with the U.S. domestic natural gas rig count during the +first quarter of 2017 falling to the lowest level ever recorded. The U.S. domestic natural gas rig count has increased from +this historic low but is still low by historical standards. We believe that customer activities directed towards drilling for +natural gas has been weak because of the high production of shale-directed natural gas wells, the high amount of natural gas +production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of +natural gas in the United States. We believe that these factors will continue to depress natural gas-directed drilling during +the near term. From a low of $1.72 per Mcf during the second quarter of 2017, the price of natural gas had risen to $2.65 per +Mcf early in the first quarter of 2019. We believe that the price of natural gas remains too low to encourage our customers +to conduct exploration and production activities directed exclusively towards natural gas. +In 2018, the Company’s strategy of +utilizing equipment in unconventional basins has continued. During 2018, we made capital expenditures totaling $242.6 million primarily +for new revenue-producing equipment and capitalized maintenance of our existing equipment. +Revenues during 2018 totaled $1.7 billion, +an increase of 7.9 percent compared to 2017 primarily as a result of higher activity levels and improved pricing for certain service +lines. Cost of revenues increased $132.2 million in 2018 compared to the prior year due to higher employment costs, maintenance +and repairs expenses and other costs, all of which were driven by higher activity levels. As a percentage of revenues, cost of +revenues increased to 68.7 percent in 2018 compared to 65.9 percent in 2017. +Selling, general and administrative expenses +as a percentage of revenues decreased slightly to 9.8 percent in 2018 compared to 10.0 percent in 2017 due to the leverage of higher +revenues over primarily fixed expenses. +Income before income taxes was $221.3 million +for 2018 compared to $232.8 million in 2017. Net income for 2018 was $175.4 million, or $0.82 earnings per share compared to $162.5 +million, or $0.75 earnings per share in 2017. Net income in 2018 and 2017 reflect the lower income rates as a result of the Tax +Cuts and Jobs Act. Additionally, net income in 2017 includes a discrete tax benefit of $19.3 million, or $0.09 per share, related +to the implementation of the Tax Cuts and Jobs Act enacted in 2017. +Cash flows from operating activities increased to $389.0 million +in 2018 compared to $133.7 million in 2017 primarily due to higher earnings coupled with favorable changes in working capital. +As of December 31, 2018, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic +oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,931 during the third quarter of 2014. Between +the third quarter of 2014 and the second quarter of 2016, the drilling rig count fell by 79 percent. During the second quarter +of 2016, the U.S. domestic drilling rig count reached the lowest level ever recorded. The principal catalyst for this steep rig +count decline was the decrease in the price of oil in the world markets, which began in the second quarter of 2014. The price of +oil began to fall at that time due to the perceived oversupply of oil, weak global demand growth, and the strength of the U.S. +dollar on world currency markets. During the second quarter of 2016, the price of oil and the U.S. domestic rig count began to +increase, and increased steadily throughout the remainder of 2016, throughout 2017 and 2018. Early in 2019, the U.S. domestic rig +count had fallen by approximately three percent compared with the end of 2018. RPC monitors rig count efficiencies and well completion +trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have +increased the number of potential well completions for a given drilling rig count; therefore, the statistics regarding well completions +are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions in the U.S. +domestic market fell from 21,355 in 2014 to 8,060 in 2016. Annual well completions increased by approximately 40 percent to 11,277 +in 2017, and by approximately 31 percent to 14,756 during 2018. RPC believes that U.S. oilfield well completion activity will remain +at its current level or decline during the near term. +19 +The current and projected prices of oil, +natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. During the first two quarters +of 2016, the prices of oil and natural gas remained at low levels that discouraged our customers from undertaking most of their +potential exploration and production activities. The prices of oil and natural gas increased during the third and fourth quarters +of 2016, throughout 2017 and continued during the first three quarters of 2018. The price of natural gas continued to rise during +the fourth quarter of 2018 and into the first quarter of 2019, due to low natural gas storage levels, cold weather and increasing +demand for natural gas exports. In spite of the recent increase in the price of natural gas, we do not believe that it has risen +to a level that encourages our customers to increase their natural gas directed drilling and production activities. By contrast, +the price of oil began to fall significantly during the fourth quarter of 2018, and at the end of the quarter, was approximately +38 percent lower than at the end of the third quarter of 2018. Early in the first quarter of 2019, the price of oil had risen by +approximately 19 percent when compared with the end of the fourth quarter of 2018. The average price of natural gas liquids in +2018 increased by 14.7 percent compared to the average price for the full year 2017. The price of oil early in the first quarter +of 2019 carries negative implications for RPC’s near-term activity levels. +The majority of the U.S. domestic rig +count remains directed towards oil. At the beginning of the first quarter of 2019, approximately 81 percent of the U.S. domestic +rig count was directed towards oil, consistent with the prior year. We believe that oil-directed drilling will remain the majority +of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near +term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing +natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +We continue to monitor the market for +our services and the competitive environment. The U.S. domestic rig count has increased sharply since the historical low recorded +during the second quarter of 2016, though there are indications early in 2019 that the rig count will decline during the near term. +The fact that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment +and raw materials carries favorable implications for our activity levels. Furthermore, we note that some wells in the U.S. domestic +market have been drilled but not completed. At the end of 2018, the number of wells in this category had increased by approximately +15 percent since the beginning of the year. We believe that operators will complete many of these wells in the near term, and that +they may provide potential revenue for RPC’s completion-directed services. During 2018, we noted that oilfield completion +crews and equipment were providing services with increasing efficiency, and we believe that this higher efficiency has caused the +market for several oilfield completion services, including pressure pumping, to become oversupplied. We believe that this development +carries negative consequences for pricing of our services, utilization of our equipment and our financial results during the near +term. +Activity levels and pricing for oilfield +services reached a level during 2018 that allowed the industry to maintain its equipment and encouraged oilfield service providers +to expand their fleets of revenue-producing equipment and hire additional personnel. The prospect of improved financial returns +also provided access to the capital markets and allowed previously insolvent service companies to resume operations and add equipment. +As a result, competition increased during 2018. Increased competition and improved service efficiency, coupled with the significant +decline in oil prices during the fourth quarter of 2018, have become catalysts for lower pricing and activity levels early in 2019. +RPC expanded the size of its fleet of revenue-producing equipment modestly during 2018 and has placed orders for a small amount +of new equipment to be delivered in 2019. The equipment we placed in service in 2018 and the new equipment we have ordered in 2019 +is more powerful and efficient than earlier generations of oilfield service equipment, and we believe that it will produce acceptable +financial returns when placed in service. Our consistent response to the near-term potential of lower activity levels and pricing +is to undertake moderate fleet expansions which will allow us to maintain a strong balance sheet, even if near-term pricing and +activity levels generated by such new equipment are modest. +The negative implications for RPC’s +near-term activity levels from low oil prices and increased competition are partially offset by improved availability and lower +cost for some of the critical raw materials used in providing RPC’s services. In addition, lower activity levels reduce the +cost, and increase the availability of, skilled labor. These factors may reduce the cost of providing RPC’s services and +reduce logistical constraints. +20 +Results of Operations +Years Ended December 31, +2018 +2017 +2016 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ 1,721,005 +$ 1,595,227 +$ 728,974 +Revenues by business segment: +Technical +$ 1,647,213 +$ 1,538,351 +$ 679,654 +Support +73,792 +56,876 +49,320 +Consolidated operating profit (loss) +$ 210,030 +$ 226,217 +$ (238,942 ) +Operating profit (loss) by business segment: +Technical +$ 216,703 +$ 251,476 +$ (203,804 ) +Support +4,612 +(12,228 ) +(26,021 ) +Corporate expenses +(14,629 ) +(17,561 ) +(17,037 ) +Gain on disposition of assets, net +3,344 +4,530 +7,920 +Net income (loss) (1) +$ 175,402 +$ 162,511 +$ (141,246 ) +Earnings (loss) per share — diluted (1) +$ 0.82 +$ 0.75 +$ (0.66 ) +Percentage of cost of revenues to revenues +69 % +66 % +83 % +Percentage of selling, general and administrative expenses to revenues +10 % +10 % +21 % +Percentage of depreciation and amortization expenses to revenues +10 % +10 % +30 % +Effective income tax rate (1) +20.7 % +30.2 % +41.0 % +Average U.S. domestic rig count +1,032 +877 +509 +Average natural gas price (per thousand cubic feet (mcf)) +$ 3.18 +$ 2.99 +$ 2.52 +Average oil price (per barrel) +$ 65.02 +$ 50.84 +$ 43.49 +(1) The indicated data for 2017 includes +the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act +enacted during the fourth quarter of 2017. +Year Ended December 31, 2018 Compared to Year Ended December +31, 2017 +Revenues. Revenues in 2018 +increased $125.8 million or 7.9 percent compared to 2017. The Technical Services segment revenues in 2018 increased $108.9 +million or 7.1 percent compared to the prior year. The increase is due primarily to higher activity levels and improved +pricing in a few of our services lines as compared to the prior year. The Support Services segment revenues in 2018 increased +$16.9 million or 29.7 percent compared to 2017 due primarily to improved activity levels and pricing in the rental tool +service line, which is the largest service line within this segment. Technical Services reported an operating profit of +$216.7 million during 2018 compared to $251.5 million in the prior year, while Support Services reported an operating income +of $4.6 million in 2018 compared to an operating loss of $12.2 million in the prior year. The average price of oil increased +27.9 percent while the average price of natural gas increased 6.4 percent during 2018 compared to the prior year. The average +domestic rig count during 2018 was 17.7 percent higher than 2017. International revenues, which increased from $55.9 million +in 2017 to $90.4 million in 2018, were five percent of consolidated revenues in 2018 compared to four percent of consolidated +revenues in 2017. International revenues increased primarily due to higher customer activity levels in Argentina and to a +lesser extent, Mexico and Pakistan in 2018, partially offset by lower activity in Gabon compared to the prior year. Our +international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues +in 2018 was $1.2 billion compared to $1.1 billion in 2017, an increase of $132.2 million or 12.6 percent due to higher employment +costs, maintenance and repair expenses and other costs, all of which were driven by higher activity levels. As a percentage of +revenues, cost of revenues increased to 68.7 percent in 2018 compared to 65.9 percent in 2017. +21 +Selling, general and administrative +expenses. Selling, general and administrative expenses increased 5.6 percent to $168.2 million in 2018 compared to $159.2 million +in 2017. These expenses increased due to higher salaries and wages expense consistent with higher activity levels as well as an +increase in information technology costs. Selling, general and administrative expenses as a percentage of revenues decreased slightly +to 9.8 percent of revenues in 2018 compared to 10.0 percent of revenues in 2017 due to the leverage of higher revenues over primarily +fixed expenses. +Depreciation and amortization. Depreciation +and amortization were $163.1 million in 2018, a decrease of $0.4 million, compared to $163.5 million in 2017 due to lower capital +expenditures in the prior year. As a percentage of revenues, depreciation and amortization decreased in 2018 compared to 2017 primarily +due to higher revenues. +Gain on disposition of assets, net. Gain +on disposition of assets, net was $3.3 million in 2018 compared to $4.5 million in 2017. The decrease is due to the sale of operating +equipment related to its oilfield pipe inspection service line during the second quarter of 2017 that did not recur in the current +period. The gain on disposition of assets, net is generally comprised of gains or losses related to various property and equipment +dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other +income, net was $9.3 million in 2018 compared to of $5.5 million in 2017. Other income recorded in 2018 includes property insurance +proceeds totaling $9.6 million. Income recorded in 2017 included a favorable settlement of $2.0 million associated with the resolution +of a sales tax matter, as well as a property insurance proceeds of $1.9 million. +Interest expense and interest income. +Interest expense increased to $0.5 million in 2018 compared to $0.4 million in 2017. Interest expense in 2018 and 2017 principally +consists of fees on the unused portion of the credit facility. Interest income increased to $2.4 million in 2018 compared to $1.5 +thousand in 2017 due to higher investable cash balances. +Income tax provision (benefit). The +income tax provision was $45.9 million in 2018 compared to $70.3 million in 2017. The effective tax rate was 20.7 percent in 2018 +compared to 30.2 percent in 2017. The decrease in the income tax provision for 2018 primarily reflects the decrease in Federal +income tax rates from 35 percent to 21 percent as enacted by the 2017 Tax Cuts and Jobs Act. +Net income and diluted earnings per share . +Net income was $175.4 million in 2018, or $0.82 earnings per diluted share, compared to $162.5 million in 2017, or $0.75 earnings +per diluted share. This improvement in earnings per share was due to higher net income as average shares outstanding was essentially +unchanged. +Year Ended December 31, 2017 Compared to Year Ended December +31, 2016 +Revenues. Revenues in 2017 increased +$866.3 million or 118.8 percent compared to 2016. The Technical Services segment revenues in 2017 increased $858.7 million or 126.3 +percent compared to the prior year. The increase was due primarily to improved pricing, higher service intensity and activity levels +and a larger active fleet of revenue-producing equipment as compared to prior year, particularly within our pressure pumping service. +The Support Services segment revenues in 2017 increased $7.6 million or 15.3 percent compared to 2016 due primarily to improved +activity levels and pricing in the rental tool service line, which is the largest service line within this segment. Technical Services +reported an operating profit during 2017 compared to an operating loss in the prior year, while Support Services reported a smaller +operating loss in 2017 compared to the prior year. The average price of oil increased 16.9 percent while the average price of natural +gas increased 18.8 percent during 2017 compared to the prior year. The average domestic rig count during 2017 was 72.2 percent +higher than 2016. International revenues, which increased from $51.2 million in 2016 to $55.8 million in 2017, were three percent +of consolidated revenues in 2017 compared to seven percent of consolidated revenues in 2016. International revenues increased primarily +due to higher customer activity levels in Canada and Argentina in 2017, partially offset by lower activity in Gabon and Bolivia +compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues +in 2017 was $1.1 billion compared to $607.9 million in 2016, an increase of $442.9 million or 72.9 percent due to higher materials +and supplies expenses, employment costs, maintenance and repairs expenses and fuel costs, all of which were driven by higher activity +levels. As a percentage of revenues, cost of revenues decreased due to leverage of higher revenues over direct employment costs +and improved pricing for our services. +22 +Selling, general and administrative +expenses. Selling, general and administrative expenses increased 5.6 percent to $159.2 million in 2017 compared to $150.7 million +in 2016. These expenses increased due to higher compensation costs, primarily incentive compensation, as well as other expenses +consistent with higher activity levels and improved profitability. Selling, general and administrative expenses as a percentage +of revenues decreased to 10.0 percent of revenues in 2017 compared to 20.7 percent of revenues in 2016 due to the leverage of higher +revenues over primarily fixed expenses. +Depreciation and amortization. Depreciation +and amortization were $163.5 million in 2017, a decrease of $53.7 million, compared to $217.3 million in 2016 due to lower capital +expenditures in the prior year. As a percentage of revenues, depreciation and amortization decreased in 2017 compared to 2016 primarily +due to higher revenues. +Gain on disposition of assets, net. Gain +on disposition of assets, net was $4.5 million in 2017 compared to $7.9 million in 2016. RPC recorded a gain on disposition of +assets of $4.0 million during the fourth quarter of 2016 resulting from the sale of operating equipment related to its oilfield +pipe inspection service. The remaining gain on disposition of assets, net in 2016 and 2017 is comprised of gains or losses related +to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other +income, net was $5.5 million in 2017 compared to other expense, net of $204 thousand in 2016. Income recorded in 2017 includes +a favorable settlement of $2.0 million associated with the resolution of a sales tax matter, as well as a property insurance recovery +of $1.9 million. +Interest expense and interest income. +Interest expense decreased to $0.4 million in 2017 compared to $0.7 million in 2016. Interest expense in 2017 and 2016 principally +consists of fees on the unused portion of the credit facility. Interest income increased to $1.5 million in 2017 compared to $467 +thousand in 2016 due to higher investable cash balances. +Income tax provision (benefit). The +income tax provision was $70.3 million in 2017 compared to an income tax benefit of $98.1 million in 2016. The effective tax rate +was 30.2 percent in 2017 compared to 41.0 percent in 2016. The income tax provision for 2017 includes a discrete benefit of $19.3 +million, due to the implementation of the recently enacted “Tax Cuts and Jobs Act.” The income tax benefit in 2016 +includes a discrete tax benefit of $15.7 million recorded in connection with the favorable resolution of an open income tax matter. +Net income (loss) and diluted earnings +(loss) per share . Net income was $162.5 million in 2017, or $0.75 earnings per diluted share, compared to a net loss of $141.2 +million in 2016, or $0.66 loss per diluted share. This improvement in earnings per share was due to higher profitability as average +shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents +were $116.3 million as of December 31, 2018, $91.1 million as of December 31, 2017 and $131.8 million as of December 31, 2016. +The following table sets forth the historical +cash flows for the years ended December 31: +(in thousands) +2018 +2017 +2016 +Net cash provided by operating activities +$ 389,009 +$ 133,704 +$ 101,704 +Net cash used for investing activities +(219,727 ) +(104,386 ) +(21,339 ) +Net cash used for financing activities +(144,070 ) +(70,103 ) +(13,726 ) +2018 +Cash provided by operating activities +in 2018 increased by $255.3 million compared to the prior year. This increase is due primarily to an increase in net income of +$12.9 million, net favorable changes in working capital of $196.7 million and the deferred income tax provision of $64.0 million +partially offset by gains due to an insurance recovery and a benefit plan financing arrangement. The net favorable change in working +capital is primarily due to favorable changes of $262.6 million in accounts receivable due to lower activity levels and revenues +in the third and fourth quarters 2018, $4.3 million in accrued expenses and $6.1 million in prepaid expenses/ other current assets. +These favorable changes were partially offset by unfavorable working capital changes of $9.3 million in net income taxes receivable/ +payable, $9.4 million in inventories, $36.9 million in accounts payable, $11.1 million in accrued state and local taxes and $9.2 +million in accrued payroll and related expenses. +23 +Cash used for investing activities in 2018 +increased by $115.3 million, compared to 2017, primarily because of higher capital expenditures partially offset by property insurance +proceeds. +Cash used for financing activities in +2018 increased by $74.0 million primarily as a result of primarily as a result of increased cash dividends to common +stockholders coupled with the higher cost of repurchases of the Company’s shares on the open market and for taxes +related to the vesting of restricted shares. +2017 +Cash provided by operating activities +in 2017 increased by $32.0 million compared to the prior year. This increase is due primarily to an increase in net income of $303.8 +million, and an increase in other long-term liabilities of $15.6 million primarily related to the favorable resolution of an income +tax matter in 2016. These changes were partially offset by net unfavorable changes in working capital of $234.7 million coupled +with a decrease in depreciation and amortization expenses of $54.5 million. The net unfavorable change in working capital was primarily +due to unfavorable changes of $273.4 million in accounts receivable and $26.6 million in inventories due to higher business activity +levels, $5.7 million in prepaid expenses and other current assets, and $10.4 million in accrued expenses due to the timing of services +performed. This unfavorable change was partially offset by favorable changes in working capital of $35.4 million in accounts payable, +$23.3 million in income taxes receivable/ payable, net and $15.9 million in accrued payroll and related expenses consistent with +higher business activity levels coupled with the timing of payments and receipts of tax refunds. +Cash used for investing activities in +2017 increased by $83.0 million, compared to 2016, primarily because of higher capital expenditures in response to improved industry +conditions. +Cash used for financing activities in 2017 +increased by $56.4 million primarily as a result of higher cash dividends to common stockholders consistent with improved financial +results, and increased repurchases of the Company’s common stock on the open market and for taxes related to the vesting +of certain restricted shares. +Financial Condition and +Liquidity +The Company’s financial condition +as of December 31, 2018 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall +strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company +currently has a $125 million revolving credit facility that matures in July 2023. The facility contains customary terms and conditions, +including restrictions on indebtedness, dividend payments, business combinations and other related items. On July 26, 2018, the +Company amended the revolving credit facility to, among other matters, (1) replace the existing minimum tangible net worth covenant, +as well as, (2) extend the maturity date of the revolving credit facility to July 26, 2023, (3) eliminate any borrowing base limitations +on revolving loans when certain criteria exist, (4) reduce the commitment fees payable by RPC and (5) reduce the letter of credit +sublimit from $50 million to $35 million. As of December 30, 2018, RPC had no outstanding borrowings under the revolving credit +facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $19.5 million; therefore, +a total of $105.5 million of the facility was available. For additional information with respect to RPC’s facility, see Note +7 of the Notes to Consolidated Financial Statements included in this report. +The Company’s decisions about +the amount of cash to be used for investing and financing purposes are influenced by its capital position, including +the expected amount of cash to be provided by operations and access to borrowings under our facility. We believe our +liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business +conditions and strong customer activity levels. In addition, the Company's decisions about the amount of cash to be used for +investing and financing activities may also be influenced by the financial covenants in our credit facility but we do not +expect the covenants to restrict our planned activities. The Company is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $242.6 million +in 2018, and we currently expect capital expenditures to be approximately $289 million in 2019. We expect that a majority of these +expenditures in 2019 will be directed towards new revenue-producing equipment and capitalized maintenance of our existing equipment. +The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, +and equipment delivery schedules. +24 +The Company’s Retirement Income Plan, +a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. +During 2018, the Company contributed $5.0 million to the pension plan and although not required, Company management will evaluate +contributing to the pension plan during 2019. +The Company has a stock buyback program, +initially adopted in 1998 and subsequently amended in 2013 and 2018, that authorizes the repurchase of up to 41,578,125 shares. +On February 12, 2018, the Board of Directors increased the number of shares authorized for +repurchase by 10 million shares. There were 2,131,496 shares purchased on the open market by the Company during 2018, and +8,843,769 shares remain available to be repurchased under the current authorization as of December 31, 2018. The Company may repurchase +outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions +under our credit facility. The stock buyback program does not have a predetermined expiration date. +On January 22, 2019, the Board of Directors +declared a regular quarterly cash dividend of $0.10 per share payable March 11, 2019 to common stockholders of record at the close +of business on February 11, 2019. Subject to industry conditions and RPC’s earnings, financial condition, and other relevant +factors, the Company expects to continue to pay regular quarterly cash dividends to common stockholders. +Contractual Obligations +The Company’s obligations and commitments +that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other +long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, +2018: +Contractual Obligations +Payments due by period +(in thousands) +Total +Less than +1 year +1-3 +years +3-5 +years +More than +5 years +Long-term debt obligations +$ — +$ — +$ — +$ — +$ — +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +44,945 +11,819 +18,409 +8,547 +6,170 +Purchase obligations (2) +72,805 +72,805 +— +— +— +Other long-term liabilities (3) +8,071 +7,180 +891 +— +— +Total contractual obligations +$ 125,821 +$ 91,804 +$ 19,300 +$ 8,547 +$ 6,170 +(1) Operating leases include +agreements for various office locations, office equipment, and certain operating equipment. +(2) Includes agreements to +purchase raw materials, goods or services that have been approved and that specify all significant terms (pricing, quantity, and +timing). As part of the normal course of business the Company occasionally enters into purchase commitments to manage its various +operating needs. +(3) Includes expected cash +payments for long-term liabilities reflected on the balance sheet where the timing of the payments is known. These amounts include +incentive compensation. These amounts exclude pension obligations with uncertain funding requirements and deferred compensation +liabilities. +Fair Value Measurements +The Company’s assets and liabilities +measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets +and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued +using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no +assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities +measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive Retirement Plan (“SERP”) +investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent +appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +25 +Inflation +The Company purchases its equipment and materials +from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the +general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases +in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially +if employment in the general economy increases. In addition, activity increases can cause increases in the costs of certain materials +and key equipment components used to provide services to the Company’s customers. Since oilfield activity began to increase +in the second quarter of 2016, the Company has experienced upward pressure on the price of labor due to the shortage of skilled +employees as well as occasional increases in the prices of certain raw materials used in providing our services. During 2018, however, +prices for the raw material comprising the Company’s single largest raw material purchase began to decline due to increased +sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, +labor cost pressures during the fourth quarter of 2018 began to abate due to lower oilfield activity. +Off Balance Sheet Arrangements +The Company does not have any material off +balance sheet arrangements. +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $873,000 in 2018, $849,000 in 2017, and $739,000 in 2016. The Company’s +receivable due from Marine Products for these services was $28,000 as of December 31, 2018 and $47,000 as of December 31, 2017. +Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,467,000 in 2018, $1,372,000 in 2017 and $890,000 +in 2016. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $101,000 in 2018, $104,000 in 2017 and $111,000 in 2016. +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $199,000 +in 2018 and $197,000 in 2017 and 2016 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2018, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +26 +Critical Accounting Policies +The consolidated financial statements are +prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by +management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical +experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. +Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee +of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher +degree of judgment and complexity: +Allowance for doubtful accounts — +Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United +States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined +using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit +evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability +to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility +in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. +Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible +and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the +required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period +to period. Recoveries were insignificant in 2018, 2017 and 2016. We record specific provisions when we become aware of a customer's +inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's +operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the +receivable would be further adjusted, either upward or downward. +The estimated allowance for doubtful accounts +is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical +write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic +and political environment of the related country and region. In addition to reserves established for specific customers, we establish +general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management +judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues ranged +from 0.03 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages +by 0.50 percentage points as of December 31, 2018 would have resulted in a change of $1.9 million to the allowance for doubtful +accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The +effective income tax rates were 20.7 percent in 2018, 30.2 percent in 2017 and 41.0 percent in 2016. Our effective tax rates +vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which our +earnings and deductions are realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to +proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual +basis. The effective tax rate for 2018 reflects the change in Federal income tax rates from 35 percent to 21 percent, as +required by the Tax Cuts and Jobs Act (TCJA), as well as other beneficial adjustments. +The Company establishes a valuation allowance +against the carrying value of deferred tax assets when it is determined that it is more likely than not that the asset will not +be realized through future taxable income. Such amounts are charged to earnings in the period the determination is made. Likewise, +if we later determine that it is more likely than not that the net deferred tax assets would be realized, the applicable portion +of the previously provided valuation allowance is reversed. The Company considers future market growth, forecasted earnings, future +taxable income, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies +in determining the need for a valuation allowance. +The Company calculates the current and deferred +tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed +during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the third quarter +of the subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are determined based on the differences +between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the year the differences are +expected to reverse. In 2017, the Company revalued its deferred tax assets and liabilities to reflect the change in Federal income +tax rates, as required by the TCJA. All deferred tax assets and liabilities from December 31, 2017 forward reflect the changed +rate. +27 +The amount of income taxes we pay is subject +to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the +potential outcome for any uncertain tax issue is highly judgmental. The Company believes it has adequately provided for any reasonably +foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to estimated +tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. +Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +Insurance expenses —The Company +self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle +and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based +valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of +these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments +occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range +of exposure for these claims. As of December 31, 2018, the Company estimates the range of exposure to be from $15.9 million to +$20.8 million. The Company has recorded liabilities at December 31, 2018 of $18.3 million which represents management’s best +estimate of probable loss. +Depreciable life of assets — +RPC’s net property, plant and equipment at December 31, 2018 was $518.0 million representing 43.2 percent of the Company’s +consolidated assets. Depreciation and amortization expenses for the year ended December 31, 2018 were $163.1 million. Management +judgment is required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation +and amortization expense. +Property, plant and equipment are reported +at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives +of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed by +the Company and is determined by management based on many factors including historical experience with similar assets. Assets are +monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted accordingly. +We did not make any changes to the estimated lives of assets resulting in a material impact in 2018 or 2017. +Defined +benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit plan, +although the Company remains obligated to provide employees benefits earned through March 2002. The Company accounts for the defined +benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) ASC 715, “Compensation – +Retirement Benefits” and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, +the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, +the discount rate, and other factors, and makes adjustments to these liabilities as necessary. +The Company chooses an expected rate of return +on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views +of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized +over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s +assumption for the expected return on plan assets was seven percent for 2018, 2017 and 2016. +The discount rate reflects the current rate +at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes +a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the +life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same +time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to +all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate +bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 4.65 percent as of December +31, 2018 compared to 4.00 percent as of December 31, 2017 and 4.45 percent in 2016. +As set forth in Note 11 to the +Company’s financial statements, included among the asset categories for the Plan’s investments are real estate +and alternative/ opportunistic/ special fund investments comprised of real estate funds and private equity funds. These +investments are measured at net asset value and are valued using significant non-observable inputs which do not have a +readily determinable fair value. These valuations are subject to judgments and assumptions of the funds which may prove +to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by +evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the +funds’ financial statements for reasonableness. +28 +As of December 31, 2018, the defined benefit +plan was under-funded and the recorded change within accumulated other comprehensive loss decreased stockholders’ equity +by $2.0 million after tax. Holding all other factors constant, a change in the discount rate used to measure plan liabilities +by 0.25 percentage points would result in a pre-tax increase or decrease of $1.1 million to the net loss related to pension reflected +in accumulated other comprehensive loss. +The Company recognized pre-tax pension (income) +expense of $(0.2) million in 2018, $0.4 million in 2017 and $0.7 million in 2016. Based on the under-funded status of the defined +benefit plan as of December 31, 2018, the Company expects to recognize pension expense of $261 thousand in 2019. Holding all other +factors constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an +increase or decrease in pension expense of $185 thousand in 2019. Holding all other factors constant, a change in the discount +rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of $10 +thousand in 2019. +Recent Accounting Pronouncements +The Financial Accounting Standards Board +(FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +Accounting Standards Update (ASU) No. +2014-09, Revenue from Contacts with Customers (Topic 606): On January 1, 2018, the Company adopted ASC 606, Revenue from +Contracts with Customers and all the related amendments (“new revenue standard”) for all contracts using the modified +retrospective method, with no cumulative-effect adjustment to retained earnings upon adoption since most of the Company’s +services are primarily short-term in nature and the pattern of transfer under ASC 605 is consistent with the pattern of transfer +when evaluated under ASC 606. The comparative information has not been restated and continues to be reported under the accounting +standards that were in effect for those periods. The adoption of the new revenue standard did not have a material impact on our +consolidated financial statements. See Note 2 for expanded disclosures. +ASU No. 2016-01, Financial Instruments +– Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments +make targeted improvements to existing U.S. GAAP and affects accounting for equity investments and financial instruments and liabilities +and related disclosures. The Company adopted these provisions in the first quarter of 2018 and recognize the change in fair value +of its equity securities as part of other income. In addition, as of the beginning of the first quarter of 2018, the Company adjusted +opening retained earnings to recognize the cumulative impact of the adoption of these amendments. The Company does not expect the +adoption of these provisions to have an ongoing material impact on its consolidated financial statements. +ASU No. 2016-15, Statement of Cash +Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance in the presentation +and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt +extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance +claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method +investees. The Company adopted these provisions in the first quarter of 2018 and has presented the accompanying statements of cash +flow in conformity with these provisions. The Company does not expect the adoption of these provisions to have an ongoing material +impact on its consolidated financial statements. +ASU No. 2016-16, Income Taxes (Topic +740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments require an entity to recognize the income tax consequences +of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for +an intra-entity transfer of an asset other than inventory. The Company adopted these provisions in the first quarter of 2018, and +since the Company’s intra-entity transfers of property, plant and equipment are carried out at net book values, the adoption +did not have a material impact on its consolidated financial statements. +ASU No. 2017-01, Business Combinations +(Topic 805): Clarifying the Definition of a Business. The amendments are intended to help companies and other organizations +evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of +a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments provide +a more robust framework to use in determining when a set of assets and activities is a business. The Company adopted these provisions +in the first quarter of 2018 and will apply these provisions as it completes future acquisitions. The Company does not expect the +adoption of these provisions to have an ongoing material impact on its consolidated financial statements. +29 +ASU No. 2017-09, Compensation - Stock +Compensation (Topic 718): Scope of Modification Accounting. The provisions are applicable when there are changes to the terms +or conditions of a share-based payment award. The amendments require an entity to apply modification accounting for the effects +of changes to the terms and conditions of a share-based payment award unless certain conditions including fair value, vesting conditions +and classification are met. The Company adopted these provisions in the first quarter of 2018 and will apply these provisions if +changes to the terms or conditions of a share-based payment award are made. The Company does not expect the adoption of these provisions +to have an ongoing material impact on its consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +To be adopted in 2019: +ASU No. 2018-02, Income Statement - +Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. +The amendments provide an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which +the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded +and require expanded disclosures regarding the Company’s accounting policy decisions on such reclassification. The amendments +are effective starting in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the impact +of adopting these provisions on its consolidated financial statements. +ASU No. 2018-07, Compensation - Stock +Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASU +718 to include share-based payments issued to nonemployees for goods or services, thereby substantially aligning the accounting +for share-based payments to nonemployees and employees. The amendments are effective starting in the first quarter of 2019. The +Company currently does not expect the adoption of these provisions to have a material impact on its consolidated financial statements. +Leases (Topic +842). Under this guidance, lessees will need to recognize a right-of-use asset and a lease liability for virtually +all of their leases (other than leases that meet the definition of a short-term lease), at the commencement of the lease +term. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject +to certain adjustments, including initial direct costs and lessor provided incentives. The Company adopted the standard on +January 1, 2019 using the optional transition method and the cumulative-effect adjustment to the opening balance of retained +earnings was not material. All of the Company’s leases are currently classified as operating leases and the Company +expects to record approximately $47 million in right-of-use assets and lease liabilities from operating leases. +To be adopted in 2020 and later: +ASU No. 2016-13, Financial Instruments +- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments require the credit losses +on available-for-sale debt securities and purchased financial assets with credit deterioration to be presented as an allowance +rather than a write-down. It also allows recording of credit loss reversals in current period net income. The amendments are effective +starting in the first quarter of 2020 with early application permitted a year earlier. The Company is currently evaluating the +impact of adopting these provisions on its consolidated financial statements. +ASU No. 2017-04, Intangibles - Goodwill +and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the +amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by +comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount +by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the +total amount of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment +tests beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests +performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on +its consolidated financial statements. +30 +ASU No. 2018-15, Intangibles - Goodwill +and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing +Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a +cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting +arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The provisions may be +applied prospectively or retrospectively. The amendments are effective starting in the first quarter of 2020, with early adoption +permitted. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about +Market Risk +The Company is subject to interest rate risk +exposure through borrowings on its revolving credit facility. As of December 31, 2018, there are no outstanding interest-bearing +advances on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market +risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in +U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +31 +MANAGEMENT’S REPORT ON INTERNAL +CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of +RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, +Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets +are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce +financial statements in accordance with accounting principles generally accepted in the United States of America. The internal +control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified +personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable +laws and regulations. +There are inherent +limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide +only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can +provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, +the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be +considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision +and with the participation of our management, including our principal executive officer and principal financial officer, we conducted +an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December +31, 2018 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee +of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that +RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2018. +The independent registered +public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December +31, 2018, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, +included in this report on page 33. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2019 +32 +REPORT OF INDEPENDENT REGISTERED PUBLIC +ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal +control over financial reporting +We have audited the +internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as +of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, +in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established +in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated +financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 28, 2019 expressed +an unqualified opinion on those financial statements. +Basis for opinion +The Company’s +management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness +of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial +Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on +our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company +in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission +and the PCAOB. +We conducted our +audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable +assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit +included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, +testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such +other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our +opinion. +Definition and +limitations of internal control over financial reporting +A company’s +internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. +A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance +of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; +(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance +with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely +detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +Because of its inherent +limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation +of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, +or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, +Georgia +February +28, 2019 +33 +REPORT OF INDEPENDENT REGISTERED PUBLIC +ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the +financial statements +We have audited the +accompanying consolidated balance sheets of RPC, Inc.(a Delaware corporation) and subsidiaries (the “Company”) as of +December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ +equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement +schedule under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements +present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results +of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting +principles generally accepted in the United States of America. +We also have audited, +in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s +internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report +dated February 28, 2019 expressed an unqualified opinion. +Basis for opinion +These financial statements +are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial +statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with +respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities +and Exchange Commission and the PCAOB. +We conducted our audits +in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable +assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits +included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error +or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence +supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles +used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. +We believe that our audits provide a reasonable basis for our opinion. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2019 +34 +Item 8. Financial Statements and Supplementary +Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2018 +2017 +ASSETS +Cash and cash equivalents +$ 116,262 +$ 91,050 +Accounts receivable, net +323,533 +377,853 +Inventories +130,083 +114,866 +Income taxes receivable +35,832 +40,243 +Prepaid expenses +9,766 +8,992 +Other current assets +3,462 +7,131 +Current assets +618,938 +640,135 +Property, plant and equipment, net +517,982 +443,928 +Goodwill +32,150 +32,150 +Other assets +30,510 +31,011 +Total assets +$ 1,199,580 +$ 1,147,224 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ 103,401 +$ 103,462 +Accrued payroll and related expenses +25,715 +23,577 +Accrued insurance expenses +6,183 +5,299 +Accrued state, local and other taxes +3,081 +8,655 +Income taxes payable +4,706 +3,224 +Other accrued expenses +151 +1,143 +Current liabilities +143,237 +145,360 +Long-term accrued insurance expenses +12,072 +10,376 +Long-term pension liabilities +29,638 +35,635 +Deferred income taxes +60,375 +39,437 +Other long-term liabilities +3,839 +4,719 +Total liabilities +249,161 +235,527 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $0.10 par value, 349,000,000 shares authorized, 214,543,511 and 216,543,552 shares issued and outstanding in 2018 and 2017, respectively +21,454 +21,654 +Capital in excess of par value +— +— +Retained earnings +947,711 +906,745 +Accumulated other comprehensive loss +(18,746 ) +(16,702 ) +Total stockholders’ equity +950,419 +911,697 +Total liabilities and stockholders’ equity +$ 1,199,580 +$ 1,147,224 +The accompanying +notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2018 +2017 +2016 +REVENUES +$ 1,721,005 +$ 1,595,227 +$ 728,974 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +1,183,048 +1,050,809 +607,888 +Selling, general and administrative expenses +168,151 +159,194 +150,690 +Depreciation and amortization +163,120 +163,537 +217,258 +Gain on disposition of assets, net +(3,344 ) +(4,530 ) +(7,920 ) +Operating profit (loss) +210,030 +226,217 +(238,942 ) +Interest expense +(489 ) +(426 ) +(681 ) +Interest income +2,426 +1,494 +467 +Other income (expense), net +9,313 +5,531 +(204 ) +Income (loss) before income taxes +221,280 +232,816 +(239,360 ) +Income tax provision (benefit) +45,878 +70,305 +(98,114 ) +Net income (loss) +$ 175,402 +$ 162,511 +$ (141,246 ) +EARNINGS (LOSS) PER SHARE +Basic +$ 0.82 +$ 0.75 +$ (0.66 ) +Diluted +$ 0.82 +$ 0.75 +$ (0.66 ) +Dividends paid per share +$ 0.47 +$ 0.20 +$ 0.05 +The accompanying notes are an integral part of these +statements. +36 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE +INCOME (LOSS) +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2018 +2017 +2016 +NET INCOME (LOSS) +$ 175,402 +$ 162,511 +$ (141,246 ) +OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES: +Pension adjustment +(1,408 ) +1,033 +(788 ) +Foreign currency translation +(621 ) +391 +652 +Unrealized (loss) gain on securities, net reclassification adjustments +— +(24 ) +3 +COMPREHENSIVE INCOME (LOSS) +$ 173,373 +$ 163,911 +$ (141,379 ) +The accompanying notes are an integral part of these +statements. +37 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ +EQUITY +RPC, INC. AND SUBSIDIARIES +(in +thousands) +Accumulated +Capital in +Other +Three Years Ended +Common +Stock +Excess of +Retained +Comprehensive +December +31, 2018 +Shares +Amount +Par +Value +Earnings +Income +(Loss) +Total +Balance, December 31, 2015 +216,991 +$ 21,699 +$ — +$ 948,551 +$ (17,969 ) +$ 952,281 +Stock +issued for stock incentive plans, net +796 +80 +9,508 +— +— +9,588 +Stock purchased and retired +(298 ) +(30 ) +(9,935 ) +6,708 +— +(3,257 ) +Net loss +— +— +— +(141,246 ) +— +(141,246 ) +Pension adjustment, net of taxes +— +— +— +— +(788 ) +(788 ) +Foreign currency translation +— +— +— +— +652 +652 +Unrealized gain on securities, net of taxes and reclassification adjustment +— +— +— +— +3 +3 +Dividends declared +— +— +— +(10,861 ) +— +(10,861 ) +Excess tax benefits for share-based payments +— +— +427 +— +— +427 +Balance, December 31, 2016 +217,489 +21,749 +— +803,152 +(18,102 ) +806,799 +Stock issued for stock incentive plans, net +420 +42 +11,048 +— +— +11,090 +Stock purchased and retired +(1,365 ) +(137 ) +(11,048 ) +(15,599 ) +— +(26,784 ) +Net income +— +— +— +162,511 +— +162,511 +Pension adjustment, net of taxes +— +— +— +— +1,033 +1,033 +Foreign currency translation +— +— +— +— +391 +391 +Unrealized loss on securities, net of taxes and reclassification adjustment +— +— +— +— +(24 ) +(24 ) +Dividends declared +— +— +— +(43,319 ) +— +(43,319 ) +Balance, December 31, 2017 +216,544 +21,654 +— +906,745 +(16,702 ) +911,697 +Adoption of accounting standard (Note 1) +— +— +— +15 +(15 ) +— +Stock issued for stock incentive plans, net +367 +37 +9,382 +— +— +9,419 +Stock purchased and retired +(2,367 ) +(237 ) +(9,382 ) +(33,382 ) +— +(43,001 ) +Net income +— +— +— +175,402 +— +175,402 +Pension adjustment, net of taxes +— +— +— +— +(1,408 ) +(1,408 ) +Foreign currency translation +— +— +— +— +(621 ) +(621 ) +Dividends declared +— +— +— +(101,069 ) +— +(101,069 ) +Balance, December 31, 2018 +214,544 +$ 21,454 +$ — +$ 947,711 +$ (18,746 ) +$ 950,419 +The accompanying +notes are an integral part of these statements. +38 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2018 +2017 +2016 +OPERATING ACTIVITIES +Net income (loss) +$ 175,402 +$ 162,511 +$ (141,246 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +166,789 +166,558 +221,038 +Stock-based compensation expense +9,419 +11,090 +10,218 +Gain on disposition of assets, net +(3,344 ) +(4,530 ) +(7,920 ) +Gain due to insurance recovery +(9,646 ) +— +— +Gain due to benefit plan financing arrangement +(1,020 ) +— +— +Deferred income tax provision (benefit) +21,395 +(42,609 ) +(34,209 ) +Excess tax benefits for share-based payments +— +— +(427 ) +(Increase) decrease in assets: +Accounts receivable +53,982 +(208,642 ) +64,715 +Income taxes receivable +4,410 +16,931 +(5,355 ) +Inventories +(15,660 ) +(6,275 ) +20,294 +Prepaid expenses +(778 ) +(2,272 ) +2,244 +Other current assets +3,375 +(1,222 ) +2 +Other non-current assets +1,494 +(4,779 ) +(1,851 ) +Increase (decrease) in liabilities: +Accounts payable +(7,754 ) +29,176 +(6,250 ) +Income taxes payable +1,482 +(1,705 ) +(2,710 ) +Accrued payroll and related expenses +2,193 +11,408 +(4,540 ) +Accrued insurance expenses +884 +1,200 +(197 ) +Accrued state, local and other taxes +(5,574 ) +5,561 +256 +Other accrued expenses +(994 ) +(5,335 ) +5,017 +Pension liabilities +(7,862 ) +4,398 +(1,385 ) +Long-term accrued insurance expenses +1,696 +839 +(1,811 ) +Other long-term liabilities +(880 ) +1,401 +(14,179 ) +Net cash provided by operating activities +389,009 +133,704 +101,704 +INVESTING ACTIVITIES +Capital expenditures +(242,610 ) +(117,509 ) +(33,938 ) +Proceeds from sale of assets +13,237 +13,123 +12,599 +Proceeds from insurance recovery +9,646 +— +— +Proceeds from benefit plan financing arrangement +2,218 +— +— +Re-investment in benefit plan financing arrangement +(2,218 ) +— +— +Net cash used for investing activities +(219,727 ) +(104,386 ) +(21,339 ) +FINANCING ACTIVITIES +Payment of dividends +(101,069 ) +(43,319 ) +(10,861 ) +Debt issue costs for notes payable to banks +— +— +(35 ) +Excess tax benefits for share-based payments +— +— +427 +Cash paid for common stock purchased and retired +(43,001 ) +(26,784 ) +(3,257 ) +Net cash used for financing activities +(144,070 ) +(70,103 ) +(13,726 ) +Net increase (decrease) in cash and cash equivalents +25,212 +(40,785 ) +66,639 +Cash and cash equivalents at beginning of year +91,050 +131,835 +65,196 +Cash and cash equivalents at end of year +$ 116,262 +$ 91,050 +$ 131,835 +The accompanying notes are an integral part of these +statements. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Note 1: Significant Accounting Policies +Principles +of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of +RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts +and transactions have been eliminated. +Common Stock +RPC is authorized to issue 349,000,000 shares +of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board +of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote +of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or +winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution +to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred +stock, $0.10 par value. As of December 31, 2018, there were no shares of preferred stock issued. The Board of Directors is authorized, +subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so +determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of +Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes +of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation. +Dividends +On January 22, 2019, the Board of Directors +declared a regular quarterly cash dividend of $0.10 per share payable March 11, 2019 to common stockholders of record at the close +of business on February 11, 2019. Subject to industry conditions and RPC’s earnings, financial condition, and other relevant +factors, the Company expects to continue to pay regular quarterly cash dividends to common stockholders. +Use of Estimates in the Preparation +of Financial Statements +The preparation of financial statements in +conformity with accounting principles generally accepted in the United States of America requires management to make estimates +and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities +at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results +could differ from those estimates. +Significant estimates are used in the determination of +the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC recognizes revenues from contracts with its customers based +on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information. +Concentration of Credit Risk +Substantially all of +the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact +overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in +economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last +three years. There was no customer that accounted for more than 10 percent of the Company’s revenues in 2018, 2017 or +2016. Additionally, there was no customer that accounted for more than 10 percent of accounts receivable as of December 31, +2018 or 2017. +Cash and Cash Equivalents +Highly liquid investments with original maturities of three +months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, +may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, +and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating +services. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Investments +Investments classified as available-for-sale +securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component +of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, +declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are +included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2018 and 2017, +and an immaterial realized loss during 2016. Securities that are held in the non-qualified Supplemental Executive Retirement Plan +(“SERP”) are classified as trading. See Note 11 for further information regarding the SERP. The change in fair value +of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements +of operations. +Management determines the appropriate classification +of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts +receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended +based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are +considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts +due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance +for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, +current economic conditions, and in the case of international customers, judgments about the economic and political environment +of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines +that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, which consist principally of +(i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment +used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are +recorded at the lower of cost and net realizable value. Cost is determined using first-in, first-out (“FIFO”) +method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, +less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities +on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, +market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including +software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis +over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful +lives: operating equipment, 3 to 20 years; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture +and fixtures, 5 to 7 years; software, 5 years; and vehicles, 3 to 5 years. The cost of assets retired or otherwise disposed of +and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting +gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. +Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute +repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived +assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows +estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the +values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. During 2016, RPC recorded +immaterial write-downs on certain equipment to comply with the Company’s policy to store and maintain key equipment in an +efficient manner. +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Goodwill +Goodwill represents the excess of the +purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reportable segment +was as follows: +Years Ended December 31, +2018 +2017 +(in thousands) +Technical Services +$ 30,992 +$ 30,992 +Support Services +1,158 +1,158 +Goodwill +$ 32,150 +$ 32,150 +Goodwill is reviewed annually, or more frequently, +if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying +amount, for impairment. In 2018 and 2017, the Company performed a quantitative impairment test by estimating the fair value of +each of its reporting units using a discounted cash flow analysis based on management’s short-term and long-term forecast +of operating results. The discounted cash flow analysis for each reporting unit includes assumptions regarding discount rates, +revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. +Based on the analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore +no impairment of goodwill occurred for the years ended December 31, 2018 and 2017. The Company completed a comprehensive qualitative +assessment of the various factors that impact goodwill for the year ended December 31, 2016, and concluded it is more likely than +not that the fair value of its reporting units exceeded their carrying amounts as of the annual test date and therefore no impairment +of its goodwill occurred for the year ended December 31, 2016. +Advertising +Advertising +expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $2,220,000 in 2018, +$1,696,000 in 2017, and $1,296,000 in 2016. +Insurance Expenses +RPC self-insures, up to certain policy-specified +limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee +health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims +are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based +on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year +in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are +determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect +for the year in which the differences are expected to reverse. The newly enacted Tax Cuts and Jobs Act required the revaluation +of our deferred tax assets and liabilities to reflect the change in Federal income tax rates from 35 percent to 21 percent. The +Company’s net deferred tax liability as of December 31, 2018 has been reduced through a discrete income tax provision adjustment +of $19.3 million related to this rate change. The Company establishes a valuation allowance against the carrying value of +deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future +taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension +plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to +2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under +the defined benefit pension plan. See Note 11 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records +the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares +acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value +is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, discloses the excess +over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ +equity. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Earnings per Share +Basic and diluted earnings per share are +computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, +the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore +considered participating securities. See Note 11 for further information on restricted stock granted to employees. +Restricted shares of common stock (participating +securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In +thousands except per share data ) +2018 +2017 +2016 +Net income (loss) available for stockholders +$ 175,402 +$ 162,511 +$ (141,246 ) +Less: Adjustments for losses attributable to participating securities +(1,839 ) +(2,102 ) +(147 ) +Net income (loss) used in calculating per share amounts +$ 173,563 +$ 160,409 +$ (141,393 ) +Weighted average shares outstanding (including participating securities) +215,198 +217,194 +217,509 +Adjustment for participating securities +(2,453 ) +(2,891 ) +(3,282 ) +Shares used in calculating basic and diluted earnings (loss) per share +212,745 +214,303 +214,227 +Fair Value of Financial Instruments +The Company’s financial instruments +consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value +of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature +of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments +held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. +All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 9 for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized +for all share-based payment awards, net estimated forfeitures. Thus, compensation cost is amortized for those shares expected to +vest on a straight-line basis over the requisite service period of the award. See Note 11 for additional information. +Recent Accounting Pronouncements +The Financial Accounting Standards Board +(FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +Accounting Standards Update (ASU) No. +2014-09, Revenue from Contacts with Customers (Topic 606): On January 1, 2018, the Company adopted ASC 606, Revenue from +Contracts with Customers and all the related amendments (“new revenue standard”) for all contracts using the modified +retrospective method, with no cumulative-effect adjustment to retained earnings upon adoption since most of the Company’s +services are primarily short-term in nature and the pattern of transfer under ASC 605 is consistent with the pattern of transfer +when evaluated under ASC 606. The comparative information has not been restated and continues to be reported under the accounting +standards that were in effect for those periods. The adoption of the new revenue standard did not have a material impact on our +consolidated financial statements. See Note 2 for expanded disclosures. +ASU No. 2016-01, Financial Instruments +– Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments +make targeted improvements to existing U.S. GAAP and affects accounting for equity investments and financial instruments and liabilities +and related disclosures. The Company adopted these provisions in the first quarter of 2018 and recognize the change in fair value +of its equity securities as part of other income. In addition, as of the beginning of the first quarter of 2018, the Company adjusted +opening retained earnings to recognize the cumulative impact of the adoption of these amendments. The Company does not expect the +adoption of these provisions to have an ongoing material impact on its consolidated financial statements. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +ASU No. 2016-15, Statement of Cash +Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance in the presentation +and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt +extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance +claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method +investees. The Company adopted these provisions in the first quarter of 2018 and has presented the accompanying statements of cash +flow in conformity with these provisions. The Company does not expect the adoption of these provisions to have an ongoing material +impact on its consolidated financial statements. +ASU No. 2016-16, Income Taxes (Topic +740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments require an entity to recognize the income tax consequences +of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for +an intra-entity transfer of an asset other than inventory. The Company adopted these provisions in the first quarter of 2018, and +since the Company’s intra-entity transfers of property, plant and equipment are carried out at net book values, the adoption +did not have a material impact on its consolidated financial statements. +ASU No. 2017-01, Business Combinations +(Topic 805): Clarifying the Definition of a Business. The amendments are intended to help companies and other organizations +evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of +a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments provide +a more robust framework to use in determining when a set of assets and activities is a business. The Company adopted these provisions +in the first quarter of 2018 and will apply these provisions as it completes future acquisitions. The Company does not expect the +adoption of these provisions to have an ongoing material impact on its consolidated financial statements. +ASU No. 2017-09, Compensation - Stock Compensation (Topic +718): Scope of Modification Accounting. The provisions are applicable when there are changes to the terms or conditions of +a share-based payment award. The amendments require an entity to apply modification accounting for the effects of changes to the +terms and conditions of a share-based payment award unless certain conditions including fair value, vesting conditions and classification +are met. The Company adopted these provisions in the first quarter of 2018 and will apply these provisions if changes to the terms +or conditions of a share-based payment award are made. The Company does not expect the adoption of these provisions to have an +ongoing material impact on its consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +To be adopted in 2019: +ASU No. 2018-02, Income Statement - +Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. +The amendments provide an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which +the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded +and require expanded disclosures regarding the Company’s accounting policy decisions on such reclassification. The amendments +are effective starting in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the impact +of adopting these provisions on its consolidated financial statements. +ASU No. 2018-07, Compensation - Stock +Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASU +718 to include share-based payments issued to nonemployees for goods or services, thereby substantially aligning the accounting +for share-based payments to nonemployees and employees. The amendments are effective starting in the first quarter of 2019. The +Company currently does not expect the adoption of these provisions to have a material impact on its consolidated financial statements. +Leases (Topic 842). Under +this guidance, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases +(other than leases that meet the definition of a short-term lease), at the commencement of the lease term. The liability will +be equal to the present value of lease payments. The asset will be based on the liability, subject to certain adjustments, +including initial direct costs and lessor provided incentives. The Company adopted the standard on January 1, 2019 using the +optional transition method and the cumulative-effect adjustment to the opening balance of retained earnings was not material. +All of the Company’s leases are currently classified as operating leases and the Company expects to record +approximately $47 million in right-of-use assets and lease liabilities from operating leases. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +To be adopted in 2020 and later: +ASU No. 2016-13, Financial Instruments +- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments require the credit losses +on available-for-sale debt securities and purchased financial assets with credit deterioration to be presented as an allowance +rather than a write-down. It also allows recording of credit loss reversals in current period net income. The amendments are effective +starting in the first quarter of 2020 with early application permitted a year earlier. The Company is currently evaluating the +impact of adopting these provisions on its consolidated financial statements. +ASU No. 2017-04, Intangibles - Goodwill +and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the +amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by +comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount +by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the +total amount of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment +tests beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests +performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on +its consolidated financial statements. +ASU No. 2018-15, Intangibles - Goodwill +and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing +Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a +cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting +arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The provisions may be +applied prospectively or retrospectively. The amendments are effective starting in the first quarter of 2020, with early adoption +permitted. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements. +Note 2: Revenues +Accounting Policy +RPC’s contract revenues are generated +principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior +to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services +is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables +needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues +based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented +on a net basis within the consolidated statements of operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized +oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil +gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services +offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site +(Support Services). For more detailed information about operating segments, see Note 13. +RPC contracts with its customers to provide the following services +by reportable segment: +Technical Services +· Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including +wireline, well control, fishing and pump down services. +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Support Services +· Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion +and workover activities. +· Other support services include oilfield pipe inspection +services, pipe management and pipe storage; well control training and consulting. +Our contracts with customers are generally very short-term in +nature and generally consist of a single performance obligation – the provision of oil field services. +Payment terms +RPC’s contracts with the customer states +the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s +contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled +the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services +and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, +it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction +of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our +arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable +measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful +depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value +transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient +for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See Note 13 for disaggregation of revenue +by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of +the periods presented is shown below: +(in thousands) +2018 +2017 +2016 +Oil field services transferred at a point in time +$ - +$ - +$ - +Oil field services transferred over time +1,721,005 +1,595,227 +728,974 +Total revenues +$ 1,721,005 +$ 1,595,227 +$ 728,974 +Contract balances +Contract assets representing the Company’s +rights to consideration for work completed but not billed are included in Accounts receivable, net on the Consolidated Balance +Sheets are shown below: +(in thousands) +2018 +2017 +Unbilled trade receivables +$ 56,408 +$ 68,494 +Substantially all of the unbilled trade +receivables as of December 31, 2018 and December 31, 2017 were invoiced during the following quarter. +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Note 3: Accounts Receivable +Accounts receivable, net consists of the +following: +December 31, +2018 +2017 +(in thousands) +Trade receivables: +Billed +$ 266,660 +$ 296,588 +Unbilled +56,408 +68,494 +Other receivables +5,278 +17,242 +Total +328,346 +382,324 +Less: allowance for doubtful accounts +(4,813 ) +(4,471 ) +Accounts receivable, net +$ 323,533 +$ 377,853 +Trade receivables relate to revenues generated +from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled +receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables +consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable +resolution of state tax audits and rebates due from suppliers. +Changes in the Company’s allowance +for doubtful accounts are as follows: +Years Ended December 31, +2018 +2017 +(in thousands) +Beginning balance +$ 4,471 +$ 2,553 +Bad debt expense +588 +1,441 +Accounts written-off +(260 ) +(105 ) +Recoveries +14 +582 +Ending balance +$ 4,813 +$ 4,471 +Note 4: Inventories +Inventories are $130,083,000 at December +31, 2018 and $114,866,000 at December 31, 2017 and consist of raw materials, parts and supplies. The reserve for obsolete and slow +moving inventory is $10,168,000 at December 31, 2018 and $3,875,000 at December 31, 2017. +Note 5: Property, Plant and Equipment +Property, plant and equipment are presented +at cost net of accumulated depreciation and consist of the following: +December 31, +2018 +2017 +(in thousands) +Land +$ 21,159 +$ 19,991 +Buildings and leasehold improvements +140,269 +138,072 +Operating equipment +1,429,906 +1,419,670 +Computer software +24,619 +23,017 +Furniture and fixtures +7,606 +7,656 +Vehicles +528,250 +494,833 +Gross property, plant and equipment +2,151,809 +2,103,239 +Less: accumulated depreciation +(1,633,827 ) +(1,659,311 ) +Net property, plant and equipment +$ 517,982 +$ 443,928 +Depreciation expense was $166.2 million +in 2018, $166.9 million in 2017, and $220.6 million in 2016, and includes amounts recorded as costs of revenues. There were no +capital leases outstanding as of December 31, 2018 and December 31, 2017. The Company had accounts payable for purchases of property +and equipment of $14.8 million as of December 31, 2018, $7.1 million as of December 31, 2017, and $3.4 million as of December 31, +2016. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Note 6: Income Taxes +The Tax Cuts and Jobs Act (“the +Act”) effective January 1, 2018, included a reduction to the US federal tax rate from 35 percent to 21 percent, a one-time +transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, adjustment of deferred tax assets +and liabilities for the new corporate tax rate, and adjustments to deductible compensation of our executive officers. The Act +also imposes a new tax on foreign earnings and profits in excess of a deemed return on tangible assets of foreign subsidiaries +referred to as Global Low Taxed Intangible Income (“GILTI”), a new tax on certain payments between a U.S. corporation +and its foreign subsidiaries referred to as Base Erosion and Anti-Abuse Minimum Tax (“BEAT”), and a tax deduction on +certain qualifying income related to export sales of property or services referred to as Foreign Derived Intangible Income (“FDII”). +The Company applied the guidance in SAB +118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. In 2017, the Company recorded a discrete +tax benefit of $19.3 million related to the enactment-date effects of the Act that included adjustments to the Company’s +net deferred tax liabilities. In 2018, the Company adjusted the enactment-date provisional amounts by decreasing tax expense by +an additional $5.1 million, recorded as a discrete tax benefit. These adjustments were recorded as components of income tax expense +from continuing operations. As of December 31, 2018, the Company has completed its accounting for all of the enactment-date income +tax effects of the Act. Discussion of specific provisions of the Act follows: +One-time transition tax +The one-time transition tax is based on +the Company’s total post-1986 foreign earnings and profits (E&P), a tax that was previously deferred until repatriation +of those earnings and profits. At December 31, 2017, the Company estimated the one-time transitional tax to be not material and +no provision was included as a component of tax expense in 2017. +Based on further analysis of the Act, +and notices and regulations issued by the US Department of the Treasury and the Internal Revenue Service, the Company concluded +that the tax impact of the Act from un-repatriated earnings and profits of our foreign subsidiaries was not material. +Executive compensation arrangements +As of December 31, 2017, we evaluated the deductibility of our +executive compensation arrangements and the related impacts on both current and deferred taxes based on the guidance that was available +at that time. At December 31, 2017, we recorded tax expense related to executive compensation of approximately $1.3 million. During +2018, with additional guidance from the US Department of Treasury and the Internal Revenue Service, we refined our calculations, +and reduced our 2017 provisional expense by approximately $0.5 million. +GILTI +Our analysis at December 31, 2017, related +to GILTI was incomplete, and therefore did not record a GILTI-related adjustment. Under FASB guidance, the Company elected to treat +tax related to GILTI as a period expense rather than create a deferred tax for the temporary differences that are expected to reverse +in future years. As of December 31, 2018, the impact of the Act on the Company related to Global Low Taxed Intangible Income was +not material. +BEAT +The Company has analyzed the Act’s +provisions related to Base Erosion and Profit Shifting, and has determined the impact to our financial statements to be not material. +No provision was included as a component of tax expense in either 2017 or 2018. +In summary, due to the complexity of the +FDII, GILTI, and BEAT provisions of the Act, the Company is continuing to evaluate their impact in 2018. At this time, the Company +has incorporated its best estimate for each of these provisions within the annual effective tax rate for 2018. The Company will +continue to monitor developments as new information becomes available with respect to each of FDII, GILTI or BEAT and anticipates +refining the calculations in connection with the filing of its 2018 US federal income tax return. +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +The following table lists the components +of the provision (benefit) for income taxes: +Years ended December 31, +2018 +2017 +2016 +(in thousands) +Current provision (benefit): +Federal +$ 13,708 +$ 95,995 +$ (43,993 ) +State +3,932 +13,966 +(24,479 ) +Foreign +6,843 +2,953 +4,567 +Deferred provision (benefit): +Federal +23,203 +(39,710 ) +(31,505 ) +State +(1,808 ) +(2,899 ) +(2,704 ) +Total income tax provision (benefit) +$ 45,878 +$ 70,305 +$ (98,114 ) +Reconciliation between the federal statutory +rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2018 +2017 +2016 +Federal statutory rate +21.0 % +35.0 % +35.0 % +State income taxes, net of federal benefit +2.6 +1.9 +1.3 +Tax credits +(0.1 ) +(0.7 ) +0.1 +Non-deductible expenses +1.8 +2.0 +(0.7 ) +Change in contingencies +— +— +6.6 +Adjustments related to the Act +(2.3 ) +(8.3 ) +— +Adjustments related to vesting of restricted stock +(0.8 ) +(1.2 ) +— +Other +(1.5 ) +1.5 +(1.3 ) +Effective tax rate +20.7 % +30.2 % +41.0 % +Significant components of the Company’s +deferred tax assets and liabilities are as follows: +December 31, +2018 +2017 +(in thousands) +Deferred tax assets: +Self-insurance +$ 5,055 +$ 4,660 +Pension +7,261 +8,730 +State net operating loss carryforwards +1,663 +4,048 +Bad debt +1,291 +1,149 +Accrued payroll +1,416 +1,117 +Stock-based compensation +3,501 +3,612 +Foreign tax credits +— +3,592 +All others +3,166 +1,681 +Valuation allowance +(445 ) +(3,994 ) +Gross deferred tax assets +22,908 +24,595 +Deferred tax liabilities: +Depreciation +(71,647 ) +(53,119 ) +Goodwill amortization +(6,587 ) +(6,450 ) +Basis differences in consolidated limited liability company +(4,636 ) +(4,102 ) +Basis differences in joint ventures +(408 ) +(355 ) +All others +(5 ) +(6 ) +Gross deferred tax liabilities +(83,283 ) +(64,032 ) +Net deferred tax liabilities +$ (60,375 ) +$ (39,437 ) +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +The Company's current intention is to +permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of +funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization +of foreign tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2018, the Company has +net operating loss carryforwards related to state income taxes of $27.6 million (gross) that will expire between 2019 and 2035. +As of December 31, 2018, the Company has a valuation allowance of $390 thousand, representing the tax-affected amount of loss carryforwards +that the Company does not expect to utilize, against the corresponding deferred tax asset. +Additionally, as of December 31, 2018, +the Company has capital loss carryforwards of $56 thousand that are not expected to be utilized, and have a full valuation allowance +against the corresponding deferred tax assets. +Total net income tax payments (refunds) +were $18.0 million in 2018, $98.0 million in 2017, and $(42.4) million in 2016. +The Company and its subsidiaries are subject +to U.S. federal and state income taxes in multiple jurisdictions. In many cases, our uncertain tax positions are related to tax +years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2015 through +2018 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an +open year. +In March 2017, the Internal Revenue Service +(IRS) initiated an examination of the Company’s Federal Income Tax Returns for the years 2013 through 2016. The IRS concluded +it examinations, without adjustment, in the fourth quarter 2018. +As of December 31, 2018 and 2017, our +liability for unrecognized tax benefits related primarily to state income taxes did not change and remained at $2,215,000, and +is recognized as a component of other long-term liabilities in the accompanying consolidated balance sheet. The liability, if recognized, +would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2018 +2017 +Balance at January 1 +$ 2,215,000 +$ 2,215,000 +Additions based on tax positions related to the current year +— +— +Additions for tax positions of prior years +— +— +Reductions for tax positions of prior years +— +— +Balance at December 31 +$ 2,215,000 +$ 2,215,000 +The Company’s policy is to record +interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2018 +and 2017 were $263 thousand and $193 thousand, respectively. +It is reasonably possible that the amount +of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. +These changes may result from, among other things, state tax settlements under voluntary disclosure agreements, or conclusions +of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time. +Note 7: Long-Term Debt +The Company has a revolving credit facility +with Bank of America and five other lenders which provides for a line of credit of up to $125 million, including a $35 million +letter of credit subfacility, and a $35 million swingline subfacility. The revolving credit facility contains customary terms +and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The +revolving credit facility includes a full and unconditional guarantee by the Company's 100 percent owned domestic subsidiaries +whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s +minor subsidiaries are not guarantors. +On July 26, 2018, the Company entered into Amendment No. 4 to Credit Agreement (the “Amendment”). +The Amendment, among other matters, replaces the existing minimum tangible net worth covenant with the following covenants: (i) +when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $50 million, +a maximum consolidated leverage ratio of 2.50:1.00 and a minimum debt service coverage ratio of 2.00:1.00, and (ii) otherwise, +a minimum tangible net worth covenant of no less than $600 million. The Amendment additionally (1) extends the Credit Agreement +maturity date from January 17, 2019 to July 26, 2023, (2) eliminates any borrowing base limitations on revolving loans when RPC’s +trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $50 million, (3) reduces the +commitment fees payable by RPC by 7.5 basis points at each pricing level and (4) reduces the letter of credit sublimit from $50 +million to $35 million. As of December 31, 2018, the Company was in compliance with these covenants. +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Revolving loans under the amended revolving +credit facility bear interest at one of the following two rates at the Company’s election: +· The Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); +plus, a margin ranging from 1.125% to 2.125%, based on a quarterly consolidated leverage ratio calculation; or +· the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds +Rate plus 0.50%, (b) Bank of America’s publicly announced “prime rate,” and (c) the Eurodollar Rate plus 1.00%; +in each case plus a margin that ranges from 0.125% to 1.125% based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual +fee ranging from 0.15% to 0.25%, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit +facility. +The Company has incurred total loan origination +fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $3.3 million. These +costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of $0.3 million +at December 31, 2018 is classified as part of non-current other assets. +As of December 31, 2018, RPC had no +outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance +programs and contract bids totaled $19.5 million; therefore, a total of $105.5 million of the facility was available. +Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization +of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2018 +2017 +2016 +(in thousands) +Interest incurred +$ 390 +$ 415 +$ 449 +Interest paid +$ 241 +$ 181 +$ 284 +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Note 8: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income +consists of the following (in thousands): +Pension +Adjustment +Unrealized +Gain (Loss) On +Securities +Foreign +Currency +Translation +Total +Balance at December 31, 2016 +$ (15,503 ) +$ 39 +$ (2,638 ) +$ (18,102 ) +Change during 2017: +Before-tax amount +776 +(38 ) +391 +1,129 +Tax (expense) benefit +(283 ) +14 +— +(269 ) +Reclassification adjustment, net of taxes: +Realized loss on securities +— +— +— +— +Amortization of net loss (1) +540 +— +— +540 +Total activity in 2017 +1,033 +(24 ) +391 +1,400 +Balance at December 31, 2017 +$ (14,470 ) +$ 15 +$ (2,247 ) +$ (16,702 ) +Change during 2018: +Before-tax amount +(2,712 ) +(15 ) +(621 ) +(3,348 ) +Tax (expense) benefit +665 +— +— +665 +Reclassification adjustment, net of taxes: +Realized loss on securities +— +— +— +— +Amortization of net loss (1) +639 +— +— +639 +Total activity in 2018 +(1,408 ) +(15 ) +(621 ) +(2,044 ) +Balance at December 31, 2018 +$ (15,878 ) +$ — +$ (2,868 ) +$ (18,746 ) +(1) Reported as part of selling, general and administrative +expenses. +Note 9: Fair Value Disclosures +The various inputs used to measure assets +at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s +assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted +prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, +and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated +by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the +Company’s estimates and assumptions, which reflect those that market participants would use. +The following table summarizes the valuation +of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2018 and 2017: +Fair Value Measurements at December 31, 2018 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ 211 +$ 211 +$ — +$ — +Investments measured at net asset value - trading securities +$ 22,815 +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Fair Value Measurements at December 31, 2017 with: +(in thousands) +Total +Quoted prices in +active markets +for identical +assets +Significant +other +observable +inputs +Significant +unobservable +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ 270 +$ 270 +$ — +$ — +Investments measured at net asset value - trading securities +$ 23,463 +The Company determines the fair value +of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing +price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the +number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the +SERP assets, as described in Note 11, and are recorded primarily at their net cash surrender values, calculated using their net +asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition +to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between +levels at the beginning of quarterly reporting periods. For the year ended December 31, 2018 there were no significant transfers +in or out of levels 1, 2 or 3. +Under the Company’s revolving credit +facility, there was no balance outstanding at December 31, 2018 and 2017. Outstanding balances based on the quote from the lender +(level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable +interest rates as described in Note 7. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial +instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the +short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial +instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 10: Commitments and Contingencies +Lease Commitments - Minimum annual +rentals, principally for noncancelable real estate and equipment leases with terms in excess of one year, in effect at December +31, 2018, are summarized in the following table: +(in thousands) +2019 +$ 11,819 +2020 +10,651 +2021 +7,758 +2022 +5,618 +2023 +2,929 +Thereafter +6,170 +Total rental commitments +$ 44,945 +Total rental expense, including short-term +rentals, charged to operations was $21,576,000 in 2018, $17,112,000 in 2017, and $15,723,000 in 2016. +Income Taxes - The amount of income +taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company +has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could +result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other taxes. +Litigation +- RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims +and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance +can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising +out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings +and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably +possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s +business or financial condition. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Note 11: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income +Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees +with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation +as an adopting employer. +The Company’s projected benefit +obligation exceeds the fair value of the plan assets under its pension plan by $5.1 million and thus the plan was under-funded +as of December 31, 2018. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized +in RPC’s consolidated balance sheets: +December 31, +2018 +2017 +(in thousands) +Accumulated benefit obligation at end of year +$ 43,417 +$ 46,397 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ 46,397 +$ 44,315 +Service cost +— +— +Interest cost +1,832 +1,932 +Amendments +— +— +Actuarial loss +(2,658 ) +2,206 +Benefits paid +(2,154 ) +(2,056 ) +Projected benefit obligation at end of year +$ 43,417 +$ 46,397 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ 38,050 +$ 34,745 +Actual return on plan assets +(2,532 ) +5,361 +Employer contribution +5,000 +— +Benefits paid +(2,154 ) +(2,056 ) +Fair value of plan assets at end of year +$ 38,364 +$ 38,050 +Funded status at end of year +$ (5,053 ) +$ (8,347 ) +December 31, +2018 +2017 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss +$ 24,650 +$ 22,762 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ 24,650 +$ 22,762 +The accumulated benefit obligation for +the Retirement Income Plan at December 31, 2018 and 2017 has been disclosed above. The Company uses a December 31 measurement date +for this qualified plan. +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Amounts recognized in the consolidated +balance sheets consist of: +December 31, +2018 +2017 +(in thousands) +Funded status of the Retirement Income Plan +$ (5,053 ) +$ (8,347 ) +SERP liability +(24,585 ) +(27,288 ) +Long-term pension liabilities +$ (29,638 ) +$ (35,635 ) +RPC’s funding policy is to contribute +to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. Amounts +contributed to the plan totaled $5.0 million in 2018 and no contributions were made in 2017. +The components of net periodic benefit +cost of the Retirement Income Plan are summarized as follows: +Years ended December 31, +2018 +2017 +2016 +(in thousands) +Service cost for benefits earned during the period +$ — +$ — +$ — +Interest cost on projected benefit obligation +1,832 +1,932 +2,006 +Expected return on plan assets +(2,837 ) +(2,356 ) +(2,131 ) +Amortization of net loss +824 +851 +799 +Net periodic benefit plan cost +$ (181 ) +$ 427 +$ 674 +The Company recognized pre-tax (increases) +decreases to the funded status in accumulated other comprehensive loss of $1,888,000 in 2018, $(1,650,000) in 2017, and $1,240,000 +in 2016. There were no previously unrecognized prior service costs as of December 31, 2018, 2017 and 2016. The pre-tax amounts +recognized in accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 are summarized as follows: +(in thousands) +2018 +2017 +2016 +Net (gain) loss +$ 2,712 +$ (799 ) +$ 2,039 +Amortization of net loss +(824 ) +(851 ) +(799 ) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ 1,888 +$ (1,650 ) +$ 1,240 +The amounts in accumulated other comprehensive +loss expected to be recognized as components of net periodic benefit cost in 2019 are as follows: +(in thousands) +2019 +Amortization of net loss +$ 897 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ 897 +The weighted average assumptions as of +December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2018 +2017 +2016 +Projected Benefit Obligation: +Discount rate +4.65 % +4.00 % +4.45 % +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.00 % +4.45 % +4.70 % +Expected return on plan assets +7.00 % +7.00 % +7.00 % +Rate of compensation increase +N/A +N/A +N/A +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +The Company’s expected return on +assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes +a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation +strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested +to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical +returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, +the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +The plan’s weighted average asset +allocation at December 31, 2018 and 2017 by asset category along with the target allocation for 2019 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2019 +2018 +2017 +Asset Category +Cash and cash equivalents +0% - 3% +3.0 % +2.8 % +Fixed income securities +15% - 100% +29.1 % +20.7 % +Domestic equity securities +0% - 40% +39.5 % +23.8 % +International equity securities +0% - 30% +19.0 % +42.4 % +Investments measured at net asset value +0% - 12% +9.4 % +10.3 % +Total +100.0 % +100.0 % +The Company’s overall investment +strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit +payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments +in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, +mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and +private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, +the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk +in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset +class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual +market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this +target allocation. Although not required, Company management will evaluate contributing to the pension plan during 2019. +Some of our assets, primarily our private +equity and real estate funds, do not have readily determinable market values given the specific investment structures involved +and the nature of the underlying investments. For plan asset reporting as of December 31, 2018, publicly traded asset pricing was +used where possible. For assets without readily determinable values, estimates were derived from investment manager statements +combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued +based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant +non-observable inputs which do not have a readily determinable fair value. The valuations are subject to judgments and assumptions +of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks +to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial +data included in the funds’ financial statements for reasonableness. +The following tables present our plan assets +using the fair value hierarchy as of December 31, 2018 and 2017. The fair value hierarchy has three levels based on the reliability +of the inputs used to determine fair value. See Note 9 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2018: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ 1,140 +$ 1,140 +$ — +Fixed Income Securities +(2) +11,163 +— +11,163 +Domestic Equity Securities +(3) +15,182 +5,602 +9,581 +International Equity Securities +(4) +7,279 +— +7,279 +Total Assets in the Fair Value Hierarchy +$ 34,764 +$ 6,742 +$ 28,023 +Investments measured at Net Asset Value +3,600 +Investments at Fair Value +$ 38,364 +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Fair Value Hierarchy +as of December 31, 2017: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ 1,084 +$ 1,084 +$ — +Fixed Income Securities +(2) +9,064 +— +9,064 +Domestic Equity Securities +(3) +16,103 +5,930 +10,173 +International Equity Securities +(4) +7,889 +— +7,889 +Total Assets in the Fair Value Hierarchy +$ 34,140 +$ 7,014 +$ 27,126 +Investments measured at Net Asset Value +3,910 +Investments at Fair Value +$ 38,050 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market +funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, +base spreads and reported trades. +(3) Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in +their respective markets. +(4) International equity securities are valued using a market +approach based on the quoted market prices of identical instruments in their respective markets. +The Company estimates that the future +benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2019 +$ 2,693 +2020 +2,741 +2021 +2,828 +2022 +2,868 +2023 +2,886 +2024-2028 +$ 14,971 +Supplemental Executive Retirement Plan (SERP) +The Company +permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested +primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. +The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in +COLI policies consisted of $47.9 million in variable life insurance policies as of December 31, 2018 and $51.0 million as of December +31, 2017. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by +the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash +surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s +credit rating was A+. +The Company +classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $22,815,000 as +of December 31, 2018 and $23,463,000 as of December 31, 2017. The SERP assets are reported in other assets on the balance sheet. +The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations +as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled +$(2,282,000) in 2018, $3,156,000 in 2017, and $966,000 in 2016. The SERP liability includes participant deferrals net of distributions +is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded +as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. +As +a result of Company-owned life insurance policy claims, the Company received insurance proceeds of $2,218,000 less a cash +surrender value of $1,182,000 and recorded tax-free gains of $1,020,000 during 2018; these gains are recorded as an +adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of +operations. Proceeds received have been reinvested into mutual funds held as supplemental retirement plan assets. +401(k) Plan +RPC sponsors a defined contribution 401(k) +plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees +to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution +imposed by the Internal Revenue Code. As of December 31, 2018, the Company made matching contributions of fifty cents ($0.50) for +each dollar ($1.00) of a participant’s contribution to the 401(k) Plan that does not exceed six percent of his or her annual +compensation. Effective January 1, 2019, the Company makes 100 percent matching contributions for each dollar ($1.00) of a +participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents +($0.50) for each dollar ($1.00) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her +annual compensation. Employees vest in the RPC contributions after three years of service. The charges to expense for the +Company’s contributions to the 401(k) plan were $5,704,000 in 2018, $4,509,000 in 2017, and $3,250,000 in 2016. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +Stock Incentive Plans +The Company has issued stock options and +restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. +The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common +stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of +various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As +of December 31, 2018, 5,402,634 shares were available for grant. +The Company recognizes compensation expense +for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these +awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the +time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based +payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) +are classified as a financing activity in the accompanying consolidated statements of cash flows. +Pre-tax stock-based employee compensation +expense was $9,419,000 in 2018 ($7,111,000 after tax), $11,090,000 in 2017 ($7,042,000 after tax), and $10,218,000 in 2016 ($6,488,000 +after tax). +Stock Options +Stock options are granted at an exercise +price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock +options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the +fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in +10 years, except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, +which expire in five years. +The Company estimates the fair value of stock options as of +the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003 +and there are none outstanding. There were no stock options exercised during 2018, 2017 or 2016 and there are no stock options +outstanding as of December 31, 2018. +Restricted Stock +The Company has granted employees time +lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. +Time lapse restricted shares issued vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees +receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued +provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have +lapsed. Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially +vests based on duration of service), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2018: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2018 +2,736,365 +$ 14.50 +Granted +522,800 +25.13 +Vested +(750,880 ) +13.06 +Forfeited +(156,135 ) +17.10 +Non-vested shares at December 31, 2018 +2,352,150 +$ 17.15 +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +The following is a summary of the changes +in non-vested restricted shares for the year ended December 31, 2017: +Shares +Weighted Average Grant- +Date Fair Value +Non-vested shares at January 1, 2017 +3,217,075 +$ 12.91 +Granted +563,065 +21.66 +Vested +(900,051 ) +13.34 +Forfeited +(143,724 ) +14.25 +Non-vested shares at December 31, 2017 +2,736,365 +$ 14.50 +The fair value of restricted share awards +is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net +of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value +per share of these restricted stock awards was $25.13 for 2018, $21.66 for 2017 and $10.77 for 2016. The total fair value of shares +vested was $16,483,000 during 2018, $19,480,000 during 2017 and $9,751,000 during 2016. +Pursuant to the adoption of +ASU 2017-09 in 2017, the classification of excess tax benefits realized from tax compensation deductions in excess of compensation +expense have been reflected as follows: +· $1,899,000 for 2018 and $2,803,000 for 2017 have been recorded as a discrete income tax adjustments and classified within operating +activities as part of net income in the consolidated statements of cash flows; and +· $427,000 for 2016 was credited to capital in excess of par value and classified within financing activities as an inflow in +addition to being disclosed as an outflow within operating activities in the consolidated statements of cash flows. +Other Information +As of December 31, 2018, total +unrecognized compensation cost related to non-vested restricted shares was $43,498,000 which is expected to be recognized over +a weighted-average period of 3.2 years. +Note 12: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $873,000 in 2018, $849,000 in 2017, and $739,000 in 2016. The Company’s +receivable due from Marine Products for these services was $28,000 as of December 31, 2018 and $47,000 as of December 31, 2017. +Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,467,000 in 2018, $1,372,000 in 2017 and $890,000 +in 2016. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $101,000 in 2018, $104,000 in 2017 and $111,000 in 2016. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $199,000 +in 2018 and $197,000 in 2017 and 2016 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2018, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +Note 13: Business Segment and Entity wide Disclosures +RPC’s reportable segments are the +same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised +of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with +completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from +services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected +overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily +of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered +under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be +closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based +on this operating segment as a whole across these various services. +Support Services consist primarily of +drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. +The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (“CODM”) +assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital +expenditures and key initiatives based on the operating segments outlined above. +Segment Revenues: +RPC’s operating segment revenues +by major service lines are shown in the following table: +(in thousands) +2018 +2017 +2016 +Technical Services: +Pressure Pumping +$ 945,919 +$ 993,538 +$ 336,550 +Downhole Tools +423,811 +294,606 +169,754 +Coiled Tubing +100,049 +109,462 +70,511 +Nitrogen +49,198 +38,961 +37,172 +Snubbing +17,818 +23,838 +18,903 +All other +110,418 +77,946 +46,764 +Total Technical Services +$ 1,647,213 +$ 1,538,351 +$ 679,654 +Support Services: +Rental Tools +$ 50,809 +$ 30,264 +$ 21,443 +All other +22,983 +26,612 +27,877 +Total Support Services +$ 73,792 +$ 56,876 +$ 49,320 +Total Revenues +$ 1,721,005 +$ 1,595,227 +$ 728,974 +60 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +The accounting policies of the reportable +segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of +its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are +reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. +Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices +for arm’s length transactions and are not material to operating results. +Summarized financial information concerning +RPC’s reportable segments for the years ended December 31, 2018, 2017 and 2016 are shown in the following table: +(in thousands) +Technical +Services +Support +Services +Corporate +Gain (loss) on +disposition of +assets, net +Total +2018 +Revenues +$ 1,647,213 +$ 73,792 +$ — +$ — +$ 1,721,005 +Operating profit (loss) +216,703 +4,612 +(14,629 ) +3,344 +210,030 +Capital expenditures +230,262 +10,364 +1,984 +— +242,610 +Depreciation and amortization +150,508 +12,174 +438 +— +163,120 +Identifiable assets +925,305 +78,413 +195,862 +— +1,199,580 +2017 +Revenues +$ 1,538,351 +$ 56,876 +$ — +$ — +$ 1,595,227 +Operating (loss) profit +251,476 +(12,228 ) +(17,561 ) +4,530 +226,217 +Capital expenditures +106,131 +9,949 +1,429 +— +117,509 +Depreciation and amortization +145,507 +17,570 +460 +— +163,537 +Identifiable assets +896,803 +75,568 +174,853 +— +1,147,224 +2016 +Revenues +$ 679,654 +$ 49,320 +$ — +$ — +$ 728,974 +Operating loss +(203,804 ) +(26,021 ) +(17,037 ) +7,920 +(238,942 ) +Capital expenditures +28,380 +2,928 +2,630 +— +33,938 +Depreciation and amortization +191,181 +25,606 +471 +— +217,258 +Identifiable assets +733,008 +76,876 +225,568 +— +1,035,452 +The following summarizes revenues for the +United States and separately for all international locations combined for the years ended December 31, 2018, 2017 and 2016. The +revenues are presented based on the location of the use of the equipment or services. Assets related to international operations +are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2018 +2017 +2016 +(in thousands) +United States Revenues +$ 1,630,569 +$ 1,539,462 +$ 677,755 +International Revenues +90,436 +55,765 +51,219 +$ 1,721,005 +$ 1,595,227 +$ 728,974 +61 +Item 9. Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2018 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2018 and issued a report thereon which +is included on page 33 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive +officers will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders, in the section titled “Election +of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on +Page 14 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee +of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2019 Annual Meeting +of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit +Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct +that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers +and Related Party Transaction Policy. Both of these documents are available on the Company’s Web site at www.rpc.net. Copies +are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 520, N.E., Atlanta, +GA 30329. +RPC, Inc. intends to satisfy the disclosure +requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements +of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which +is provided above. +62 +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section +16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s +Proxy Statement for its 2019 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive +compensation will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders, in the sections titled “Compensation +Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and +Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated +herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners +and Management and Related Stockholder Matters +Information concerning +security ownership will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders, in the sections “Capital +Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance +Under Equity Compensation Plans +The following table sets forth certain +information regarding equity compensation plans as of December 31, 2018. +Plan category +(A) +Number of Securities +To Be Issued Upon +Exercise of Outstanding +Options, Warrants and +Rights +(B) +Weighted Average +Exercise Price of +Outstanding Options, +Warrants and Rights +(C) +Number of Securities Remaining +Available for Future Issuance Under +Equity Compensation Plans +(Excluding Securities Reflected in +Column (A)) +Equity compensation plans approved by securityholders +— +$ — +5,402,634 (1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ — +5,402,634 +(1) All of the securities can be issued in the form of restricted +stock or other stock awards. +See Note 11 to the Consolidated Financial +Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant +fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC +Proxy Statement for its 2019 Annual Meeting of Stockholders. This information is incorporated herein by reference. +63 +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement +Schedule and Exhibits +1. Consolidated +financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this +report. +2. The financial +statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this +report. +3. Exhibits listed in the accompanying Index to Exhibits are +filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1 2004 Stock Incentive Plan (incorporated herein by reference +to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated +herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated +herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit +10.14 to the Form 10-K filed on March 2, 2007). +10.10 Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, +2006). +10.11 Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form +10-K filed on March 3, 2010). +10.14 Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May +2, 2012). +10.15 Summary of Compensation Arrangements with Non-Employee Directors. +10.17 2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement +filed on March 17, 2014). +10.20 Form +of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated +herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +64 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2017). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors. +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated +herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among +RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated +herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash +Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among +RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated +herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +65 +SIGNATURES +Pursuant to the requirements of Section 13 +or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, +thereunto duly authorized. +RPC, Inc. +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2019 +Pursuant to the requirements of the Securities +Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities +and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2019 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 28, 2019 +The Directors of RPC (listed below) executed +a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +Amy Rollins Kreisler, Director +Gary W. Rollins, Director +Pamela R. Rollins, Director +Henry B. Tippie, Director +Bill J. Dismuke, Director +James B. Williams, Director +Larry L. Prince, Director +/s/ Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 28, 2019 +66 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following +documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +32 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +33 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +34 +Consolidated Balance Sheets as of December 31, 2018 and 2017 +35 +Consolidated Statements of Operations for the three years ended December 31, 2018 +36 +Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2018 +37 +Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2018 +38 +Consolidated Statements of Cash Flows for the three years ended December 31, 2018 +39 +Notes to Consolidated Financial Statements +40 - 61 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +67 +Schedules not listed above have been omitted +because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +SCHEDULE II — VALUATION AND QUALIFYING +ACCOUNTS +For the years ended +December 31, 2018, 2017 and 2016 +(in thousands) +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Net (Deductions) +Recoveries +Balance +at End of +Period +Year ended December 31, 2018 +Allowance for doubtful accounts +$ 4,471 +$ 588 +$ (246 ) (1) +$ 4,813 +Deferred tax asset valuation allowance +$ 3,994 +$ — (2) +$ (3,549 ) +$ 445 +Reserve for obsolete or slow moving inventory +$ 3,875 +$ 8,088 +$ (1,794 ) (3) +$ 10,169 +Year ended December 31, 2017 +Allowance for doubtful accounts +$ 2,553 +$ 1,441 +$ 477 (1) +$ 4,471 +Deferred tax asset valuation allowance +$ 356 +$ 3,638 (2) +$ — +$ 3,994 +Reserve for obsolete or slow moving inventory +$ 3,052 +$ 5,869 +$ (5,046 ) (3) +$ 3,875 +Year ended December 31, 2016 +Allowance for doubtful accounts +$ 10,605 +$ 6,021 +$ (14,073 ) (1) +$ 2,553 +Deferred tax asset valuation allowance +$ 276 +$ 80 (2) +$ — +$ 356 +Reserve for obsolete or slow moving inventory +$ 2,588 +$ 6,401 +$ (5,937 ) (3) +$ 3,052 +(1) Net (deductions) recoveries in the allowance for doubtful accounts principally reflect the write-off of previously reserved +accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state net operating losses, +foreign tax credits and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or +disposal of previously reserved inventory. +67 +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2018 +Revenues +$ 436,334 +$ 467,926 +$ 439,994 +$ 376,751 +Operating profit +$ 60,798 +$ 75,029 +$ 54,553 +$ 19,650 +Net income +$ 52,130 +$ 59,943 +$ 49,967 +$ 13,362 +Net income per share — basic (a) +$ 0.24 +$ 0.28 +$ 0.23 +$ 0.06 +Net income per share — diluted (a) +$ 0.24 +$ 0.28 +$ 0.23 +$ 0.06 +2017 +Revenues +$ 298,119 +$ 398,810 +$ 470,999 +$ 427,299 +Operating profit +$ 1,574 +$ 67,002 +$ 97,357 +$ 60,284 +Net income (b) +$ 3,634 +$ 43,840 +$ 57,334 +$ 57,703 +Net income per share — basic (a) (b) +$ 0.02 +$ 0.20 +$ 0.26 +$ 0.27 +Net income per share — diluted (a) (b) +$ 0.02 +$ 0.20 +$ 0.26 +$ 0.27 +(a) The sum of the income (loss) per share for the four quarters +may differ from annual amounts due to the required method of computing the weighted average shares for the respective periods. +(b) The indicated Statement of Operations data for 2017 includes +the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act +enacted during the fourth quarter of 2017. +68 \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/filing_metadata.csv b/raw/filings/0000742278/2018/0001144204-19-011175/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..8f52a4d8ddb3472e6d197bd43c1452deb69f2ed0 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2019-02-28,2018-12-31,2019-02-28T21:31:32.000Z,0001144204-19-011175,tv514318_10k.htm,FORM 10-K,6418727,1,0,https://www.sec.gov/Archives/edgar/data/742278/000114420419011175/tv514318_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000114420419011175/,2018,2018,1 diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/item1.txt b/raw/filings/0000742278/2018/0001144204-19-011175/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2dc2079f4f1bbc3edd36e2dacdf3fe278dad364 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/item1.txt @@ -0,0 +1,382 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally +organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +2 +RPC provides a broad range of specialized +oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production +and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, +Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following +legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized +support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support +Services which are its operating segments. As of December 31, 2018, RPC had approximately 3,600 employees. +Business Segments +RPC manages its business as either services +offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site +(Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment +and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the +operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily +able to generate revenues through equipment or services offered off the well site. During 2018, approximately three percent of +RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2018, we also estimate +that 85 percent of our revenues were related to drilling and production activities for oil, while 15 percent of revenues were related +to drilling and production activities for natural gas. +Technical Services include RPC’s +oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly +to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital +toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address +well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, +well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected +nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. +The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical +processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services +to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions +based on this operating segment as a whole across these various services. The principal markets for this business segment include +the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected +international markets. +Support Services include all of the services +that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer +operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational +success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand +equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate +to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include +rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting +services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal +markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian +regions and project work in selected international locations in the last three years, including primarily Canada, Latin America +and the Middle East. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals +and selected nationally owned oil companies. +A brief description of the primary services +conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping +services, which accounted for 55 percent of 2018 revenues, 62 percent of 2017 revenues and 46 percent of 2016 revenues are provided +to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these +services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure +pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service +offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal +materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these +items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services +offered include: +3 +Fracturing — Fracturing services +are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly +important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons +is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel +and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, +ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into +the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains +in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and +ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an +acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services +are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage +due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated +acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of +oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the +beginning of a fracturing operation. +Downhole Tools . Thru Tubing Solutions +(“TTS”) accounted for 25 percent of 2018 revenues, 19 percent of 2017 revenues and 23 percent of 2016 revenues. TTS +provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators +and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion +stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. +TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled +tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, +which accounted for six percent of revenues in 2018, seven percent of revenues in 2017 and 10 percent of revenues in 2016, involve +the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations +and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches +manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing +production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing +coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the +ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to +direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size +and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion +activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in +order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation +because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. +At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well +effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques +and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing +them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers +of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred +to as hydraulic workover services), which accounted for one percent of revenues in 2018, two percent of revenues in 2017 and three +percent of revenues in 2016, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production +tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace +downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without +removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform +many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails +high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience +and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional +completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited +range than drill pipe conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for three +percent of revenues in 2018, two percent of revenues in 2017 and five percent of revenues in 2016. There are a number of uses for +nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. +For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling +applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. +It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing +service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium +and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, +because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or +acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen +can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of +pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on +offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources +of supply are adequate. +Well Control . Cudd Energy Services +specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and +internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply +the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, +the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting +staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to +well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most +critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental +damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events +ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. +Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In +these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can +resume as promptly as safety permits. +Wireline Services . Wireline is classified +into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, +conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects +into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into +a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can +be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services +are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use +various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, +and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process +is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use +of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service +required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically +declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. +The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted +for three percent of revenues in 2018, two percent of revenues in 2017 and three percent of revenues in 2016. The Company rents +specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling +and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined +by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors +often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of +assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in +Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad +range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield +Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic +and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s +inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers +are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control +of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity +cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for +both oilfield and non-oilfield customers. +Well Control School . Well Control +School provides industry and government accredited training for the oil and gas industry both in the United States and in limited +international locations. Well Control School provides training in various formats including conventional classroom training, interactive +computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy +Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and +workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff +engineering and well site management. +Refer to Note 13 in the Notes to the Consolidated +Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services +to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities +of its customers in Texas, the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. +Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels +of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions +about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources +of oil internationally, the drilling rig count in the U.S. has declined by approximately 77 percent from its peak in 1981. However, +due to continuously enhanced rig and other technologies, more wells are drilled during periods of strong industry activity, and +these wells are increasingly productive. For these reasons, the domestic production of natural gas rose to record levels in the +third quarter of 2015, and domestic production of crude oil in the third quarter of 2015 reached its highest level since the third +quarter of 1971. With the decline in domestic drilling and completion activities beginning in early 2015, domestic production of +both natural gas and oil began to decline during the third and fourth quarters of 2015, although production continues to remain +high in comparison to historical levels. Oil and gas industry activity levels have historically been volatile, experiencing multiple +cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. +oilfield history. The rig count during the peak of the most recent cycle occurred at the end of the third quarter of 2014, and +began to decline sharply during the fourth quarter of 2014. The rig count continued to decline in 2015 and 2016, until June of +2016 when it stabilized and began to increase. Early in 2019, the rig count had recovered by approximately 159 percent from the +historical low set during the second quarter of 2016, but was still approximately 46 percent lower than the cyclical peak in the +third quarter of 2014. +6 +Because of the increased efficiency of drilling +rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to +RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so +they are an important indicator of the demand for RPC’s services. As reported by the U.S. Energy Information Administration +during the first quarter of 2019, annual well completions fell from a cyclical peak of 21,370 in 2014 to 8,106 in 2016. Between +2016 and 2018, annual well completions increased by 6,456 or 79.7 percent. In spite of the increase in well completions during +the past two years, annual well completions in 2018 were 31.9 percent lower than the 2014 cyclical peak. +The fluctuations in domestic drilling +activity since the third quarter of 2014 peak are consistent with global supply of and demand for oil, the domestic supply of +and demand for natural gas, U.S. domestic storage levels of oil and natural gas, fluctuations in the value of the U.S. dollar +on world currency markets, and projected near-term economic growth. During 2015 and into the first quarter of 2016, the price +of oil fell by approximately 78 percent from the cyclical peak in the third quarter of 2014. From its low price in early +2016, the price of oil had risen approximately 155 percent to its recent cyclical peak early in the fourth quarter of 2018. +Between this cyclical peak and early in the first quarter of 2019, the price of oil fell by approximately 28 percent. RPC +believes that the increase in the price of oil between 2016 and 2018 was due to increasing global demand and a perceived +moderation of global supply, and that the recent decline in the price of oil was due to a change in sentiment regarding +supply and demand. The average price of natural gas increased by approximately 6.4 percent during 2018 as compared with 2017 +and early in the first quarter of 2019, the price of natural gas was approximately 18 percent lower than the price at +the end of 2018. RPC does not believe that the current price of natural gas is sufficient to encourage natural gas-directed +drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In +addition to oil and natural gas, the price of natural gas liquids plays a minor role in determining our customers’ +activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various +natural gas liquids has increased to a level comparable to that of natural gas. During 2018 the average price of natural gas +liquids increased by approximately 15 percent compared with 2017. Early in the first quarter of 2019, the price of natural +gas liquids increased by approximately 29 percent compared to the average price in 2018. During 2018, the price of oil +was high enough to encourage increased drilling and production activity, but the unexpected and significant drop in the price +of oil during the fourth quarter of 2018 has caused many of RPC’s customers to delay or curtail their drilling and +completion plans for the near term. The fluctuations in the prices of these commodities, and in particular, the extreme +volatility in the price of oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling +rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural +gas began to decline, and by early in the first quarter of 2015 had fallen to approximately 18 percent of total +drilling activity. In absolute terms, the natural gas drilling rig count in the third quarter of 2016 was the lowest natural +gas drilling rig count ever recorded. During 2018 and early into the first quarter of 2019, the natural gas drilling rig +count as a percentage of the total rig count remained steady at approximately 18 percent of total drilling. Although the +demand for natural gas has remained stable, the price of natural gas has fallen in recent years due to increased domestic +reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. In spite of these +unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign +imports of natural gas do not compete with domestic production to a meaningful degree, and for several years, the United +States has exported increasing volumes of natural gas to other countries. We anticipate that oil-directed drilling will +continue to represent the majority of the total drilling rig count during the near term. Over the long term, we believe that +natural gas-directed drilling will increase due to the lack of natural gas production from oil-directed drilling +and increased natural gas demand from U.S. exports of natural gas in addition to changes in demand due to increased use of +natural gas as a transportation fuel or for other purposes. We continue to believe in the long-term growth opportunities for +our business due to the continued high demand for hydrocarbons generally and the growing production of oil in the domestic +U.S. market in particular. Furthermore, we note that the techniques used to extract oil and natural gas in the U.S. +domestic market increasingly require the types of services that RPC provides to its customers. +Unconventional wells generate a higher demand +for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling +and during the fourth quarter of 2018 and early in the first quarter of 2019, have reached a historical high of approximately 94 +percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, +they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation +fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. +Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and +drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types +of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +7 +International. RPC has historically +operated in several countries outside of the United States, and international revenues accounted for five percent of RPC’s +consolidated revenues in 2018, four percent in 2017 and seven percent in 2016. RPC’s allocation of growth capital over the +last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and +expected financial returns. International revenues increased 61.9 percent in 2018 compared to the prior year primarily due to higher +customer activity levels in Argentina and to a lesser extent, Mexico and Pakistan, partially offset by lower activity in +Gabon. During 2018, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Oman, as +well as rental tools in Pakistan. We also provided snubbing services in Gabon. We continue to focus on the selected development +of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent +of total revenues in 2019. +RPC provides services to its international +customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, +including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international +projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective +with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. +Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different +objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and +duration of contract work is not possible. Refer to Note 13 in the Notes to Consolidated Financial Statements for further information +on our international operations. +Growth Strategies +RPC’s primary objective is to generate +excellent long-term returns on investment through the effective and conservative management of its invested capital to generate +strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the +long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies +are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market +penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. +RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large +customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities +through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that +we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. +Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, +and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation +expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions +of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate +large transactions. +RPC has a revolving credit facility which +can be used to fund working capital requirements. The borrowing base for this credit facility is $125 million less the amount of +any outstanding letters of credit. There was no outstanding balance on this credit facility as of December 31, 2018. Our capital +structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment +depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, +the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist +of major and independent oil and natural gas producing companies. During 2018, RPC provided oilfield services to several hundred +customers. Of these customers, there was no customer in 2018 or 2017 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales +force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital +expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering +services or equipment and providing services or delivering equipment, there is no significant sales backlog. +8 +Competition +RPC operates in highly competitive areas +of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings +generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, +general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, +including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller +oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. +During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated +the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded or newly +formed companies increased competitive pressures during the near term, since they began to provide services to our +existing customers at lower prices, and hired experienced personnel from more established companies such as RPC. Pricing for our +services improved significantly during 2017, but began to decline during the fourth quarter of 2017 and throughout 2018. RPC believes +that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment +and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes +dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker +Hughes, a GE Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations +are more similar to RPC, including Basic Energy Services, C&J Energy Services, Keane Group, Inc., Liberty Oilfield Services, +Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Service, Patterson-UTI Energy, Inc., ProPetro Holding +Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily +of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially +all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These +manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed +deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district +facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive +offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, +Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, +Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. +For additional information with respect to RPC’s lease commitments, see Note 10 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, +federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to +worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how +such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations +will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by +laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations +are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent +to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations +which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent +protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its +competitive position. +9 +Availability of Filings +RPC makes available, free of charge, on its +website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments +to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/item13.txt b/raw/filings/0000742278/2018/0001144204-19-011175/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..54aade142e28d317b5540bbdcfaf05cca9282351 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/item13.txt @@ -0,0 +1,7 @@ +Item 13. Certain Relationships and Related Party Transactions +and Director Independence +Information concerning certain relationships +and related party transactions will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders, in the +sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence +will be included in the RPC Proxy Statement for its 2019 Annual Meeting of Stockholders in the section titled “Director Independence +and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/item9a.txt b/raw/filings/0000742278/2018/0001144204-19-011175/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d3746e77571f7a745d7073b05bee021e17faa4f --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/item9a.txt @@ -0,0 +1,22 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and +procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required +to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in +the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including +the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this +report, December 31, 2018 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and +with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness +of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer +and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable +assurance level as of the Evaluation Date. +Management’s report on internal +control over financial reporting — Management is responsible for establishing and maintaining adequate internal control +over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal +control over financial reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered +public accounting firm, has audited the effectiveness of internal control as of December 31, 2018 and issued a report thereon which +is included on page 33 of this report. +Changes in internal control over financial +reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s +internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially +affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/rp_note.txt b/raw/filings/0000742278/2018/0001144204-19-011175/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..b5e55eb3efbffd5c3206dde3f0c7ab9015635c90 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/rp_note.txt @@ -0,0 +1,43 @@ +Note 12: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the +business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. +RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation +(a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing +the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into +various agreements that define the companies’ relationship. +In accordance with a Transition Support Services +agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting +and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations +that are subsidiaries of the Company) for such services were $873,000 in 2018, $849,000 in 2017, and $739,000 in 2016. The Company’s +receivable due from Marine Products for these services was $28,000 as of December 31, 2018 and $47,000 as of December 31, 2017. +Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of +both the Company and Marine Products. +Other +The Company periodically purchases in the +ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated +with the directors of RPC. The total amounts paid to these affiliated parties were $1,467,000 in 2018, $1,372,000 in 2017 and $890,000 +in 2016. +RPC receives certain administrative services +and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated +with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement +basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration +of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries +of the Company) for such services and rent totaled $101,000 in 2018, $104,000 in 2017 and $111,000 in 2016. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, +Inc. and Subsidiaries +Years +ended December 31, 2018, 2017 and 2016 +A group that includes the Company’s +Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies +under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each +of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The +purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each +company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a +period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $199,000 +in 2018 and $197,000 in 2017 and 2016 for the corporate aircraft. The Company accounts for this investment using the equity method +and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2018, +the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. \ No newline at end of file diff --git a/raw/filings/0000742278/2018/0001144204-19-011175/rpt_disclosure.txt b/raw/filings/0000742278/2018/0001144204-19-011175/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8369135230b2e89729225389b989721486fa3433 --- /dev/null +++ b/raw/filings/0000742278/2018/0001144204-19-011175/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $873,000 in 2018. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2018, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $199,000 for the corporate aircraft. +During 2018, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2018, payments totaling approximately $1,467,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $101,000 in 2018. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins, who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, +27 +consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. 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of 1934 +For the fiscal year ended December 31, 2019 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ◻ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated Filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 410,695,775 based on the closing price on the New York Stock Exchange on June 28, 2019 of $7.21 per share. +RPC, Inc. had 214,432,084 shares of Common Stock outstanding as of February 14, 2020. +Documents Incorporated by Reference +Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include without limitation statements regarding natural gas prices, production levels and drilling activities; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity; our belief that the long-term demand outlook for natural gas is favorable and that natural gas-directed drilling will increase over the long-term; our continued belief in the long-term growth opportunities for our business; our expectation to continue to focus on the development of international business opportunities in current and other international markets; our expectations regarding acquisition targets in our industry; our belief that the passing of the proposed ban on hydraulic fracturing would reduce the demand for our services; the adequacy of our insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our belief that industry factors will continue to depress natural gas directed drilling activity during the near-term; our belief that U.S. oilfield activity will have a negative impact on RPC’s revenues and earnings during the near-term; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that oilfield well completion activity will decline during the near-term; the fact that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment and raw materials carries favorable implications for our activity levels; higher industry efficiencies have caused the market for several oil completion services including pressure pumping to be oversupplied and that this development carries negative consequences for pricing of our services, utilization of our equipment and our financial results during the near-term; our belief that newly acquired and ordered equipment will provide acceptable financial returns when placed in service at high utilization levels; our plans to undertake moderate fleet expansions which will allow us to maintain a strong balance sheet; our belief that declining activity levels may reduce the costs of providing our services and reduce logistical constraints; our expectations about contributions to the defined benefit pension plan in 2020; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual obligations for future periods; our expectations to resume payments of cash dividends; our expectations regarding the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition. +The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2019, RPC had approximately 2,700 employees. +2 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2019, approximately four percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2019, we also estimate that 82 percent of our revenues were related to drilling and production activities for oil, while 18 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations in the last three years, including primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 42 percent of 2019 revenues, 55 percent of 2018 revenues and 62 percent of 2017 revenues are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +3 +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 34 percent of 2019 revenues, 25 percent of 2018 revenues and 19 percent of 2017 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for seven percent of revenues in 2019, six percent of revenues in 2018 and seven percent of revenues in 2017, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for one percent of revenues in 2019, one percent of revenues in 2018 and two percent of revenues in 2017, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for four percent of revenues in 2019, three percent of revenues in 2018 and two percent of revenues in 2017. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +4 +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Energy Services specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2019, three percent of revenues in 2018 and two percent of revenues in 2017. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 14 in the Notes to the Consolidated Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 83 percent from its peak in 1981. However, due to continuously enhanced rig and other technologies, more wells are drilled during periods of strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of both oil and natural gas rose to record levels in the fourth quarter of 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. oilfield history. In the current cycle, the rig count peaked late in the fourth quarter of 2018, and by early in the first quarter of 2020, had fallen by approximately 27 percent. +Because of the increased efficiency of drilling rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so they are an important indicator of the demand for RPC’s services. As reported by the U.S. Energy Information Administration during the first quarter of 2020, annual well completions fell from a cyclical peak of 21,381 in 2014 to 8,123 in 2016. Between 2016 and 2019, annual well completions increased by 7,684 or 94.6 percent. In spite of the increase in well completions during the past three years, annual well completions in 2019 were 26.1 percent lower than the 2014 cyclical peak. +6 +The fluctuations in domestic drilling and completions activity since the recent cyclical peak in late 2018 are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following a cyclical peak in the fourth quarter of 2018, the price of oil had fallen by approximately 25 percent as of the first quarter of 2020. Although total world oil production was unchanged in 2019, and production increased slightly during this period, expectations for slowing global economic growth have caused the price of oil to decline. +The average price of natural gas decreased by approximately 19.2 percent during 2019 as compared with 2018 and early in the first quarter of 2020, the price of natural gas was approximately 4.9 percent lower than the price at the end of 2019. RPC does not believe that the current price of natural gas is sufficient to encourage natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the price of natural gas liquids plays a minor role in determining our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2019 the average price of natural gas liquids decreased by approximately 37.9 percent compared with 2018. Early in the first quarter of 2020, the price of natural gas liquids decreased by approximately 26.1 percent compared to the average price in 2019. During 2019, the declining price of oil began to discourage drilling and production activity as our customers increasingly began to scrutinize their projected financial returns. This scrutiny has increased early in 2020 due to continued lower commodity prices and budget pressure imposed by capital sources. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. During this time period the natural gas drilling rig count as a percentage of the total rig count remained steady at approximately 18 percent of total drilling, though it declined to approximately 15 percent of total drilling early in 2020. Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become approximately three percent of U.S. natural gas production, the price of natural gas has fallen in recent years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree. In addition, liquified natural gas exports, which began in 2013, have increased tremendously and now account for a meaningful use of U.S. natural gas production. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We do not believe that natural gas-directed drilling will increase during the near term because of the tremendous productivity of existing natural gas wells, as well as the associated production of natural gas in wells that are directed towards oil drilling. We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons generally and the growing production of oil in the domestic U.S. market in particular. +Unconventional wells generate a higher demand for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling and during the fourth quarter of 2019 and early in the first quarter of 2020, have reached a historical high of approximately 95 percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for five percent of RPC’s consolidated revenues in 2019, five percent in 2018 and four percent in 2017. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues increased 61.9 percent in 2019 compared to the prior year primarily due to higher customer activity levels in Algeria and to a lesser extent, Mexico and Pakistan, partially offset by lower activity in Gabon. During 2019, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Oman, as well as rental tools in Pakistan. We also provided snubbing services in Gabon. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2020. +7 +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 14 in the Notes to Consolidated Financial Statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital requirements. The borrowing base for this credit facility is $125 million less the amount of any outstanding letters of credit. There was no outstanding balance on this credit facility as of December 31, 2019. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2019, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2019 or 2018 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded or newly formed companies increased competitive pressures during the near term, since they began to provide services to our existing customers at lower prices, and hired experienced personnel from more established companies such as RPC. Pricing for our services improved significantly during 2017, but began to decline during the fourth quarter of 2017 and throughout 2019. Rising oil and gas production because of completion efficiencies is contributing to competitive pricing. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +8 +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Basic Energy Services, Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProPetro Holding Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 10 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 32 percent of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +9 +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. There was no customer that accounted for more than 10 percent of the Company’s revenues in 2019, 2018 or 2017. In addition, there was no customer as of December 31, 2019 or 2018 that accounted for more than 10 percent of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased losses for doubtful accounts. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations which could cause us to experience increased losses for doubtful accounts. +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition. +10 +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, our capacity and profitability could be diminished, and our growth potential could be impaired. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +11 +Compliance with federal and state regulations relating to hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry. In spite of these favorable empirical data, however, two presidential candidates in one of the major U.S. political parties have stated that they will ban hydraulic fracturing early in their presidential terms, which will begin in the first quarter of 2021. Furthermore, one of those candidates, in his current position as a U.S. senator, introduced a bill during the first quarter of 2020 which, if passed, would commission a study of oil and natural gas wells in the United States and would institute a permanent ban on all hydraulic fracturing by the year 2025. We believe that such a ban, if it occurs, would be less comprehensive than this bill contemplates. One possibility is that the legislation would only impact Federal oil and gas drilling areas, which at the present time represent less than 20 percent of U.S. drilling and completion activities. We are unable to predict the outcome of the 2020 U.S. presidential election, the probability of the passing of the proposed ban on hydraulic fracturing, and the scope of this ban if it is passed. If this or similar legislation is passed, however, we believe that such legislation would reduce the demand for RPC’s hydraulic fracturing services, as well as the other services within RPC’s Technical Segment. +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Our management has a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother, Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 73 percent of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +Our management has a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +12 +Provisions in RPC's certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital in order to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our credit facility to fund our necessary working capital and equipment requirements. Our credit facility, as amended July 26, 2018, provides a borrowing base of $125 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +Our operations are subject to cyber-attacks that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Item 1B. Unresolved Staff Comments +None. +13 +Item 2. Properties +RPC owns or leases approximately 100 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” contained in Item 7. As of December 31, 2019, the lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yards +Elk City, Oklahoma — Operations, sales and equipment storage yards +Houma, Louisiana — Administrative office +Houston, Texas — Pipe storage terminal and inspection sheds +Kilgore, Texas — Operations, sales and equipment storage yards +Odessa, Texas — Operations, sales and equipment storage yards +Rock Springs, Wyoming — Operations, sales and equipment storage yards +Vernal, Utah — Operations, sales and equipment storage yards +Leased Locations +Hobbs, New Mexico — Pumping services facility +Midland, Texas — Operations, sales and equipment storage yards +Montgomery, Pennsylvania — Operations, sales and administrative office +Oklahoma City, Oklahoma — Operations, sales and administrative office +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Washington, Pennsylvania — Operations, sales and equipment storage yards +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K. +Item 4A. Information About Our Executive Officers +Each of the executive officers of RPC was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting of stockholders or until his earlier removal by the Board of Directors or his resignation. The following table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +R. Randall Rollins (1) +88 +1/24/84 +Chairman of the Board +Richard A. Hubbell (2) +75 +4/22/03 +President and Chief Executive Officer +Ben M. Palmer (3) +59 +7/8/96 +Vice President, Chief Financial Officer and Corporate Secretary +14 +(1) R. Randall Rollins began working for Rollins, Inc. (consumer services) in 1949. Mr. Rollins has served as Chairman of the Board of RPC since the spin-off of RPC from Rollins, Inc. in 1984. He has served as Chairman of the Board of Marine Products Corporation (boat manufacturing) since it was spun off from RPC in 2001 and as Chairman of the Board of Rollins, Inc. since October 1991. He is also a director of Dover Motorsports, Inc. +(2) Richard A. Hubbell has been the President of RPC since 1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +(3) Ben M. Palmer has been the Vice President and Chief Financial Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation in July 2017. +15 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 14, 2020 there were 214,432,084 shares of common stock outstanding and approximately 13,500 beneficial holders of our common stock. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchases in the fourth quarter of 2019 are outlined below. +Total Number of +Maximum Number (or +Shares (or Units) +Approximate Dollar +Total Number of +Purchased as Part +Value) of Shares (or +Shares +Average Price +of Publicly +Units) that May Yet Be +(or Units) +Paid Per Share +Announced Plans +Purchased Under the +Period +Purchased +(or Unit) +or Programs +Plans or Programs (1) +October 1, 2019 to October 31, 2019 +— +$ +— +— +8,248,184 +November 1, 2019 to November 30, 2019 +548 +(2) +4.12 +— +8,248,184 +December 1, 2019 to December 31, 2019 +— +— +— +8,248,184 +Totals +548 +$ +4.12 +— +8,248,184 +(1) The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 and 2019 that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10,000,000 shares. There were no shares repurchased as part of this program during the fourth quarter of 2019. As of December 31, 2019, there are 8,248,184 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +(2) Shares purchased by the Company in addition to those purchased as part of publicly announced plans or programs, represent shares repurchased in connection with taxes related to the vesting of certain restricted shares. +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index. +16 +The Company was a component of the Russell 2000 during 2019. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2019 of $2.5 billion, and a median market capitalization of $821 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. +Item 6. Selected Financial Data +The following table summarizes certain selected financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere in this document. +17 +Statements of Operations Data: +Years Ended December 31, +2019 +2018 +2017 +2016 +2015 +(in thousands, except employee and per share amounts) +Revenues +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +$ +728,974 +$ +1,263,840 +Cost of revenues +919,595 +1,183,048 +1,050,809 +607,888 +986,144 +Selling, general and administrative expenses +168,127 +168,151 +159,194 +150,690 +156,579 +Impairment and other charges +82,273 +- +- +- +- +Depreciation and amortization +170,409 +163,120 +163,537 +217,258 +270,977 +(Gain) loss on disposition of assets, net +(3,707) +(3,344) +(4,530) +(7,920) +6,417 +Operating (loss) profit +(114,288) +210,030 +226,217 +(238,942) +(156,277) +Interest expense +(334) +(489) +(426) +(681) +(2,032) +Interest income +1,906 +2,426 +1,494 +467 +83 +Other (expense) income, net +(385) +9,313 +5,531 +(204) +5,185 +(Loss) income before income taxes +(113,101) +221,280 +232,816 +(239,360) +(153,041) +Income tax (benefit) provision (1) +(25,990) +45,878 +70,305 +(98,114) +(53,480) +Net (loss) income (1) +$ +(87,111) +$ +175,402 +$ +162,511 +$ +(141,246) +$ +(99,561) +(Loss) earnings per share: (1) +Basic +$ +(0.41) +$ +0.82 +$ +0.75 +$ +(0.66) +$ +(0.47) +Diluted +$ +(0.41) +$ +0.82 +$ +0.75 +$ +(0.66) +$ +(0.47) +Dividends paid per share +$ +0.150 +$ +0.470 +$ +0.200 +$ +0.050 +$ +0.155 +Other Data: +Operating (loss) profit margin percent +(9.3) +% +12.2 +% +14.2 +% +(32.8) +% +(12.4) +% +Net cash provided by operating activities +$ +209,141 +$ +389,009 +$ +133,704 +$ +101,704 +$ +473,792 +Net cash used for investing activities +(235,788) +(219,727) +(104,386) +(21,339) +(157,583) +Net cash used for financing activities +(39,592) +(144,070) +(70,103) +(13,726) +(260,785) +Capital expenditures +$ +250,629 +$ +242,610 +$ +117,509 +$ +33,938 +$ +167,426 +Employees at end of period +2,700 +3,600 +3,500 +2,500 +3,100 +Balance Sheet Data at Year End: +Accounts receivable, net +$ +242,574 +$ +323,533 +$ +377,853 +$ +169,166 +$ +232,187 +Working capital +335,456 +475,701 +494,775 +377,589 +384,744 +Property, plant and equipment, net +516,727 +517,982 +443,928 +497,986 +688,335 +Total assets +1,053,218 +1,199,580 +1,147,224 +1,035,452 +1,237,094 +Long-term debt +— +— +— +— +— +Total stockholders’ equity +$ +830,333 +$ +950,419 +$ +911,697 +$ +806,799 +$ +952,281 +(1) The indicated data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. +18 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements included elsewhere in this document. See also “Forward-Looking Statements” on page 2. +RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of certain high-demand raw materials used in our operations, both in order to conduct our operations and to enhance our competitive position. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +19 +Current industry conditions are characterized by oil prices which have fallen from a cyclical peak of $75 per barrel in the fourth quarter of 2018 to $53 per barrel in the first quarter of 2020. In spite of this significant decrease in the price of oil, the U.S. domestic rig count and well completion counts have not fallen significantly during the fourth quarter of 2019 and into the first quarter of 2020. However, many of our customers indicate that they are curtailing or delaying their drilling and completion plans early in 2020, and we believe that this will have a negative impact on RPC’s revenues and earnings during the near term. One catalyst for the recent decrease in the price of oil relates to global supply and demand for the commodity. Early in 2020, a potential slowdown in economic growth is perceived to be a catalyst for lower oil prices, a factor which is exacerbated by continued growth in oil production, particularly in the United States. RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States grew to be the world’s largest producer of oil during the second quarter of 2016. Following its recent peak, U.S. oil production fell by 25 percent as of the third quarter of 2017. Since that time, however, improving drilling and completion activity have caused U.S. domestic oil production to rise, and as of the most recent monthly reported statistics, current U.S. oil production has increased to a level that is 42 percent higher than the cyclical low production recorded during the third quarter of 2016. During the fourth quarter of 2018, U.S. oil production rose to its highest level on record. We believe that record U.S. oil production is a catalyst for lower oil prices during the near term. Customer activities directed towards natural gas drilling and production have been weak for several years, with the U.S. domestic natural gas rig count during the first quarter of 2017 falling to the lowest level ever recorded. The U.S. domestic natural gas rig count has increased from this historic low but is still low by historical standards. We believe that customer activities directed towards drilling for natural gas has been weak because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. We believe that these factors will continue to depress natural gas-directed drilling during the near term. From a low of $1.72 per Mcf during the second quarter of 2017, the price of natural gas had risen to $1.95 per Mcf early in the first quarter of 2020. While current natural gas prices are higher than at the recent cyclical trough, we believe that they are still too low to encourage our customers to conduct exploration and production activities directed exclusively towards natural gas. +In 2019, the Company’s strategy of utilizing equipment in unconventional basins has continued. During 2019, we made capital expenditures totaling $250.6 million primarily for new revenue-producing equipment and capitalized maintenance of our existing equipment. +Revenues during 2019 totaled $1.2 billion, a decrease of 29.0 percent compared to 2018 primarily as a result of lower activity levels and lower pricing for certain service lines. Cost of revenues decreased $263.5 million in 2019 compared to the prior year due to lower employment costs, maintenance and repairs expenses, materials and supplies expense and other costs, all of which were driven by lower activity levels. As a percentage of revenues, cost of revenues increased to 75.2 percent in 2019 compared to 68.7 percent in 2018. +Selling, general and administrative expenses as a percentage of revenues increased to 13.8 percent in 2019 compared to 9.8 percent in 2018 due to lower revenues over primarily fixed expenses. +Impairment and other charges were $82.3 million in 2019, primarily due to equipment disposals, closing operating locations and reducing employee staffing. +Loss before income taxes was $113.1 million for 2019 compared to income before income taxes of $221.3 million in 2018. Net loss for 2019 was $87.1 million, or $0.41 loss per share compared to net income of $175.4 million, or $0.82 earnings per share in 2018. Net income in 2019 and 2018 reflect the lower income tax rates as a result of the Tax Cuts and Jobs Act enacted in 2017. +Cash flows from operating activities decreased to $209.1 million in 2019 compared to $389.0 million in 2018 primarily due to lower earnings, partially offset by a favorable changes in working capital. As of December 31, 2019, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,931 during the third quarter of 2014. Between the third quarter of 2014 and the second quarter of 2016, the drilling rig count fell by 79 percent. During the second quarter of 2016, the U.S. domestic drilling rig count reached the lowest level ever recorded. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets, which began in the third quarter of 2014. The price of oil began to fall at that time due to the perceived oversupply of oil, weak global demand growth, and the strength of the U.S. dollar on world currency markets. During the second quarter of 2016, the price of oil and the U.S. domestic rig count began to increase, and increased steadily throughout the remainder of 2016, 2017 and 2018. At the end of 2019, the U.S. domestic rig count had fallen by approximately 26 percent compared with the end of 2018. RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig count; therefore, we believe the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions in the U.S. completions +20 +increased by approximately 30 percent to 14,655 in 2018 compared to 11,277 in 2017, and by approximately seven percent to 15,734 during 2019. However, we believe that U.S. oilfield well completion activity will decline during the near term. +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. During the first two quarters of 2016, the prices of oil and natural gas remained at low levels that discouraged our customers from undertaking most of their potential exploration and production activities. The prices of oil and natural gas increased during the third and fourth quarters of 2016, throughout 2017 and continued during 2018. The price of natural gas declined during 2019 and we do not believe that it is at a level that encourages our customers to increase their natural gas directed drilling and production activities. The price of oil began to increase during 2019, and at the end of the fourth quarter of 2019 was approximately 35 percent higher than at the end of the fourth quarter of 2018. The average price of natural gas liquids in 2019 decreased by 19.2 percent compared to the average price for the full year 2018. +The majority of the U.S. domestic rig count remains directed towards oil. At the beginning of 2020, approximately 85 percent of the U.S. domestic rig count was directed towards oil, a slight increase compared to the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +We continue to monitor the market for our services and the competitive environment. The U.S. domestic rig count had increased sharply since the historical low recorded during the third quarter of 2016 and continuing until the fourth quarter of 2018, though the rig count has declined during 2019. The fact that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment and raw materials carries favorable implications for our activity levels. Furthermore, we note that some wells in the U.S. domestic market have been drilled but not completed. At the end of the fourth quarter of 2019, the number of wells in this category had decreased by approximately ten percent since the beginning of 2019. These moderately positive economic factors are offset by indications from our customers that they intend to reduce drilling and completion activity during 2020 because they are managing their operations to maximize near-term cash flow. Also, during 2018, we began to observe that oilfield completion crews and equipment were providing services with increasing efficiency, and we believe that this higher efficiency has caused the market for several oilfield completion services, including pressure pumping, to become oversupplied. This trend continued during 2019, and we believe that this development carries negative consequences for pricing of our services, utilization of our equipment and our financial results during the near term. +Activity levels and pricing for oilfield services reached a level during 2018 that allowed the industry to maintain its equipment and encouraged oilfield service providers to expand their fleets of revenue-producing equipment and hire additional personnel. The prospect of improved financial returns also provided access to the capital markets and allowed previously insolvent service companies to resume operations and add equipment. As a result, competition increased during 2018. Increased competition and improved service efficiency, coupled with the significant decline in oil prices during the fourth quarter of 2018, became catalysts for lower pricing and activity levels in 2019. RPC expanded the size of its fleet of revenue-producing equipment modestly during 2018 and placed orders in the latter part of 2018 for a small amount of new equipment that was delivered in 2019. The equipment we placed in service in 2018 and 2019 is more powerful and efficient than earlier generations of oilfield service equipment, and we believe that it will produce acceptable financial returns as it is placed in service at high utilization levels. Our consistent response to the near-term potential of lower activity levels and pricing is to undertake moderate fleet expansions which we believe will allow us to maintain a strong balance sheet, even if near-term pricing and activity levels generated by such new equipment are modest. +The negative implications for RPC’s near-term activity levels from low oil prices and increased competition are partially offset by improved availability and lower cost for some of the critical raw materials used in providing RPC’s services. In addition, lower activity levels reduce the cost, and increase the availability of, skilled labor. These factors may reduce the cost of providing RPC’s services and reduce logistical constraints. +The Company recorded impairment and other charges in 2019 of $82.3 million primarily related to equipment disposals, closing operating locations and reducing employee staffing. We made operational decisions resulting in these impairments and other charges because the U.S. oilfield has undergone fundamental changes in the past few years. These changes require equipment which is capable of operating continuously, over long periods of time, and much of our older equipment is not able to fulfill this requirement, no matter how well maintained. We believe that the oilfield will require less pressure pumping equipment in the foreseeable future based on the fact that U.S. oil production has reached record levels while not fully utilizing the pressure pumping capacity that has been available during the period. In addition, we are aware that our customers have been forced to conduct their operations with little or no access to outside capital for the first time in many years, and we assume that this aspect of exploration and production financing will remain in place for the foreseeable future, thereby reducing the volume of future drilling and completion of new wells. +21 +Results of Operations +Years Ended December 31, +2019 +2018 +2017 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +Revenues by business segment: +Technical +$ +1,145,554 +$ +1,647,213 +$ +1,538,351 +Support +76,855 +73,792 +56,876 +Consolidated operating (loss) profit +$ +(114,288) +$ +210,030 +$ +226,217 +Operating (loss) profit by business segment: +Technical +$ +(32,993) +$ +216,703 +$ +251,476 +Support +10,016 +4,612 +(12,228) +Corporate expenses +(12,745) +(14,629) +(17,561) +Impairment and other charges (1) +(82,273) +- +- +Gain on disposition of assets, net +3,707 +3,344 +4,530 +Net (loss) income (2) +$ +(87,111) +$ +175,402 +$ +162,511 +(Loss) Earnings per share — diluted (2) +$ +(0.41) +$ +0.82 +$ +0.75 +Percentage of cost of revenues to revenues +75 +% +69 +% +66 +% +Percentage of selling, general and administrative expenses to revenues +14 +% +10 +% +10 +% +Percentage of depreciation and amortization expenses to revenues +14 +% +10 +% +10 +% +Effective income tax rate (2) +23.0 +% +20.7 +% +30.2 +% +Average U.S. domestic rig count +943 +1,032 +877 +Average natural gas price (per thousand cubic feet (mcf)) +$ +2.57 +$ +3.18 +$ +2.99 +Average oil price (per barrel) +$ +56.90 +$ +65.02 +$ +50.84 +(1) Amount in 2019 represents $80,263 related to technical services and $2,010 related to corporate services. +(2) The indicated data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. +Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 +Revenues. Revenues in 2019 decreased $498.6 million or 29.0 percent compared to 2018. The Technical Services segment revenues in 2019 decreased $501.7 million or 30.5 percent compared to the prior year. The decrease is due primarily to lower activity levels and lower pricing in several of our service lines as compared to the prior year. The Support Services segment revenues in 2019 increased $3.1 million or 4.2 percent compared to 2018 due primarily to improved activity levels and pricing in the rental tools service line, which is the largest service line within this segment. Technical Services reported an operating loss of $33.0 million during 2019 compared to a profit of $216.7 million in the prior year, while Support Services reported an operating income of $10.0 million in 2019 compared to $4.6 million in the prior year. The average price of oil decreased 12.5 percent and the average price of natural gas decreased 19.2 percent during 2019 compared to the prior year. The average domestic rig count during 2019 was 8.6 percent lower than 2018. International revenues, which decreased from $90.4 million in 2018 to $64.6 million in 2019, were five percent of consolidated revenues in both 2019 and 2018. International revenues decreased in 2019 primarily due to lower customer activity levels in Argentina and to a lesser extent, Canada and Gabon, partially offset by higher activity in Algeria compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2019 was $919.6 million compared to $1.2 billion in 2018, a decrease of $22.3 percent due to lower employment costs, maintenance and repair expenses, materials and supplies expense and other costs, all of which were driven by lower activity levels. As a percentage of revenues, cost of revenues increased to 75.2 percent in 2019 compared to 68.7 percent in 2018 primarily due to lower activity levels and more competitive pricing. +Selling, general and administrative expenses. Selling, general and administrative expenses decreased slightly to $168.1 million in 2019 compared to $168.2 million in 2018. Selling, general and administrative expenses as a percentage of revenues increased to 13.8 percent of revenues in 2019 compared to 9.8 percent of revenues in 2018 due to the negative leverage of lower revenues over primarily fixed expenses. +Depreciation and amortization. Depreciation and amortization were $170.4 million in 2019, an increase of $7.3 million, compared to $163.1 million in 2018 due to capital expenditures made during 2019. As a percentage of revenues, depreciation and amortization increased in 2019 compared to 2018 primarily due to lower revenues. +22 +Impairment and other charges. Impairment and other charges were $82.3 million in 2019, primarily due to equipment disposals, closing operating locations and reducing employee staffing. +Gain on disposition of assets, net. Gain on disposition of assets, net was $3.7 million in 2019 compared to $3.3 million in 2018. The gain on disposition of assets, net is generally comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other (expense) income, net. Other expense, net was $0.4 million in 2019 compared to other income, net of $9.3 million in 2018. Other income recorded in 2018 includes property insurance proceeds totaling $9.6 million. +Interest expense and interest income. Interest expense was $0.3 million in 2019 compared to $0.5 million in 2018. Interest expense in 2019 and 2018 principally consists of fees on the unused portion of the credit facility. Interest income decreased to $1.9 million in 2019 compared to $2.4 million in 2018 due to lower investable cash balances. +Income tax (benefit) provision. The income tax benefit was $26.0 million in 2019 compared to a provision of $45.9 million in 2018. The effective tax rate was 23.0 percent in 2019 compared to 20.7 percent in 2018. The increase in the effective tax rate in 2019 is due primarily to certain state taxes based on revenues rather than taxable income or losses and unfavorable discrete adjustments in 2019 compared to 2018. +Net (loss) income and diluted (loss) earnings per share. Net loss was $87.1 million in 2019, or $0.41 loss per diluted share, compared to net income of $175.4 million in 2018, or $0.82 earnings per diluted share. This decrease in earnings per share was due to lower profitability as average shares outstanding was essentially unchanged. +Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 +Revenues. Revenues in 2018 increased $125.8 million or 7.9 percent compared to 2017. The Technical Services segment revenues in 2018 increased $108.9 million or 7.1 percent compared to the prior year. The increase is due primarily to higher activity levels and improved pricing in a few of our services lines as compared to the prior year. The Support Services segment revenues in 2018 increased $16.9 million or 29.7 percent compared to 2017 due primarily to improved activity levels and pricing in the rental tool service line, which is the largest service line within this segment. Technical Services reported an operating profit of $216.7 million during 2018 compared to $251.5 million in the prior year, while Support Services reported an operating income of $4.6 million in 2018 compared to an operating loss of $12.2 million in the prior year. The average price of oil increased 27.9 percent while the average price of natural gas increased 6.4 percent during 2018 compared to the prior year. The average domestic rig count during 2018 was 17.7 percent higher than 2017. International revenues, which increased from $55.9 million in 2017 to $90.4 million in 2018, were five percent of consolidated revenues in 2018 compared to four percent of consolidated revenues in 2017. International revenues increased primarily due to higher customer activity levels in Argentina and to a lesser extent, Mexico and Pakistan in 2018, partially offset by lower activity in Gabon compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2018 was $1.2 billion compared to $1.1 billion in 2017, an increase of $132.2 million or 12.6 percent due to higher employment costs, maintenance and repair expenses and other costs, all of which were driven by higher activity levels. As a percentage of revenues, cost of revenues increased to 68.7 percent in 2018 compared to 65.9 percent in 2017. +Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.6 percent to $168.2 million in 2018 compared to $159.2 million in 2017. These expenses increased due to higher salaries and wages expense consistent with higher activity levels as well as an increase in information technology costs. Selling, general and administrative expenses as a percentage of revenues decreased slightly to 9.8 percent of revenues in 2018 compared to 10.0 percent of revenues in 2017 due to the leverage of higher revenues over primarily fixed expenses. +Depreciation and amortization. Depreciation and amortization were $163.1 million in 2018, a decrease of $0.4 million, compared to $163.5 million in 2017 due to lower capital expenditures in the prior year. As a percentage of revenues, depreciation and amortization decreased in 2018 compared to 2017 primarily due to higher revenues. +Gain on disposition of assets, net. Gain on disposition of assets, net was $3.3 million in 2018 compared to $4.5 million in 2017. The decrease is due to the sale of operating equipment related to its oilfield pipe inspection service line during the second quarter of 2017 that did not recur in the current period. The gain on disposition of assets, net is generally comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other income, net was $9.3 million in 2018 compared to of $5.5 million in 2017. Other income recorded in 2018 includes property insurance proceeds totaling $9.6 million. Income recorded in 2017 included a favorable settlement of $2.0 million associated with the resolution of a sales tax matter, as well as a property insurance proceeds of $1.9 million. +23 +Interest expense and interest income. Interest expense increased to $0.5 million in 2018 compared to $0.4 million in 2017. Interest expense in 2018 and 2017 principally consists of fees on the unused portion of the credit facility. Interest income increased to $2.4 million in 2018 compared to $1.5 million in 2017 due to higher investable cash balances. +Income tax provision (benefit). The income tax provision was $45.9 million in 2018 compared to $70.3 million in 2017. The effective tax rate was 20.7 percent in 2018 compared to 30.2 percent in 2017. The decrease in the income tax provision for 2018 primarily reflects the decrease in Federal income tax rates from 35 percent to 21 percent as enacted by the 2017 Tax Cuts and Jobs Act. +Net income and diluted earnings per share . Net income was $175.4 million in 2018, or $0.82 earnings per diluted share, compared to $162.5 million in 2017, or $0.75 earnings per diluted share. This improvement in earnings per share was due to higher net income as average shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $50.0 million as of December 31, 2019, $116.3 million as of December 31, 2018 and $91.1 million as of December 31, 2017. +The following table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2019 +2018 +2017 +Net cash provided by operating activities +$ +209,141 +$ +389,009 +$ +133,704 +Net cash used for investing activities +(235,788) +(219,727) +(104,386) +Net cash used for financing activities +(39,592) +(144,070) +(70,103) +2019 +Cash provided by operating activities in 2019 decreased by $179.9 million compared to the prior year. This decrease is due primarily to a decrease in net income (loss) of $262.5 million, the deferred income tax benefit of $22.2 million and gains due to benefit plan financing arrangement in 2018. These decreases were partially offset by a net favorable change in working capital of $24.9 million. The net favorable change in working capital is primarily due to favorable changes of $27.1 million in accounts receivable due to lower activity levels and revenues in the third and fourth quarters of 2019 and $36.6 million in inventories due to lower activity levels. These favorable changes were partially offset by unfavorable working capital changes of $34.5 million in accounts payable and $8.3 million in accrued payroll and related expenses. +Cash used for investing activities in 2019 increased by $16.1 million compared to 2018 primarily because of higher capital expenditures in 2019 and property insurance proceeds in 2018. +Cash used for financing activities in 2019 decreased by $104.5 million primarily as a result of a reduction in cash dividends to common stockholders, partially offset by the lower cost of repurchases of the Company’s shares on both the open market and for taxes related to the vesting of restricted shares. +2018 +Cash provided by operating activities in 2018 increased by $255.3 million compared to the prior year. This increase is due primarily to an increase in net income of $12.9 million, net favorable changes in working capital of $196.7 million and the deferred income tax provision of $64.0 million partially offset by gains due to an insurance recovery and a benefit plan financing arrangement. The net favorable change in working capital is primarily due to favorable changes of $262.6 million in accounts receivable due to lower activity levels and revenues in the third and fourth quarters 2018, $4.3 million in accrued expenses and $6.1 million in prepaid expenses/ other current assets. These favorable changes were partially offset by unfavorable working capital changes of $9.3 million in net income taxes receivable/ payable, $9.4 million in inventories, $36.9 million in accounts payable, $11.1 million in accrued state and local taxes and $9.2 million in accrued payroll and related expenses. +Cash used for investing activities in 2018 increased by $115.3 million, compared to 2017, primarily because of higher capital expenditures partially offset by property insurance proceeds. +24 +Cash used for financing activities in 2018 increased by $74.0 million primarily as a result of increased cash dividends to common stockholders coupled with the higher cost of repurchases of the Company’s shares on the open market and for taxes related to the vesting of restricted shares. +Financial Condition and Liquidity +The Company’s financial condition as of December 31, 2019 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company currently has a $125 million revolving credit facility that matures in July 2023. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On July 26, 2018, the Company amended the revolving credit facility to, among other matters, (1) replace the existing minimum tangible net worth covenant, as well as, (2) extend the maturity date of the revolving credit facility to July 26, 2023, (3) eliminate any borrowing base limitations on revolving loans when certain criteria exist, (4) reduce the commitment fees payable by RPC and (5) reduce the letter of credit sublimit from $50 million to $35 million. As of December 31, 2019, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $19.5 million; therefore, a total of $105.5 million of the facility was available. For additional information with respect to RPC’s facility, see Note 8 of the Notes to Consolidated Financial Statements included in this report. +The Company’s decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position, including the expected amount of cash to be provided by operations and access to borrowings under our facility. We believe our liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity levels. In addition, the Company's decisions about the amount of cash to be used for investing and financing activities may also be influenced by the financial covenants in our credit facility but we do not expect the covenants to restrict our planned activities. The Company is in compliance with these financial covenants. +Cash Requirements +Capital expenditures were $250.6 million in 2019, and we currently expect capital expenditures to be approximately $80 million in 2020. We expect that a majority of these expenditures in 2020 will be directed towards capitalized maintenance of our existing equipment. The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. +The Company’s Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. During 2019, the Company did not make any contributions to the plan and does not expect to make any contributions to the plan during 2020. +The Company has a stock buyback program, initially adopted in 1998 and subsequently amended in 2013 and 2018, that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10 million shares. There were 595,585 shares repurchased on the open market by the Company during 2019, and 8,248,184 shares remain available to be repurchased under the current authorization as of December 31, 2019. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +The Company recorded impairment and other charges of $82.3 million during 2019, of which $8.7 million is expected to have a cash impact during 2020. +On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends. +25 +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, 2019: +Contractual Obligations +Payments due by period +Less than +1-3 +3-5 +More than +(in thousands) +Total +1 year +years +years +5 years +Long-term debt obligations +$ +— +$ +— +$ +— +$ +— +$ +— +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +44,685 +12,091 +16,231 +7,231 +9,132 +Purchase obligations (2) +229 +229 +— +— +— +Other long-term liabilities (3) +11,294 +7,903 +3,007 +384 +— +Total contractual obligations +$ +56,208 +$ +20,223 +$ +19,238 +$ +7,615 +$ +9,132 +(1) Operating leases include agreements for various office locations, office equipment, and certain operating equipment. +(2) Includes agreements to purchase raw materials, goods or services that have been approved and that specify all significant terms (pricing, quantity, and timing). As part of the normal course of business the Company occasionally enters into purchase commitments to manage its various operating needs. +(3) Includes expected cash payments for long-term liabilities reflected on the balance sheet where the timing of the payments is known. These amounts include incentive compensation, severance costs and estimated charges related to disposal of impaired assets. Also includes amounts related to the usage of corporate aircraft. These amounts exclude pension obligations with uncertain funding requirements and deferred compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive Retirement Plan (“SERP”) investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. When oilfield activity began to increase in the third quarter of 2016, the Company experienced upward pressure on the price of labor due to the shortage of skilled employees as well as occasional increases in the prices of certain raw materials used in providing our services. During 2018, however, prices for the raw material comprising the Company’s single largest raw material purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor cost pressures during the fourth quarter of 2018 began to abate due to lower oilfield activity. These cost pressures continued to decline during 2019. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +26 +Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $865,000 in 2019, $873,000 in 2018, and $849,000 in 2017. The Company’s receivable due from Marine Products for these services was $55,000 as of December 31, 2019 and $28,000 as of December 31, 2018. Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1,625,000 in 2019, $1,467,000 in 2018 and $1,372,000 in 2017. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $104,000 in 2019, $101,000 in 2018 and $104,000 in 2017. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $199,000 in 2019 and 2018 and $197,000 in 2017 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $1.0 million as of December 31, 2019 and $0.8 million as of December 31, 2018. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2019, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +Critical Accounting Policies +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +27 +Allowance for doubtful accounts — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our allowance for doubtful accounts is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period to period. Recoveries were insignificant in 2019, 2018 and 2017. We record specific provisions when we become aware of a customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated allowance for doubtful accounts is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net provisions for doubtful accounts as a percentage of revenues ranged from 0.03 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages by 0.50 percentage points as of December 31, 2019 would have resulted in a change of $1.1 million to the allowance for doubtful accounts and a corresponding change to selling, general and administrative expenses. +Income taxes — The effective income tax benefits were 23.0 percent in 2019, compared to an income tax provision of 20.7 percent in 2018 and 30.2 percent in 2017. Our effective tax rates vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which our earnings and deductions are realized, and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis. The effective tax rate for 2019 reflects the decrease in favorable discrete adjustments, along with a higher percentage of permanent adjustments compared to income (loss). +The Company establishes a valuation allowance against the carrying value of deferred tax assets when it is determined that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period the determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, the applicable portion of the previously provided valuation allowance is reversed. The Company considers future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. +The Company calculates the current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the third quarter of the subsequent year for U.S. federal and state provisions. Deferred tax liabilities and assets are determined based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the year the differences are expected to reverse. In 2017, the Company revalued its deferred tax assets and liabilities to reflect the change in Federal income tax rates, as required by the TCJA. All deferred tax assets and liabilities from December 31, 2017 forward reflect the changed rate. +The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. +Insurance expenses —The Company self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2019, the Company estimates the range of exposure to be from $19.0 million to $24.2 million. The Company has recorded liabilities at December 31, 2019 of $21.6 million which represents management’s best estimate of probable loss. +28 +Depreciable life of assets — RPC’s net property, plant and equipment at December 31, 2019 was $516.7 million representing 49.1 percent of the Company’s consolidated assets. Depreciation and amortization expense for the year ended December 31, 2019 was $170.4 million. Management judgment is required in the determination of the estimated useful lives used to calculate the annual and accumulated depreciation and amortization expense. +Property, plant and equipment are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors including historical experience with similar assets. Assets are monitored to ensure changes in asset lives are identified and prospective depreciation and amortization expense is adjusted accordingly. We did not make any changes to the estimated lives of assets resulting in a material impact in 2019 or 2018. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on our balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. +For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group's carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management's short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management's short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. +The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for the Company's services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions further deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. +Defined benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit plan, although the Company remains obligated to provide employees benefits earned through March 2002. The Company accounts for the defined benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) ASC 715, “Compensation – Retirement Benefits” and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary. +The Company chooses an expected rate of return on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s assumption for the expected return on plan assets was seven percent for 2019, 2018 and 2017. +29 +The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 3.60 percent as of December 31, 2019 compared to 4.65 percent as of December 31, 2018 and 4.00 percent in 2017. +As set forth in Note 12 to the Company’s financial statements, included among the asset categories for the Plan’s investments are real estate and alternative/ opportunistic/ special fund investments comprised of real estate funds and private equity funds. These investments are measured at net asset value and are valued using significant non-observable inputs which do not have a readily determinable fair value. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +As of December 31, 2019, the defined benefit plan was under-funded and the recorded change within accumulated other comprehensive loss decreased stockholders’ equity by $3.0 million after tax. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of $1.3 million to the net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense (income) of $0.3 million in 2019, $(0.2) million in 2018 and $0.4 million in 2017. Based on the under-funded status of the defined benefit plan as of December 31, 2019, the Company expects to recognize pension income of $15 thousand in 2020. Holding all other factors constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase or decrease in pension expense of $194 thousand in 2020. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of $19 thousand in 2020. +Recent Accounting Pronouncements +The Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +● Accounting Standards Update (ASU) 2016-02, Leases (Topic 842 ) . The Company adopted ASC 842, Leases, and all the related amendments on January 1, 2019, by recognizing on its balance sheet, a right-of-use asset and lease liabilities totaling approximately $44 million, for all of its leases with terms greater than 12 months. The Company adopted the standard using the optional transition method, with an immaterial adjustment to retained earnings upon adoption. The comparative information has not been restated and continues to be reported under the accounting standards that were in effect for those periods. The adoption of the standard did not have a material impact on the Company’s consolidated statements of operations and consolidated statements of cash flows. See “Leases” in the Notes to Consolidated Financial Statements for expanded disclosures +● ASU No. 2018-02— Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments provide an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The Company adopted the standard in the first quarter of 2019 and elected to reclassify approximately $2.7 million of stranded tax effects related to its pension plan from AOCI to retained earnings. +● ASU No. 2018-07 — Compensation —Stock Compensation (Topic 718) —Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASU 718 to include share-based payments issued to nonemployees for goods or services, thereby substantially aligning the accounting for share-based payments to nonemployees and employees. The Company adopted these provisions in the first quarter of 2019 and the adoption did not have a material impact on its consolidated financial statements. +30 +Recently Issued Accounting Standards Not Yet Adopted: +To be adopted in 2020 and later: +● ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for recognition in place of the current incurred loss model. The Company adopted the provisions of the standard in the first quarter of 2020 and currently expects the adoption to have an immaterial cumulative-effect adjustment to the opening balance of retained earnings. The Company plans to continue to record an allowance on its trade receivables based on aging at the end of each reporting period using current reasonable and supportable forecasted economic conditions. +● ASU No. 2017-04 —Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted these provisions in the first quarter of 2020, on a prospective basis. +● ASU No. 2018-15 — Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The Company adopted these provisions in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements. +● ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The amendments are effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years. The company is currently evaluating the impact of adopting these provisions on its consolidated financial statements. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its revolving credit facility. As of December 31, 2019, there are no outstanding interest-bearing advances on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +31 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2019 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2019. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2019, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 33. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2020 +32 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 28, 2020 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2020 +33 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2020 expressed an unqualified opinion. +Change in accounting principle +As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Codification Topic 842, Leases . +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2020 +34 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2019 +2018 +ASSETS +Cash and cash equivalents +$ +50,023 +$ +116,262 +Accounts receivable, net +242,574 +323,533 +Inventories +100,947 +130,083 +Income taxes receivable +24,145 +35,832 +Prepaid expenses +10,459 +9,766 +Assets held for sale +5,385 +— +Other current assets +3,325 +3,462 +Current assets +436,858 +618,938 +Property, plant and equipment, net +516,727 +517,982 +Operating lease right-of-use assets +33,850 +— +Goodwill +32,150 +32,150 +Other assets +33,633 +30,510 +Total assets +$ +1,053,218 +$ +1,199,580 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +53,147 +$ +103,401 +Accrued payroll and related expenses +19,641 +25,715 +Accrued insurance expenses +7,540 +6,183 +Accrued state, local and other taxes +2,427 +3,081 +Income taxes payable +1,534 +4,706 +Current portion of operating lease liabilities +10,625 +— +Other accrued expenses +6,488 +151 +Current liabilities +101,402 +143,237 +Long-term accrued insurance expenses +14,040 +12,072 +Long-term pension liabilities +39,254 +29,638 +Deferred income taxes +37,319 +60,375 +Long-term operating lease liabilities +28,378 +— +Other long-term liabilities +2,492 +3,839 +Total liabilities +222,885 +249,161 +Commitments and contingencies (Note 11) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 214,422,979 and 214,543,511 shares issued and outstanding in 2019 and 2018, respectively +21,443 +21,454 +Capital in excess of par value +— +— +Retained earnings +832,113 +947,711 +Accumulated other comprehensive loss +( 23,223 ) +( 18,746 ) +Total stockholders’ equity +830,333 +950,419 +Total liabilities and stockholders’ equity +$ +1,053,218 +$ +1,199,580 +The accompanying notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2019 +2018 +2017 +REVENUES +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +919,595 +1,183,048 +1,050,809 +Selling, general and administrative expenses +168,127 +168,151 +159,194 +Impairment and other charges +82,273 +— +— +Depreciation and amortization +170,409 +163,120 +163,537 +Gain on disposition of assets, net +( 3,707 ) +( 3,344 ) +( 4,530 ) +Operating (loss) profit +( 114,288 ) +210,030 +226,217 +Interest expense +( 334 ) +( 489 ) +( 426 ) +Interest income +1,906 +2,426 +1,494 +Other (expense) income, net +( 385 ) +9,313 +5,531 +(Loss) income before income taxes +( 113,101 ) +221,280 +232,816 +Income tax (benefit) provision +( 25,990 ) +45,878 +70,305 +Net (loss) income +$ +( 87,111 ) +$ +175,402 +$ +162,511 +(LOSS) EARNINGS PER SHARE +Basic +$ +( 0.41 ) +$ +0.82 +$ +0.75 +Diluted +$ +( 0.41 ) +$ +0.82 +$ +0.75 +Dividends paid per share +$ +0.15 +$ +0.47 +$ +0.20 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2019 +2018 +2017 +NET (LOSS) INCOME +$ +( 87,111 ) +$ +175,402 +$ +162,511 +OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES: +Pension adjustment +( 5,030 ) +( 1,408 ) +1,033 +Foreign currency translation +553 +( 621 ) +391 +Unrealized loss on securities, net reclassification adjustments +— +— +( 24 ) +COMPREHENSIVE (LOSS) INCOME +$ +( 91,588 ) +$ +173,373 +$ +163,911 +The accompanying notes are an integral part of these statements. +37 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2016 +217,489 +$ +21,749 +$ +— +$ +803,152 +$ +( 18,102 ) +$ +806,799 +Stock issued for stock incentive plans, net +420 +42 +11,048 +— +— +11,090 +Stock purchased and retired +( 1,365 ) +( 137 ) +( 11,048 ) +( 15,599 ) +— +( 26,784 ) +Net income +— +— +— +162,511 +— +162,511 +Pension adjustment, net of taxes +— +— +— +— +1,033 +1,033 +Foreign currency translation +— +— +— +— +391 +391 +Unrealized loss on securities, net of taxes and reclassification adjustment +— +— +— +— +( 24 ) +( 24 ) +Dividends declared +— +— +— +( 43,319 ) +— +( 43,319 ) +Balance, December 31, 2017 +216,544 +21,654 +— +906,745 +( 16,702 ) +911,697 +Adoption of accounting standard (Note 1) +— +— +— +15 +( 15 ) +— +Stock issued for stock incentive plans, net +367 +37 +9,382 +— +— +9,419 +Stock purchased and retired +( 2,367 ) +( 237 ) +( 9,382 ) +( 33,382 ) +— +( 43,001 ) +Net income +— +— +— +175,402 +— +175,402 +Pension adjustment, net of taxes +— +— +— +— +( 1,408 ) +( 1,408 ) +Foreign currency translation +— +— +— +— +( 621 ) +( 621 ) +Dividends declared +— +— +— +( 101,069 ) +— +( 101,069 ) +Balance, December 31, 2018 +214,544 +21,454 +— +947,711 +( 18,746 ) +950,419 +Adoption of accounting standard (Note 1) +— +— +— +2,464 +( 2,732 ) +( 268 ) +Stock issued for stock incentive plans, net +667 +66 +8,564 +— +— +8,630 +Stock purchased and retired +( 788 ) +( 77 ) +( 8,564 ) +1,280 +— +( 7,361 ) +Net loss +— +— +— +( 87,111 ) +— +( 87,111 ) +Pension adjustment, net of taxes +— +— +— +— +( 2,298 ) +( 2,298 ) +Foreign currency translation +— +— +— +— +553 +553 +Dividends declared +— +— +— +( 32,231 ) +— +( 32,231 ) +Balance, December 31, 2019 +214,423 +$ +21,443 +$ +— +$ +832,113 +$ +( 23,223 ) +$ +830,333 +The accompanying notes are an integral part of these statements. +38 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2019 +2018 +2017 +OPERATING ACTIVITIES +Net (loss) income +$ +( 87,111 ) +$ +175,402 +$ +162,511 +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +172,607 +166,789 +166,558 +Stock-based compensation expense +8,630 +9,419 +11,090 +Gain on disposition of assets, net +( 2,645 ) +( 3,344 ) +( 4,530 ) +Gain due to insurance recovery +— +( 9,646 ) +— +Gain due to benefit plan financing arrangement +( 126 ) +( 1,020 ) +— +Deferred income tax (benefit) provision +( 22,225 ) +21,395 +( 42,609 ) +Impairment and other charges +73,560 +— +— +(Increase) decrease in assets: +Accounts receivable +81,094 +53,982 +( 208,642 ) +Income taxes receivable +11,687 +4,410 +16,931 +Inventories +20,962 +( 15,660 ) +( 6,275 ) +Prepaid expenses +( 692 ) +( 778 ) +( 2,272 ) +Other current assets +300 +3,375 +( 1,222 ) +Other non-current assets +( 3,024 ) +1,494 +( 4,779 ) +Increase (decrease) in liabilities: +Accounts payable +( 42,241 ) +( 7,754 ) +29,176 +Income taxes payable +( 3,172 ) +1,482 +( 1,705 ) +Accrued payroll and related expenses +( 6,103 ) +2,193 +11,408 +Accrued insurance expenses +1,357 +884 +1,200 +Accrued state, local and other taxes +( 654 ) +( 5,574 ) +5,561 +Other accrued expenses +( 2,089 ) +( 994 ) +( 5,335 ) +Pension liabilities +6,575 +( 7,862 ) +4,398 +Long-term accrued insurance expenses +1,968 +1,696 +839 +Other long-term liabilities +483 +( 880 ) +1,401 +Net cash provided by operating activities +209,141 +389,009 +133,704 +INVESTING ACTIVITIES +Capital expenditures +( 250,629 ) +( 242,610 ) +( 117,509 ) +Proceeds from sale of assets +14,841 +13,237 +13,123 +Proceeds from insurance recovery +— +9,646 +— +Proceeds from benefit plan financing arrangement +507 +2,218 +— +Re-investment in benefit plan financing arrangement +( 507 ) +( 2,218 ) +— +Net cash used for investing activities +( 235,788 ) +( 219,727 ) +( 104,386 ) +FINANCING ACTIVITIES +Payment of dividends +( 32,231 ) +( 101,069 ) +( 43,319 ) +Cash paid for common stock purchased and retired +( 7,361 ) +( 43,001 ) +( 26,784 ) +Net cash used for financing activities +( 39,592 ) +( 144,070 ) +( 70,103 ) +Net (decrease) increase in cash and cash equivalents +( 66,239 ) +25,212 +( 40,785 ) +Cash and cash equivalents at beginning of year +116,262 +91,050 +131,835 +Cash and cash equivalents at end of year +$ +50,023 +$ +116,262 +$ +91,050 +The accompanying notes are an integral part of these statements. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts and transactions have been eliminated. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2019, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation . +Dividends +On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the allowance for doubtful accounts, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last three years. There was no customer that accounted for more than 10 percent of the Company’s revenues in 2019, 2018 or 2017. Additionally, there was no customer that accounted for more than 10 percent of accounts receivable as of December 31, 2019 or 2018. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2019, 2018 and 2017. Securities that are held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) are classified as trading. See Note 12 for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. +Allowance for Doubtful Accounts +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated allowance for doubtful accounts is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts are written off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible and recoveries of previously written-off accounts are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years; software, 5 years; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. Management believes that the long-lived assets in the accompanying balance sheets have not been impaired. +During the year ended December 31, 2019, the Company recorded accelerated depreciation related to certain operating equipment that was retired. In addition, the Company recorded a write down for certain real estate that were classified as held for sale. See Note 3 for additional information. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reportable segment was as follows: +Years Ended December 31, +2019 +2018 +(in thousands) +Technical Services +$ +30,992 +$ +30,992 +Support Services +1,158 +1,158 +Goodwill +$ +32,150 +$ +32,150 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In 2019 and 2018, the Company performed a quantitative impairment test by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). The discounted cash flow analysis is based on management’s short-term and long-term forecast of operating results for each reporting unit and includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. Based on this analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore no impairment of goodwill occurred for the years ended December 31, 2019 and 2018. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 2,003,000 in 2019, $ 2,220,000 in 2018, and $ 1,696,000 in 2017 . +Insurance Expenses +RPC self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The newly enacted Tax Cuts and Jobs Act required the revaluation of our deferred tax assets and liabilities to reflect the change in Federal income tax rates from 35 percent to 21 percent. The Company’s net deferred tax liability as of December 31, 2017 was reduced through a discrete income tax provision adjustment of $ 19.3 million related to this rate change. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension plan that provides monthly benefits upon retirement at age 65 to eligible employees with at least one year of service prior to 2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the defined benefit pension plan. See Note 11 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See Note 12 for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In thousands except per share data ) +2019 +2018 +2017 +Net (loss) income available for stockholders +$ +( 87,111 ) +$ +175,402 +$ +162,511 +Less: Adjustments for losses attributable to participating securities +( 334 ) +( 1,839 ) +( 2,102 ) +Net (loss) income used in calculating per share amounts +$ +( 87,445 ) +$ +173,563 +$ +160,409 +Weighted average shares outstanding (including participating securities) +214,730 +215,198 +217,194 +Adjustment for participating securities +( 2,509 ) +( 2,453 ) +( 2,891 ) +Shares used in calculating basic and diluted (loss) earnings per share +212,221 +212,745 +214,303 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 10 for additional information. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See Note 12 for additional information. +Recent Accounting Pronouncements +The FASB issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +● Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The Company adopted ASC 842 , Leases, and all the related amendments on January 1, 2019, by recognizing on its balance sheet, a right-of-use asset and lease liabilities totaling approximately $ 44 million, for all of its leases with terms greater than 12 months. The Company adopted the standard using the optional transition method, with an immaterial adjustment to retained earnings upon adoption. The comparative information has not been restated and continues to be reported under the accounting standards that were in effect for those periods. The adoption of the standard did not have a material impact on the Company’s consolidated statements of operations and consolidated statements of cash flows. See Note 15 “Leases” in the Notes to Consolidated Financial Statements for expanded disclosures +● ASU No. 2018-02— Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments provide an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The Company adopted the standard in the first quarter of 2019 and elected to reclassify approximately $ 2.7 million of stranded tax effects related to its pension plan from AOCI to retained earnings. +● ASU No. 2018-07 — Compensation —Stock Compensation (Topic 718) —Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASU 718 to include share-based payments issued to nonemployees for goods or services, thereby substantially aligning the accounting for share-based payments to nonemployees and employees. The Company adopted these provisions in the first quarter of 2019 and the adoption did not have a material impact on its consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +To be adopted in 2020 and later: +● ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for recognition in place of the current incurred loss model. The Company adopted the provisions of the standard in the first quarter of 2020 and currently expects the adoption to have an immaterial cumulative-effect adjustment to the opening balance of retained earnings. The Company plans to continue to record an allowance on its trade receivables based on aging at the end of each reporting period using current reasonable and supportable forecasted economic conditions. +● ASU No. 2017-04 —Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted these provisions in the first quarter of 2020, on a prospective basis. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +● ASU No. 2018-15 — Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The Company adopted these provisions in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements. +● ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The amendments are effective for fiscal years beginning after December 15,2020, and for interim periods within those fiscal years. The company is currently evaluating the impact of adopting these provisions on its consolidated financial statements. +Note 2: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 14. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. +Our contracts with customers are generally very short-term in nature and generally consist of a single performance obligation – the provision of oilfield services. +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Payment terms +RPC’s contracts with the customer states the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See Note 14 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below: +(in thousands) +2019 +2018 +2017 +Oilfield services transferred at a point in time +$ +— +$ +— +$ +— +Oilfield services transferred over time +1,222,409 +1,721,005 +1,595,227 +Total revenues +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the Consolidated Balance Sheets are shown below: +(in thousands) +2019 +2018 +Unbilled trade receivables +$ +52,052 +$ +56,408 +Substantially all of the unbilled trade receivables as of December 31, 2019 and December 31, 2018 were invoiced during the following quarter. +Note 3: Impairment and Other Charges +In response to the decline in customer activities and expectation for it to continue in the near term, the Company recorded the following estimated pre-tax charges during 2019. These charges are reflected in impairment and other charges in the consolidated statements of operations. +December 31, +2019 +2018 +(in thousands) +Abandonment of assets (1) +$ +35,861 +$ +— +Assets held for sale write down (2) +14,326 +— +Retirement of equipment (3) +17,218 +— +Inventory write-downs +9,077 +— +Severance costs +5,748 +— +Other +43 +— +Total +$ +82,273 +$ +— +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +(1) +Includes accelerated depreciation for assets that were ceased to be used during 2019 and were abandoned before the end of their previously estimated useful lives. These assets have been recorded at salvage value. Also includes Right-Of-Use (ROU) assets related to leased real estate locations that were abandoned; see Note 15 for additional information on leased assets. +(2) +Represents real estate properties that are expected to be sold within the next 12 months. In connection with the plan of sale, the Company determined that the carrying values of some of the underlying assets exceeded their fair values. The impairment loss of $ 14,326,000 represents the estimated excess of the carrying values of the assets over their fair values, less cost to sell. The carrying value of the assets that are held for sale is separately presented in the Consolidated Balance Sheets in the caption "Assets held for sale," and these assets are no longer being depreciated. +(3) +Represents accelerated depreciation of older pressure pumping equipment being retired because it no longer effectively meets the industry’s current market requirements, requires costly maintenance, and is not expected to generate adequate returns in the future, and the related cost of disposal. +The estimated charges listed above are subject to change in the near term as the transactions are settled including asset disposals and payment of severence as the Company continues to position itself to compete in this difficult market environment. See Note 14 for details of impairment and other charges by segment. +Note 4: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2019 +2018 +(in thousands) +Trade receivables: +Billed +$ +191,579 +$ +266,660 +Unbilled +52,052 +56,408 +Other receivables +4,124 +5,278 +Total +247,755 +328,346 +Less: allowance for doubtful accounts +( 5,181 ) +( 4,813 ) +Accounts receivable, net +$ +242,574 +$ +323,533 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Changes in the Company’s allowance for doubtful accounts are as follows: +Years Ended December 31, +2019 +2018 +(in thousands) +Beginning balance +$ +4,813 +$ +4,471 +Bad debt expense +1,481 +588 +Accounts written-off +( 1,142 ) +( 260 ) +Recoveries +29 +14 +Ending balance +$ +5,181 +$ +4,813 +Note 5: Inventories +Inventories are $ 100,947 ,000 at December 31, 2019 and $ 130,083 ,000 at December 31, 2018 and consist of raw materials, parts and supplies. The reserve for obsolete and slow moving inventory is $ 10,467,000 at December 31, 2019 and $ 10,168,000 at December 31, 2018. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Note 6: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2019 +2018 +(in thousands) +Land +$ +18,945 +$ +21,159 +Buildings and leasehold improvements +114,318 +140,269 +Operating equipment +1,194,071 +1,429,906 +Computer software +25,247 +24,619 +Furniture and fixtures +7,086 +7,606 +Vehicles +553,968 +528,250 +Gross property, plant and equipment +1,913,635 +2,151,809 +Less: accumulated depreciation +( 1,396,908 ) +( 1,633,827 ) +Net property, plant and equipment +$ +516,727 +$ +517,982 +Depreciation expense was $ 172.6 million in 2019, $ 166.2 million in 2018, and $ 166.9 million in 2017, and includes amounts recorded as costs of revenues. There were no capital leases outstanding as of December 31, 2019 and December 31, 2018. The Company had accounts payable for purchases of property and equipment of $ 6.8 million as of December 31, 2019, $ 14.8 million as of December 31, 2018, and $ 7.1 million as of December 31, 2017. The Company transferred inventory to property, plant and equipment totaling $ 20.8 million in 2019 and $ 23.1 million in 2018. +Note 7: Income Taxes +The Tax Cuts and Jobs Act (“the Act”) effective January 1, 2018, included a reduction to the US federal tax rate from 35 percent to 21 percent, a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, adjustment of deferred tax assets and liabilities for the new corporate tax rate, and adjustments to deductible compensation of our executive officers. The Act also imposes a new tax on foreign earnings and profits in excess of a deemed return on tangible assets of foreign subsidiaries referred to as Global Low Taxed Intangible Income (“GILTI”), a new tax on certain payments between a U.S. corporation and its foreign subsidiaries referred to as Base Erosion and Anti-Abuse Minimum Tax (“BEAT”), and a tax deduction on certain qualifying income related to export sales of property or services referred to as Foreign Derived Intangible Income (“FDII”). +The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. In 2017, the Company recorded a discrete tax benefit of $ 19.3 million related to the enactment-date effects of the Act that included adjustments to the Company’s net deferred tax liabilities. In 2018, the Company adjusted the enactment-date provisional amounts by decreasing tax expense by an additional $ 5.1 million, recorded as a discrete tax benefit. These adjustments were recorded as components of income tax expense from continuing operations. As of December 31, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the Act. Discussion of specific provisions of the Act follows: +One-time transition tax +The one-time transition tax is based on the Company’s total post-1986 foreign earnings and profits (E&P), a tax that was previously deferred until repatriation of those earnings and profits. At December 31, 2017, the Company estimated the one-time transitional tax to be not material and no provision was included as a component of tax expense in 2017. +Based on further analysis of the Act, and notices and regulations issued by the US Department of the Treasury and the Internal Revenue Service, the Company concluded that the tax impact of the Act from un-repatriated earnings and profits of our foreign subsidiaries was not material. +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Executive compensation arrangements +As of December 31, 2017, we evaluated the deductibility of our executive compensation arrangements and the related impacts on both current and deferred taxes based on the guidance that was available at that time. At December 31, 2017, we recorded tax expense related to executive compensation of approximately $ 1.3 million. During 2018, with additional guidance from the US Department of Treasury and the Internal Revenue Service, we refined our calculations, and reduced our 2017 provisional expense by approximately $ 0.5 million. +GILTI +Our analysis at December 31, 2017, related to GILTI was incomplete, and therefore did not record a GILTI-related adjustment. Under FASB guidance, the Company elected to treat tax related to GILTI as a period expense rather than create a deferred tax for the temporary differences that are expected to reverse in future years. As of December 31, 2018, the impact of the Act on the Company related to GILTI was not material. +BEAT +The Company has analyzed the Act’s provisions related to Base Erosion and Profit Shifting, and has determined the impact to our financial statements to be not material. No provision was included as a component of tax expense in either 2017, 2018 or 2019. +In summary, the Company completed its evaluation of the impact of FDII, GILTI, and BEAT provisions of the Act in 2018. The Company has incorporated each of these provisions within the annual effective tax rate for 2019. +The following table lists the components of the provision (benefit) for income taxes: +Years ended December 31, +2019 +2018 +2017 +(in thousands) +Current provision (benefit): +Federal +$ +( 3,548 ) +$ +13,708 +$ +95,995 +State +( 3,185 ) +3,932 +13,966 +Foreign +2,968 +6,843 +2,953 +Deferred provision (benefit): +Federal +( 26,493 ) +23,203 +( 39,710 ) +State +4,268 +( 1,808 ) +( 2,899 ) +Total income tax (benefit) provision +$ +( 25,990 ) +$ +45,878 +$ +70,305 +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2019 +2018 +2017 +Federal statutory rate +21.0 +% +21.0 +% +35.0 +% +State income taxes, net of federal benefit +( 0.3 ) +2.6 +1.9 +Tax credits +0.3 +( 0.1 ) +( 0.7 ) +Non-deductible expenses +( 1.9 ) +1.8 +2.0 +Adjustments related to the Act +— +( 2.3 ) +( 8.3 ) +Adjustments related to vesting of restricted stock +( 0.4 ) +( 0.8 ) +( 1.2 ) +Other +4.3 +( 1.5 ) +1.5 +Effective tax rate +23.0 +% +20.7 +% +30.2 +% +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2019 +2018 +(in thousands) +Deferred tax assets: +Self-insurance +$ +5,729 +$ +5,055 +Pension +9,617 +7,261 +State net operating loss carryforwards +1,445 +1,663 +Bad debt +1,392 +1,291 +Stock-based compensation +3,358 +3,501 +Inventory reserve +2,478 +2,447 +Impairment reserve +2,802 +— +Foreign tax credit carryforwards +3,086 +— +Federal net operating loss carryforwards +19,664 +— +Basis differences in consolidated limited liability company +5,778 +— +All others +2,191 +1,690 +Gross deferred tax assets +57,540 +22,908 +Deferred tax liabilities: +Depreciation +( 87,647 ) +( 71,647 ) +Goodwill amortization +( 6,763 ) +( 6,587 ) +Basis differences in consolidated limited liability company +— +( 4,636 ) +Basis differences in joint ventures +( 444 ) +( 408 ) +All others +( 5 ) +( 5 ) +Gross deferred tax liabilities +( 94,859 ) +( 83,283 ) +Net deferred tax liabilities +$ +( 37,319 ) +$ +( 60,375 ) +The Company’s current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2019, the Company has net operating loss carryforwards related to federal income taxes of $ 93.6 million with an indefinite carryforward. As of December 31, 2019, the Company has no valuation allowance against the corresponding deferred tax asset. As of December 31, 2019, the Company has net operating loss carryforwards related to state income taxes of $ 23.9 million (gross) that will expire between 2020 and 2035. As of December 31, 2019, the Company has a valuation allowance of $ 415 thousand, representing the tax-affected amount of loss carryforwards related to state income taxes that the Company does not expect to utilize, against the corresponding deferred tax asset. +As of December 31, 2019, the Company has foreign tax credit carryforwards of $ 3.1 million that will expire in 2029. As of December 31, 2019, the Company has no valuation allowance against the corresponding deferred tax asset. +Total net income tax payments (refunds) were $( 11.8 ) million in 2019, $ 18.0 million in 2018, and $ 98.0 million in 2017. +The Company and its subsidiaries are subject to U.S. federal and state income taxes in multiple jurisdictions. In many cases, our uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2016 through 2019 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +As of December 31, 2019 and 2018, our liability for unrecognized tax benefits related primarily to state income taxes did not change and remained at $ 2,215,000 , and is recognized as a component of other long-term liabilities in the accompanying consolidated balance sheet. The liability, if recognized, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2019 +2018 +Balance at January 1 +$ +2,215,000 +$ +2,215,000 +Additions based on tax positions related to the current year +— +— +Additions for tax positions of prior years +— +— +Reductions for tax positions of prior years +— +— +Balance at December 31 +$ +2,215,000 +$ +2,215,000 +The Company’s policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2019 and 2018 were $ 203 thousand and $ 263 thousand, respectively. +It is reasonably possible that the amount of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. These changes may result from, among other things, state tax settlements under voluntary disclosure agreements, or conclusions of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time. +Note 8: Long-Term Debt +The Company has a revolving credit facility with Bank of America and five other lenders which provides for a line of credit of up to $ 125 million, including a $ 35 million letter of credit subfacility, and a $ 35 million swingline subfacility. The revolving credit facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company’s 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. +On July 26, 2018, the Company entered into Amendment No. 4 to Credit Agreement (the “Amendment”). The Amendment, among other matters, replaces the existing minimum tangible net worth covenant with the following covenants: (i) when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million, a maximum consolidated leverage ratio of 2.50 :1.00 and a minimum debt service coverage ratio of 2.00 :1.00, and (ii) otherwise, a minimum tangible net worth covenant of no less than $ 600 million. The Amendment additionally (1) extends the Credit Agreement maturity date from January 17, 2020 to July 26, 2023, (2) eliminates any borrowing base limitations on revolving loans when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million, (3) reduces the commitment fees payable by RPC by 7.5 basis points at each pricing level and (4) reduces the letter of credit sublimit from $ 50 million to $ 35 million. As of December 31, 2019, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● The Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a margin ranging from 1.125 % to 2.125 % , based on a quarterly consolidated leverage ratio calculation; or +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Eurodollar Rate plus 1.00 % ; in each case plus a margin that ranges from 0.125 % to 1.125 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.15 % to 0.25 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $ 3.3 million. These costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of $ 0.2 million at December 31, 2019 is classified as part of non-current other assets. +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +As of December 31, 2019, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 21.6 million; therefore, a total of $ 103.4 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2019 +2018 +2017 +(in thousands) +Interest incurred +$ +256 +$ +390 +$ +415 +Interest paid +$ +162 +$ +241 +$ +181 +Note 9: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income consists of the following (in thousands): +Unrealized +Foreign +Pension +Gain (Loss) On +Currency +Adjustment +Securities +Translation +Total +Balance at December 31, 2017 +$ +( 14,470 ) +$ +15 +$ +( 2,247 ) +$ +( 16,702 ) +Change during 2018: +Before-tax amount +( 2,712 ) +( 15 ) +( 621 ) +( 3,348 ) +Tax (expense) benefit +665 +— +— +665 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +639 +— +— +639 +Total activity in 2018 +( 1,408 ) +( 15 ) +( 621 ) +( 2,044 ) +Balance at December 31, 2018 +$ +( 15,878 ) +$ +— +$ +( 2,868 ) +$ +( 18,746 ) +Change during 2019: +Before-tax amount +( 3,962 ) +— +553 +( 3,409 ) +Tax (expense) benefit +970 +— +— +970 +Adoption of accounting standard (note 1) +( 2,732 ) +— +— +( 2,732 ) +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +694 +— +— +694 +Total activity in 2019 +( 5,030 ) +— +553 +( 4,477 ) +Balance at December 31, 2019 +$ +( 20,908 ) +$ +— +$ +( 2,315 ) +$ +( 23,223 ) +(1) Reported as part of selling, general and administrative expenses. +Note 10: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2019 and 2018: +Fair Value Measurements at December 31, 2019 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ +237 +$ +237 +$ +— +$ +— +Investments measured at net asset value - trading securities +$ +28,476 +Fair Value Measurements at December 31, 2018 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ +211 +$ +211 +$ +— +$ +— +Investments measured at net asset value - trading securities +$ +22,815 +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 12, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2019 there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2019 and 2018. Outstanding balances based on the quote from the lender (level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable interest rates as described in Note 8. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +The Company’s real estate classified as held for sale has been stated at fair value less costs to sell since the fair value less costs to sell is lower than its carrying amount. The non-recurring fair value measurement was completed in the third quarter of 2019 and determined based on observable market data that includes price per square foot involving comparable properties in similar locations and reflected in the table below: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Assets held for sale +$ +5,385 +$ +— +$ +5,385 +$ +— +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Note 11: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. Any probable and estimable assessment costs are included in accrued state, local and other taxes. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 12: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer. +The Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by $ 8.4 million and thus the plan was under-funded as of December 31, 2019. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2019 +2018 +(in thousands) +Accumulated benefit obligation at end of year +$ +48,519 +$ +43,417 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ +43,417 +$ +46,397 +Service cost +— +— +Interest cost +1,960 +1,832 +Amendments +— +— +Actuarial loss (gain) +5,521 +( 2,658 ) +Benefits paid +( 2,379 ) +( 2,154 ) +Projected benefit obligation at end of year +$ +48,519 +$ +43,417 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ +38,364 +$ +38,050 +Actual return (loss) on plan assets +4,157 +( 2,532 ) +Employer contribution +— +5,000 +Benefits paid +( 2,379 ) +( 2,154 ) +Fair value of plan assets at end of year +$ +40,142 +$ +38,364 +Funded status at end of year +$ +( 8,377 ) +$ +( 5,053 ) +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +December 31, +2019 +2018 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss +$ +27,693 +$ +24,650 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +27,693 +$ +24,650 +The accumulated benefit obligation for the Retirement Income Plan at December 31, 2019 and 2018 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan. +Amounts recognized in the consolidated balance sheets consist of: +December 31, +2019 +2018 +(in thousands) +Funded status of the Retirement Income Plan +$ +( 8,377 ) +$ +( 5,053 ) +SERP liability +( 30,877 ) +( 24,585 ) +Long-term pension liabilities +$ +( 39,254 ) +$ +( 29,638 ) +RPC’s funding policy is to contribute to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. There were no contributions to the plan in 2019 and $ 5.0 million contributions were made in 2018. +The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows: +Years ended December 31, +2019 +2018 +2017 +(in thousands) +Service cost for benefits earned during the period +$ +— +$ +— +$ +— +Interest cost on projected benefit obligation +1,960 +1,832 +1,932 +Expected return on plan assets +( 2,598 ) +( 2,837 ) +( 2,356 ) +Amortization of net loss +919 +824 +851 +Net periodic benefit plan cost +$ +281 +$ +( 181 ) +$ +427 +The Company recognized pre-tax (increases) decreases to the funded status in accumulated other comprehensive loss of $ 3,043,000 in 2019, $ 1,888,000 in 2018, and $( 1,650,000 ) in 2017. There were no previously unrecognized prior service costs as of December 31, 2019, 2018 and 2017. The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2019, 2018 and 2017 are summarized as follows: +(in thousands) +2019 +2018 +2017 +Net (gain) loss +$ +3,962 +$ +2,712 +$ +( 799 ) +Amortization of net loss +( 919 ) +( 824 ) +( 851 ) +Net transition obligation (asset) +— +— +— +Amount recognized in accumulated other comprehensive loss +$ +3,043 +$ +1,888 +$ +( 1,650 ) +The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in 2020 are as follows: +(in thousands) +2020 +Amortization of net loss +$ +1,002 +Prior service cost (credit) +— +Net transition obligation (asset) +— +Estimated net periodic benefit plan cost +$ +1,002 +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2019 +2018 +2017 +Projected Benefit Obligation: +Discount rate +3.60 +% +4.65 +% +4.00 +% +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.65 +% +4.00 +% +4.45 +% +Expected return on plan assets +7.00 +% +7.00 +% +7.00 +% +Rate of compensation increase +N/A +N/A +N/A +The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company has concluded that its expected long-term return assumption of seven percent is reasonable. +The plan’s weighted average asset allocation at December 31, 2019 and 2018 by asset category along with the target allocation for 2020 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2020 +2019 +2018 +Asset Category +Cash and cash equivalents +0 % - 5 % +1.3 +% +3.0 +% +Fixed income securities +15 % - 100 % +91.7 +% +29.1 +% +Domestic equity securities +0 % - 40 % +— +% +39.5 +% +International equity securities +0 % - 20 % +— +% +19.0 +% +Investments measured at net asset value +0 % - 12 % +7.0 +% +9.4 +% +Total +100.0 +% +100.0 +% +The Company’s investments consist primarily of fixed income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets while minimizing the level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. Although not required, Company management will evaluate contributing to the pension plan during 2020. +Some of our assets, primarily our private equity and real estate funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For plan asset reporting as of December 31, 2019, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant non-observable inputs which do not have a readily determinable fair value. The valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +The following tables present our plan assets using the fair value hierarchy as of December 31, 2019 and 2018. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 10 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2019: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +505 +$ +505 +$ +— +Fixed Income Securities +(2) +36,813 +— +36,813 +Domestic Equity Securities +(3) +3 +3 +— +Total Assets in the Fair Value Hierarchy +$ +37,321 +$ +508 +$ +36,813 +Investments measured at Net Asset Value +2,821 +Investments at Fair Value +$ +40,142 +Fair Value Hierarchy as of December 31, 2018: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +1,140 +$ +1,140 +$ +— +Fixed Income Securities +(2) +11,163 +— +11,163 +Domestic Equity Securities +(3) +15,182 +5,602 +9,581 +International Equity Securities +(4) +7,279 +— +7,279 +Total Assets in the Fair Value Hierarchy +$ +34,764 +$ +6,742 +$ +28,023 +Investments measured at Net Asset Value +3,600 +Investments at Fair Value +$ +38,364 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. +(3) Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. +(4) International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. +The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2020 +$ +2,764 +2021 +2,858 +2022 +2,899 +2023 +2,919 +2024 +2,987 +2025‑2029 +$ +15,211 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of $ 55.3 million in variable life insurance policies as of December 31, 2019 and $ 47.9 million as of December 31, 2018. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $ 28,476,000 as of December 31, 2019 and $ 22,815,000 as of December 31, 2018. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading gains (losses) related to the SERP assets totaled $ 5,524,000 in 2019, $( 2,282,000 ) in 2018, and $ 3,156,000 in 2017. The SERP liability includes participant deferrals net of distributions and is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. +As a result of Company-owned life insurance policy claims, the Company received insurance proceeds of $ 507,000 less a cash surrender value of $ 377,000 and recorded tax-free gains of $ 126,000 during 2019; these gains are recorded as an adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Proceeds received have been reinvested into mutual funds held as supplemental retirement plan assets. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. During 2018, the Company made matching contributions of fifty cents ($0.50) for each dollar ($ 1.00 ) of a participant’s contribution to the 401(k) Plan that did not exceed six percent of his or her annual compensation. Effective January 1, 2019, the Company began making 100 percent matching contributions for each dollar ($ 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents ($0.50) for each dollar ($ 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 10,805,000 in 2019, $ 5,704,000 in 2018, and $ 4,509,000 in 2017. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2019, 4,729,863 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense was $ 8,630,000 in 2019 ($ 6,516,000 after tax), $ 9,419,000 in 2018 ($ 7,111,000 after tax) and $ 11,090,000 in 2017 ($ 7,042,000 after tax). +Stock Options +Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years , except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire in five years . +The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003. There were no stock options exercised during 2019, 2018 or 2017 and there are no stock options outstanding as of December 31, 2019 and 2018. +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Restricted Stock +The Company has granted employees time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse restricted shares issued to date vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2019: +Weighted Average Grant- +Shares +Date Fair Value +Non-vested shares at January 1, 2019 +2,352,150 +$ +17.15 +Granted +858,150 +11.39 +Vested +( 625,465 ) +14.73 +Forfeited +( 191,278 ) +15.90 +Non-vested shares at December 31, 2019 +2,393,557 +$ +13.23 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2018: +Weighted Average Grant- +Shares +Date Fair Value +Non-vested shares at January 1, 2018 +2,736,365 +$ +14.50 +Granted +522,800 +25.13 +Vested +( 750,880 ) +13.06 +Forfeited +( 156,135 ) +17.10 +Non-vested shares at December 31, 2018 +2,352,150 +$ +17.15 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 11.39 for 2019, $ 25.13 for 2018 and $ 21.66 for 2017. The total fair value of shares vested was $ 7,026,000 during 2019, $ 16,483,000 during 2018 and $ 19,480,000 during 2017. +The consolidated statement of cash flows reflect discrete income tax adjustments that resulted in $ 442,000 of detrimental impact in 2019 and $ 1,889,000 of beneficial impact in 2018 realized from tax compensation deductions and classified within operating activities as part of net income. +Other Information +As of December 31, 2019, total unrecognized compensation cost related to non-vested restricted shares was $ 44,642,000 which is expected to be recognized over a weighted-average period of 3.4 years. +Note 13: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 865,000 in 2019, $ 873,000 in 2018, and $ 849,000 in 2017. The Company’s receivable due from Marine Products for these services was $ 55,000 as of December 31, 2019 and $ 28,000 as of December 31, 2018. Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,625,000 in 2019, $ 1,467,000 in 2018 and $ 1,372,000 in 2017. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2019, $ 101,000 in 2018 and $ 104,000 in 2017. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 199,000 in 2019 and 2018 and $ 197,000 in 2017 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.0 million as of December 31, 2019 and $ 0.8 million as of December 31, 2018. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2019, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. +Note 14: Business Segment and Entity wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +60 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Segment Revenues: +RPC’s operating segment revenues by major service lines are shown in the following table: +(in thousands) +2019 +2018 +2017 +Technical Services: +Pressure Pumping +$ +519,543 +$ +945,919 +$ +993,538 +Downhole Tools +414,352 +423,811 +294,606 +Coiled Tubing +80,758 +100,049 +109,462 +Nitrogen +45,658 +49,198 +38,961 +Snubbing +14,520 +17,818 +23,838 +All other +70,723 +110,418 +77,946 +Total Technical Services +$ +1,145,554 +$ +1,647,213 +$ +1,538,351 +Support Services: +Rental Tools +$ +51,792 +$ +50,809 +$ +30,264 +All other +25,063 +22,983 +26,612 +Total Support Services +$ +76,855 +$ +73,792 +$ +56,876 +Total Revenues +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +The accounting policies of the reportable segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2019, 2018 and 2017 are shown in the following table: +Gain on +Impairment +Technical +Support +disposition of +and other +(in thousands) +Services +Services +Corporate +assets, net +charges +Total +2019 +Revenues +$ +1,145,554 +$ +76,855 +$ +— +$ +— +$ +— +$ +1,222,409 +Operating (loss) profit +( 32,993 ) +10,016 +( 12,745 ) +3,707 +( 82,273 ) +(1) +( 114,288 ) +Capital expenditures +237,950 +10,330 +2,349 +— +— +250,629 +Depreciation and amortization +154,776 +15,328 +305 +— +— +170,409 +Identifiable assets +848,264 +72,351 +132,603 +— +— +1,053,218 +2018 +Revenues +$ +1,647,213 +$ +73,792 +$ +— +$ +— +$ +— +$ +1,721,005 +Operating profit (loss) +216,703 +4,612 +( 14,629 ) +3,344 +— +210,030 +Capital expenditures +230,262 +10,364 +1,984 +— +— +242,610 +Depreciation and amortization +150,508 +12,174 +438 +— +— +163,120 +Identifiable assets +925,305 +78,413 +195,862 +— +— +1,199,580 +2017 +Revenues +$ +1,538,351 +$ +56,876 +$ +— +$ +— +$ +— +$ +1,595,227 +Operating profit (loss) +251,476 +( 12,228 ) +( 17,561 ) +4,530 +— +226,217 +Capital expenditures +106,131 +9,949 +1,429 +— +— +117,509 +Depreciation and amortization +145,507 +17,570 +460 +— +— +163,537 +Identifiable assets +896,803 +75,568 +174,853 +— +— +1,147,224 +(1) Represents $ 80,263 related to technical services and $ 2,010 related to corporate services. +61 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2019, 2018 and 2017. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2019 +2018 +2017 +(in thousands) +United States Revenues +$ +1,157,760 +$ +1,630,569 +$ +1,539,462 +International Revenues +64,649 +90,436 +55,765 +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +Note 15: Leases: +The Company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 and recognized leases with duration greater than 12 months on the balance sheet using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for a carry-forward of the historical lease classification. For leases with terms greater than 12 months, the Company has recorded the related Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. A few of the leases include rental escalation clauses or renewal options and they have been factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement, to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, railcars, storage containers and office equipment. The Company does not have any finance leases. The Company has a significant population of month-to-month real estate leases that have been classified as short-term leases, and therefore has not recognized a related ROU asset or lease liability. The Company determines at contract inception, if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2019, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2019, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +Lease position: +The table below presents the assets and liabilities related to operating leases recorded on the balance sheet: +(in thousands) +December 31,2019 +Assets: +Operating lease right-of-use assets +$ +33,850 +Liabilities: +Current portion of operating leases +$ +10,625 +Long-term operating lease liabilities +28,378 +Total lease liabilities +$ +39,003 +During the year ended December 31, 2019, the Company recorded an impairment totaling $ 4,903 representing the acceleration of depreciation on the remaining balance of the ROU assets related to leases that have been abandoned. The Company has not terminated these leases and continues to carry the present value of lease liabilities related to these payments. +62 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +Lease costs: +The components of lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations. +Year ended +(in thousands) +December 31,2019 +Operating lease cost +$ +14,109 +Short-term lease cost +7,254 +Variable lease cost +521 +Sublease income +( 72 ) +Total lease cost +$ +21,812 +Total rental expense, including short-term rentals charged to operations related to operating leases under the previous lease standard, were $ 21.6 million in 2018 and $ 17.1 million in 2017. +Other information: +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +12,863 +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +7,992 +Weighted average remaining lease term – operating leases +5.5 years +Weighted average discount rate – operating leases +3.58 +% +Maturity of lease liabilities (in thousands) +Operating Leases +2020 +12,091 +2021 +9,623 +2022 +6,608 +2023 +4,153 +2024 +3,078 +Thereafter +9,132 +Total lease payments +44,685 +Less: Amounts representing interest +( 5,682 ) +Present value of lease liabilities +$ +39,003 +As of December 31, 2018, future total rentals on our non- cancellable operating leases under the previous lease standard were $ 44.9 million in the aggregate, which consisted of the following: $ 11.8 million in 2019; $ 10.6 million in 2020; $ 7.8 million in 2021; $ 5.6 million in 2022; $ 2.9 million in 2023; and $ 6.2 million thereafter. +63 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2019 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2019 and issued a report thereon which is included on page 33 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +64 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive officers will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the section titled “Election of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on Page 14 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the sections titled “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the sections “Capital Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2019. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A)) +Equity compensation plans approved by securityholders +— +$ +— +4,729,863 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +4,729,863 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +65 +See Note 12 to the Consolidated Financial Statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1 2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 27, 2015.) +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +66 +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2017). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +4.2 +Description of Registrant's Securities. +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +67 +Exhibit +Number +Description +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +68 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2020 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2020 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 28, 2020 +The Directors of RPC (listed below) executed a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +R. Randall Rollins, Director +Amy Rollins Kreisler, Director +Gary W. Rollins, Director +Pamela R. Rollins, Director +Henry B. Tippie, Director +Bill J. Dismuke, Director +James B. Williams, Director +/s/ +Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 28, 2020 +69 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +32 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +33 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +34 +Consolidated Balance Sheets as of December 31, 2019 and 2018 +35 +Consolidated Statements of Operations for each of the three years ended December 31, 2019 +36 +Consolidated Statements of Comprehensive (Loss) Income for each of the three years ended December 31, 2019 +37 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2019 +38 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2019 +39 +Notes to Consolidated Financial Statements +40 - 63 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +71 +Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +70 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2019, 2018 and 2017 +Balance at +Charged to +Balance +Beginning +Costs and +Net (Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries +Period +Year ended December 31, 2019 +Allowance for doubtful accounts +$ +4,813 +$ +1,481 +$ +( 1,113 ) +(1) +$ +5,181 +Deferred tax asset valuation allowance +$ +445 +$ +— +$ +26 +$ +471 +Reserve for obsolete or slow moving inventory +$ +10,169 +$ +6,467 +$ +( 6,169 ) +(3) +$ +10,467 +Year ended December 31, 2018 +Allowance for doubtful accounts +$ +4,471 +$ +588 +$ +( 246 ) +(1) +$ +4,813 +Deferred tax asset valuation allowance +$ +3,994 +$ +— +$ +( 3,549 ) +$ +445 +Reserve for obsolete or slow moving inventory +$ +3,875 +$ +8,088 +$ +( 1,794 ) +(3) +$ +10,169 +Year ended December 31, 2017 +Allowance for doubtful accounts +$ +2,553 +$ +1,441 +$ +477 +(1) +$ +4,471 +Deferred tax asset valuation allowance +$ +356 +$ +3,638 +(2) +$ +— +$ +3,994 +Reserve for obsolete or slow moving inventory +$ +3,052 +$ +5,869 +$ +( 5,046 ) +(3) +$ +3,875 +(1) Net (deductions) recoveries in the allowance for doubtful accounts principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the net operating losses, foreign tax credits and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory. +SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) +Quarters ended +March 31 +June 30 +September 30 +December 31 +(in thousands except per share data) +2019 +Revenues +$ +334,656 +$ +358,516 +$ +293,240 +$ +235,997 +Operating (loss) profit +$ +(2,161) +$ +8,387 +$ +(92,639) +$ +(27,875) +Net (loss) income +$ +(739) +$ +6,171 +$ +(69,181) +$ +(23,362) +Net income per share — basic (a) +$ +0.00 +$ +0.03 +$ +(0.33) +$ +(0.11) +Net income per share — diluted (a) +$ +0.00 +$ +0.03 +$ +(0.33) +$ +(0.11) +2018 +Revenues +$ +436,334 +$ +467,926 +$ +439,994 +$ +376,751 +Operating profit +$ +60,798 +$ +75,029 +$ +54,553 +$ +19,650 +Net income (b) +$ +52,130 +$ +59,943 +$ +49,967 +$ +13,362 +Net income per share — basic (a) (b) +$ +0.24 +$ +0.28 +$ +0.23 +$ +0.06 +Net income per share — diluted (a) (b) +$ +0.24 +$ +0.28 +$ +0.23 +$ +0.06 +(a) The sum of the income (loss) per share for the four quarters may differ from annual amounts due to the required method of computing the weighted average shares for the respective periods. +(b) The indicated Statement of Operations data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. +71 \ No newline at end of file diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/filing_metadata.csv b/raw/filings/0000742278/2019/0001104659-20-027017/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..92036b7c775581f9c649cbd2fa94a1b642a4edb2 --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2020-02-28,2019-12-31,2020-02-28T19:52:19.000Z,0001104659-20-027017,res-20191231x10k4d7590.htm,FORM 10-K,11746701,1,1,https://www.sec.gov/Archives/edgar/data/742278/000110465920027017/res-20191231x10k4d7590.htm,https://www.sec.gov/Archives/edgar/data/742278/000110465920027017/,2019,2019,1 diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/item1.txt b/raw/filings/0000742278/2019/0001104659-20-027017/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2a14342cb730087f44d517ac5dfc4c6c5e0e21fc --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/item1.txt @@ -0,0 +1,80 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2019, RPC had approximately 2,700 employees. +2 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2019, approximately four percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2019, we also estimate that 82 percent of our revenues were related to drilling and production activities for oil, while 18 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations in the last three years, including primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 42 percent of 2019 revenues, 55 percent of 2018 revenues and 62 percent of 2017 revenues are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +3 +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 34 percent of 2019 revenues, 25 percent of 2018 revenues and 19 percent of 2017 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for seven percent of revenues in 2019, six percent of revenues in 2018 and seven percent of revenues in 2017, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for one percent of revenues in 2019, one percent of revenues in 2018 and two percent of revenues in 2017, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for four percent of revenues in 2019, three percent of revenues in 2018 and two percent of revenues in 2017. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +4 +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Energy Services specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2019, three percent of revenues in 2018 and two percent of revenues in 2017. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 14 in the Notes to the Consolidated Financial Statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 83 percent from its peak in 1981. However, due to continuously enhanced rig and other technologies, more wells are drilled during periods of strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of both oil and natural gas rose to record levels in the fourth quarter of 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including six down cycle troughs between 1981 and 2016, with May 2016 marking the lowest U.S. domestic rig count in U.S. oilfield history. In the current cycle, the rig count peaked late in the fourth quarter of 2018, and by early in the first quarter of 2020, had fallen by approximately 27 percent. +Because of the increased efficiency of drilling rigs, the Company also monitors well completions in the U.S. domestic oilfield. Well completions are particularly important to RPC because the majority of its services are utilized during the completion stage of an oil or gas well’s life cycle, so they are an important indicator of the demand for RPC’s services. As reported by the U.S. Energy Information Administration during the first quarter of 2020, annual well completions fell from a cyclical peak of 21,381 in 2014 to 8,123 in 2016. Between 2016 and 2019, annual well completions increased by 7,684 or 94.6 percent. In spite of the increase in well completions during the past three years, annual well completions in 2019 were 26.1 percent lower than the 2014 cyclical peak. +6 +The fluctuations in domestic drilling and completions activity since the recent cyclical peak in late 2018 are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following a cyclical peak in the fourth quarter of 2018, the price of oil had fallen by approximately 25 percent as of the first quarter of 2020. Although total world oil production was unchanged in 2019, and production increased slightly during this period, expectations for slowing global economic growth have caused the price of oil to decline. +The average price of natural gas decreased by approximately 19.2 percent during 2019 as compared with 2018 and early in the first quarter of 2020, the price of natural gas was approximately 4.9 percent lower than the price at the end of 2019. RPC does not believe that the current price of natural gas is sufficient to encourage natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the price of natural gas liquids plays a minor role in determining our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2019 the average price of natural gas liquids decreased by approximately 37.9 percent compared with 2018. Early in the first quarter of 2020, the price of natural gas liquids decreased by approximately 26.1 percent compared to the average price in 2019. During 2019, the declining price of oil began to discourage drilling and production activity as our customers increasingly began to scrutinize their projected financial returns. This scrutiny has increased early in 2020 due to continued lower commodity prices and budget pressure imposed by capital sources. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and by early in the first quarter of 2015 had fallen to approximately 18 percent of total drilling activity. In absolute terms, the natural gas drilling rig count in the third quarter of 2016 was the lowest natural gas drilling rig count ever recorded. During this time period the natural gas drilling rig count as a percentage of the total rig count remained steady at approximately 18 percent of total drilling, though it declined to approximately 15 percent of total drilling early in 2020. Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become approximately three percent of U.S. natural gas production, the price of natural gas has fallen in recent years due to increased domestic reserves, productivity of new wells, and high associated natural gas production from oil-directed wells. In spite of these unfavorable near-term dynamics, the long-term demand outlook for natural gas is still favorable because, unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree. In addition, liquified natural gas exports, which began in 2013, have increased tremendously and now account for a meaningful use of U.S. natural gas production. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We do not believe that natural gas-directed drilling will increase during the near term because of the tremendous productivity of existing natural gas wells, as well as the associated production of natural gas in wells that are directed towards oil drilling. We continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons generally and the growing production of oil in the domestic U.S. market in particular. +Unconventional wells generate a higher demand for RPC’s services because they are difficult and costly to complete. They comprise the majority of U.S. domestic drilling and during the fourth quarter of 2019 and early in the first quarter of 2020, have reached a historical high of approximately 95 percent of total drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which in turn require a great deal of pressure pumping horsepower on location to complete the well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for five percent of RPC’s consolidated revenues in 2019, five percent in 2018 and four percent in 2017. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues increased 61.9 percent in 2019 compared to the prior year primarily due to higher customer activity levels in Algeria and to a lesser extent, Mexico and Pakistan, partially offset by lower activity in Gabon. During 2019, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Oman, as well as rental tools in Pakistan. We also provided snubbing services in Gabon. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2020. +7 +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 14 in the Notes to Consolidated Financial Statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital requirements. The borrowing base for this credit facility is $125 million less the amount of any outstanding letters of credit. There was no outstanding balance on this credit facility as of December 31, 2019. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2019, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2019 or 2018 that accounted for more than 10 percent of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated the formation of new companies and allowed existing companies to expand their operations. RPC believes that these expanded or newly formed companies increased competitive pressures during the near term, since they began to provide services to our existing customers at lower prices, and hired experienced personnel from more established companies such as RPC. Pricing for our services improved significantly during 2017, but began to decline during the fourth quarter of 2017 and throughout 2019. Rising oil and gas production because of completion efficiencies is contributing to competitive pricing. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +8 +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Basic Energy Services, Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProPetro Holding Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one leased facility in The Woodlands, Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one owned facility in Houma, Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 10 of the Notes to Consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/item13.txt b/raw/filings/0000742278/2019/0001104659-20-027017/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..22084e1fa8516b7e2a9eb0fcf3d48201ebd6fce4 --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2020 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/item9a.txt b/raw/filings/0000742278/2019/0001104659-20-027017/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..72fba0a78e6e0702e772dfb6c66c3c562e9d2673 --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2019 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2019 and issued a report thereon which is included on page 33 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/rp_note.txt b/raw/filings/0000742278/2019/0001104659-20-027017/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..a11cce7ad6aaddcfdcd4739cbb2a6aa8d20afd0f --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/rp_note.txt @@ -0,0 +1,13 @@ +Note 13: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2019, 2018 and 2017 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 865,000 in 2019, $ 873,000 in 2018, and $ 849,000 in 2017. The Company’s receivable due from Marine Products for these services was $ 55,000 as of December 31, 2019 and $ 28,000 as of December 31, 2018. Many of the Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,625,000 in 2019, $ 1,467,000 in 2018 and $ 1,372,000 in 2017. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2019, $ 101,000 in 2018 and $ 104,000 in 2017. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 199,000 in 2019 and 2018 and $ 197,000 in 2017 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.0 million as of December 31, 2019 and $ 0.8 million as of December 31, 2018. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2019, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC. \ No newline at end of file diff --git a/raw/filings/0000742278/2019/0001104659-20-027017/rpt_disclosure.txt b/raw/filings/0000742278/2019/0001104659-20-027017/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..6edf01b1f562b5de7917ab416b516f58eba989ac --- /dev/null +++ b/raw/filings/0000742278/2019/0001104659-20-027017/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $865,000 in 2019. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2019, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $199,000 for the corporate aircraft. +During 2019, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2019, payments totaling approximately $1,625,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $104,000 in 2019. +A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins, who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, +28 +consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2019 were reviewed, approved and/or ratified by the Nominating and Governance Committee in accordance with the Code. \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/filing.txt b/raw/filings/0000742278/2020/0001104659-21-029211/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..1a2d074a0b2b1d979366499eac3a1b43c0371f74 --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/filing.txt @@ -0,0 +1,3440 @@ +GA NYSE 214951093 214422979 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 1566000 0.06 0.06 0.50 0000742278 --12-31 2020 FY false 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2020-01-01 2020-12-31 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2019-01-01 2019-12-31 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2018-01-01 2018-12-31 0000742278 us-gaap:InventoryValuationAndObsolescenceMember 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res:StockIncentivePlansMember 2019-01-01 2019-12-31 0000742278 res:StockIncentivePlansMember 2018-01-01 2018-12-31 0000742278 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2020-01-01 2020-12-31 0000742278 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-12-31 0000742278 2019-01-01 2019-12-31 0000742278 2020-06-30 0000742278 2021-02-19 0000742278 2020-01-01 2020-12-31 xbrli:shares iso4217:USD res:age xbrli:pure res:Lender res:customer iso4217:USD xbrli:shares +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +☐ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31, 2020 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ◻ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 176,775,762 based on the closing price on the New York Stock Exchange on June 30, 2020 of $3.08 per share. +RPC, Inc. had 215,823,799 shares of Common Stock outstanding as of February 19, 2021. +Documents Incorporated by Reference +Portions of the Proxy Statement for the 2021 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include without limitation statements regarding natural gas prices, production levels and drilling activities; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity; our continued belief in the long-term stability for our business; our belief that unconventional wells will continue to comprise the majority of drilling activity; our expectation to continue to focus on the development of international business opportunities in current and other international markets; our expectations regarding acquisition targets in our industry; our belief that the ban on leasing permits in federal oil and gas drilling areas will reduce the demand for our services; the adequacy of our insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our belief that industry factors will continue to depress natural gas directed drilling activity during the near-term; our belief that recent price increases have encouraged our customers to increase drilling and completion activities; our belief that U.S. oilfield activity will have a negative impact on RPC’s revenues and earnings during the near-term; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that oilfield well completion activity will remain weak during the near-term; our expectations about contributions to the defined benefit pension plan in 2021; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual obligations for future periods; our expectations to resume payments of cash dividends; our expectations regarding the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition. +The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2020, RPC had approximately 2,000 employees. +2 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2020, less than five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2020, we also estimate that 75 percent of our revenues were related to drilling and production activities for oil, while 25 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 37 percent of 2020 revenues, 42 percent of 2019 revenues and 55 percent of 2018 revenues are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +3 +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 34 percent of revenues in 2020, 34 percent of revenues in 2019 and 25 percent of 2018 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in 2020, seven percent of revenues in 2019 and six percent of revenues in 2018, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for one percent of revenues in 2020, one percent of revenues in 2019 and one percent of revenues in 2018, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for five percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these +4 +pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 95 percent from its peak in 1981. However, due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of both oil and natural gas rose to record levels in the fourth quarter of 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and early in the first quarter of 2021, the U.S. domestic rig count rose by approximately 63 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completions in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,394 wells were completed, the lowest number of annual well completions recorded during the seven years that these data have been reported. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the +6 +first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas decreased by approximately 20.9 percent during 2020 as compared with 2019. Early in the first quarter of 2021, the price of natural gas was approximately 8.9 percent higher than the price at the end of 2020. RPC does not believe that the current price of natural gas is sufficient to encourage increasing levels of natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2020 the average price of benchmark natural gas liquids decreased by approximately 14.4 percent compared with 2019. Early in the first quarter of 2021, however, the price of natural gas liquids increased by approximately 85.5 percent compared to the average price in 2020. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become a source of demand for U.S. natural gas, while the price of natural gas generally has fallen in recent years. Unlike oil demand, which is impacted by numerous global factors, the demand for natural gas is determined by U.S. domestic and export demand. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for six percent of RPC’s consolidated revenues in 2020, five percent in 2019 and five percent in 2018. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues decreased 44.5 percent in 2020 compared to the prior year primarily due to lower customer activity levels in Argentina, and Canada, partially offset by higher activity in Algeria. During 2020, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2021. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist +7 +opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2020. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2020, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2020 or 2019 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated the formation of new companies and allowed existing companies to expand their operations. Pricing for our services improved significantly during 2017 but declined during the fourth quarter of 2017 and throughout the following years before achieving some level of stability early in 2021. RPC believes that expanded service capacity during the three years prior to 2020 increased competitive pressures and caused labor price increases because these companies hired experienced personnel from more established companies such as RPC. During this period, improving completion services efficiency also served to increase effective capacity and impose another catalyst for declining pricing. As in the oilfield downturn of 2015 and 2016, several oilfield services companies became insolvent or sought bankruptcy protection during 2020 as the impact of the COVID-19 pandemic drove oilfield activity to historically low levels. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Basic Energy Services, Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProPetro Holding Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +8 +Human Capital +The table below shows the number of employees at December 31, 2020 and 2019: +At December 31, +2020 +2019 +Employees +2,005 +2,656 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce reflects the diversity of the communities in which it operates. Our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a diversity committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). Annual review of the Code is required which prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, education tuition assistance and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. In addition, a component of our field employee compensation plans is based on safety measures. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +9 +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities in The Woodlands, Texas, and Midland, Texas that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Oklahoma City, Oklahoma that includes operations, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Risks Related to our Business. +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 39 percent of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +10 +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2020, 2019 or 2018. In addition, there was no customer as of December 31, 2020 or 2019 that accounted for 10 percent or more of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations which could cause us to experience increased credit losses for accounts receivable. +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition. +11 +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the Rocky Mountains and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events occurred, our capacity and profitability could be diminished, and our growth potential could be impaired. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility, as amended September 25, 2020, provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +Our financial results could continue to be negatively impacted by the COVID-19 pandemic. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic that has continued throughout 2020 and through the first quarter of 2021. The pandemic has significantly impacted global economic conditions and created unprecedented uncertainties. In response to this downturn, we have reduced our workforce, instituted compensation adjustments, and reduced our expense structure and capital expenditures. We will continue to adjust our cost structure in accordance with our assessment of the operating environment, however a continued +12 +economic slowdown caused by the COVID-19 pandemic would have an adverse effect on our financial results by continuing to depress global oil demand. +Risk Management Risks. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +Compliance with federal and state regulations relating to hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry. In spite of these favorable empirical data, however, the current administration has announced a one year suspension of new oil and gas leasing permits on federal oil and gas drilling areas, which at the present time represent less than 20 percent of U.S. drilling and completion activities. We believe this ban or similar legislation, if passed, will reduce the demand for RPC’s hydraulic fracturing services, as well as the other services within RPC’s Technical Segment. +General Risks. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +13 +Risks Related to our Capital and Ownership Structure. +Our management has a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of independent directors. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 69 percent of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +Our management has a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC's certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Risks Related to Digital operations, Cybersecurity and Business Disruption. +Our operations rely on digital systems and processes that are subject to cyber-attacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyber-attacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for all employees, simulate phishing assessments and closely manage the accounts and privileges of all employees and contractors. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents. +If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Item 1B. Unresolved Staff Comments +None. +14 +Item 2. Properties +RPC owns or leases approximately 100 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” contained in Item 7. As of December 31, 2020, the lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yards +Elk City, Oklahoma — Operations, sales and equipment storage yards +Houma, Louisiana — Administrative office +Houston, Texas — Pipe storage terminal and inspection sheds +Odessa, Texas — Pumping services facility +Rock Springs, Wyoming — Operations, sales and equipment storage yards +Vernal, Utah — Operations, sales and equipment storage yards +Newcastle, Oklahoma — Administrative office +Leased Locations +Midland, Texas — Operations, sales and equipment storage yards +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Odessa, Texas — Pumping services facility +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K. +Item 4A. Information About Our Executive Officers +Each of the executive officers of RPC was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting of stockholders or until his earlier removal by the Board of Directors or his resignation. The following table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +Richard A. Hubbell (1) +76 +4/22/03 +President and Chief Executive Officer +Ben M. Palmer (2) +60 +7/8/96 +Vice President, Chief Financial Officer and Corporate Secretary +(1) Richard A. Hubbell has been the President of RPC since 1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +15 +(2) Ben M. Palmer has been the Vice President and Chief Financial Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation in July 2017. +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 19, 2021 there were 215,823,799, shares of common stock outstanding and approximately 14,400 beneficial holders of our common stock. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchases in the fourth quarter of 2020 are outlined below. +Total Number of +Maximum Number (or +Shares (or Units) +Approximate Dollar +Total Number of +Purchased as Part +Value) of Shares (or +Shares +Average Price +of Publicly +Units) that May Yet Be +(or Units) +Paid Per Share +Announced Plans +Purchased Under the +Period +Purchased +(or Unit) +or Programs +Plans or Programs (1) +October 1, 2020 to October 31, 2020 +2,984 +(2) +$ +2.71 +— +8,248,184 +November 1, 2020 to November 30, 2020 +3,818 +(2) +2.41 +— +8,248,184 +December 1, 2020 to December 31, 2020 +1,805 +(2) +3.09 +— +8,248,184 +Totals +8,607 +$ +2.66 +— +8,248,184 +(1) The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 and 2019 that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10,000,000 shares. There were no shares repurchased as part of this program during the fourth quarter of 2020. As of December 31, 2020, there are 8,248,184 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +(2) Shares purchased by the Company in addition to those purchased as part of publicly announced plans or programs, represent shares repurchased in connection with taxes related to the vesting of certain employees’ restricted shares. +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index. +16 +The Company was a component of the Russell 2000 during 2020. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2020 of $3.8 billion, and a median market capitalization of $922 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. +17 +Item 6. Selected Financial Data +The following table summarizes certain selected financial data of the Company. The historical information may not be indicative of the Company’s future results of operations. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the Notes thereto included elsewhere in this document. +Statements of Operations Data: +Years Ended December 31, +2020 +2019 +2018 +2017 +2016 +(in thousands, except employee and per share amounts) +Revenues +$ +598,302 +$ +1,222,409 +$ +1,721,005 +$ +1,595,227 +$ +728,974 +Cost of revenues +480,739 +919,595 +1,183,048 +1,050,809 +607,888 +Selling, general and administrative expenses +123,698 +168,127 +168,151 +159,194 +150,690 +Impairment and other charges +217,493 +82,273 +- +- +- +Depreciation and amortization +95,530 +170,409 +163,120 +163,537 +217,258 +Gain on disposition of assets, net +(9,523) +(3,707) +(3,344) +(4,530) +(7,920) +Operating (loss) profit +(309,635) +(114,288) +210,030 +226,217 +(238,942) +Interest expense +(373) +(334) +(489) +(426) +(681) +Interest income +496 +1,906 +2,426 +1,494 +467 +Other income (expense), net +81 +(385) +9,313 +5,531 +(204) +(Loss) income before income taxes +(309,431) +(113,101) +221,280 +232,816 +(239,360) +Income tax (benefit) provision (1) +(97,239) +(25,990) +45,878 +70,305 +(98,114) +Net (loss) income (1) +$ +(212,192) +$ +(87,111) +$ +175,402 +$ +162,511 +$ +(141,246) +(Loss) earnings per share: (1) +Basic +$ +(1.00) +$ +(0.41) +$ +0.82 +$ +0.75 +$ +(0.66) +Diluted +$ +(1.00) +$ +(0.41) +$ +0.82 +$ +0.75 +$ +(0.66) +Dividends paid per share +— +$ +0.15 +$ +0.47 +$ +0.20 +$ +0.05 +Other Data: +Operating (loss) profit margin percent +(51.8) +% +(9.3) +% +12.2 +% +14.2 +% +(32.8) +% +Net cash provided by operating activities +$ +77,958 +$ +209,141 +$ +389,009 +$ +133,704 +$ +101,704 +Net cash used for investing activities +(42,659) +(235,788) +(219,727) +(104,386) +(21,339) +Net cash used for financing activities +(826) +(39,592) +(144,070) +(70,103) +(13,726) +Capital expenditures +$ +65,065 +$ +250,629 +$ +242,610 +$ +117,509 +$ +33,938 +Employees at end of period +2,005 +2,700 +3,600 +3,500 +2,500 +Balance Sheet Data at Year End: +Accounts receivable, net +$ +161,771 +$ +242,574 +$ +323,533 +$ +377,853 +$ +169,166 +Working capital +348,794 +335,456 +475,701 +494,775 +377,589 +Property, plant and equipment, net +264,411 +516,727 +517,982 +443,928 +497,986 +Total assets +790,505 +1,053,218 +1,199,580 +1,147,224 +1,035,452 +Long-term debt +— +— +— +— +— +Total stockholders’ equity +$ +631,567 +$ +830,333 +$ +950,419 +$ +911,697 +$ +806,799 +(1) The indicated data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. +18 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with “Selected Financial Data” and the consolidated financial statements included elsewhere in this document. See also “Forward-Looking Statements” on page 2. Discussions of year-to-year comparisons of 2019 and 2018 and 2018 items that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2019, which Item is incorporated herein by reference. +RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain capital strength sufficient to allow us to remain a going concern and maintain our operational strength during protracted industry downturns. +- To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of raw materials used in our operations. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global demand for oil caused by the combined impact of the OPEC disputes and COVID-19 pandemic that has continued throughout 2020. The pandemic has significantly impacted the economic conditions in the United States, as federal, state and local governments have reacted to the public health crisis, creating significant uncertainties in the United States, as well as the global economy. RPC continued our regular operations during the period since we function as an essential infrastructure business in the energy sector under +19 +guidance issued by the Department of Homeland Security. However, in response to the pandemic, RPC instituted strict procedures to assess employee health and safety while in our facilities or on operational locations. +Current industry conditions are characterized by oil prices which fell from a cyclical peak of $75 per barrel in the fourth quarter of 2018 to less than $20 per barrel in the second quarter of 2020. In response to this significant decrease in the price of oil, the drilling rig count fell from 1,083 in the fourth quarter of 2018 to 244 in the third quarter of 2020. Also, monthly U.S. well completions fell from a cyclical peak of 1,371 in the second quarter of 2018 to 292 in the second quarter of 2020. Early in the first quarter of 2021, the price of oil had recovered to approximately $56 per barrel, and both the drilling rig count and well completions had increased as well. One catalyst for the decrease in the price of oil during 2020 relates to the significant decrease in global oil demand resulting from the COVID-19 pandemic. In late 2019, the global oil supply and demand were in equilibrium. By the second quarter of 2020, however, global oil demand had fallen by approximately 16 percent, while supply had only fallen by approximately nine percent. The tremendous decline in oil prices, drilling and well completions during 2020 resulted from this sudden and unpredicted decrease in demand. +RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States has grown to be the world’s largest producer of oil and is more flexible in its ability to increase or decrease drilling and production activities rapidly than the state-owned oil companies which comprise OPEC membership. During the past several years, improving drilling and completion activity have caused U.S. domestic oil production to continue to rise to a record production level in December 2019. Since that time, U.S. oil production has declined due to lower drilling and completion activity, but it remains historically high, and as of the most recent monthly reported statistics, was 30 percent higher than the cyclical low production recorded during the third quarter of 2016. We believe that continued high U.S. oil production is a catalyst for lower oil prices during the near term. Customer activities directed towards natural gas drilling and production have been weak for several years because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. One of these factors has been mitigated by the decline in oil-directed drilling. In addition, weather in the United States during the first quarter of 2021 is colder than during the comparable period in 2020. As a result, the price of natural gas has recovered from a low of $1.63 per Mcf during the second quarter of 2020 to $2.96 per Mcf early in the first quarter of 2021. While current natural gas prices are higher than at the recent cyclical trough, we believe that they are still too low to encourage our customers to conduct increased levels of exploration and production activities directed exclusively towards natural gas. +In 2020, the Company’s strategy of utilizing equipment in unconventional basins has continued. During 2020, we made capital expenditures totaling $65.1 million, a decrease of $185.6 compared to the prior year. Capital expenditures during 2020 were primarily for new revenue-producing equipment and capitalized maintenance of our existing equipment, as well as upgrades of selected pressure pumping equipment for dual-fuel capability. +Revenues during 2020 totaled $598.3 million, a decrease of 51.1 percent compared to 2019 primarily as a result of lower activity levels and lower pricing for most of our service lines caused by a steep decline in oil and gas prices due to COVID-19. Cost of revenues decreased $438.9 million in 2020 compared to the prior year primarily due to lower materials and supplies expenses and employment costs consistent with lower activity levels and as a result of RPC’s expense reduction initiatives. As a percentage of revenues, cost of revenues increased to 80.4 percent in 2020 compared to 75.2 percent in 2019. +Selling, general and administrative expenses as a percentage of revenues increased to 20.7 percent in 2020 compared to 13.8 percent in 2019, primarily due to lower revenues, partially offset by personnel headcount decreases and other reductions. +Impairment and other charges were $217.5 million in 2020. These charges were comprised primarily of the total amount by which several of our asset groups’ carrying amounts exceeded their fair value partly due to the pandemic related demand reductions, a non-cash pension settlement loss, costs to finalize the disposal of our former sand facility and employee severance costs. +Loss before income taxes was $309.4 million for 2020 compared to loss before income taxes of $113.1 million in 2019. Net loss for 2020 was $212.2 million, or $1.00 loss per share compared to net loss of $87.1 million, or $0.41 loss per share in 2019. +Cash flows from operating activities decreased to $78.0 million in 2020 compared to $209.1 million in 2019 primarily due to lower earnings, partially offset by favorable changes in working capital. As of December 31, 2020, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018. Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77 +20 +percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig count; therefore, the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions during 2018 increased by approximately 25 percent compared to 2017, and by approximately five percent in 2019 compared to 2018. Well completions in 2020 decreased by approximately 49 percent compared to 2019. Although the price of oil and well completions increased in the fourth quarter of 2020, we believe that U.S. oilfield well completion activity will remain weak during the near term because of continued low oil prices and projections of depressed industry activity. +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil has risen by more than 100 percent early in the first quarter of 2021 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by approximately 94 percent during the same time period, due to steady demand for natural gas and normal seasonal demand in the first quarter of 2021. Following a low price of $0.23 per gallon in the first quarter of 2020, the price of benchmark natural gas liquids has risen to $0.87 per gallon early in the first quarter of 2021, an increase of almost 300 percent. The price increases in these commodities during the past three quarters are encouraging, and RPC believes that they have encouraged our customers to increase drilling and completion activities. We remain cautious, however, because we do not believe that current commodity prices are sufficiently high to encourage our customers to increase their drilling and production activities to previous cyclical peak levels. +The majority of the U.S. domestic rig count remains directed towards oil. Early in the first quarter of 2021, approximately 77 percent of the U.S. domestic rig count was directed towards oil, a decrease compared with approximately 85 percent during the same period in the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term. +We continue to monitor the market for our services and the competitive environment. An increasingly important factor impacting the demand for our services is the growing efficiency with which oilfield completion crews are providing services. We began to observe this in 2018, and we believe that this higher efficiency has contributed to the oversupplied nature of our market. In addition, the U.S. domestic rig count began to decline during the first quarter of 2019, and by the beginning of the second quarter of 2020 had fallen to the lowest level ever recorded. Combined with the long-term trend of increased efficiency, the U.S. domestic rig count decline has caused significant decreases in activity levels and pricing for our services. +RPC expanded its fleet of revenue-producing equipment in 2019, while also retiring older equipment which could no longer function effectively in service-intensive operating environments. We continue to upgrade our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. However, we do not plan meaningfully to increase our fleet capacity either through purchases of new equipment or bringing idled equipment into service until the projected financial returns for such an investment are justified. Our consistent response to the near-term potential of lower activity levels and pricing has been to undertake moderate fleet expansions which we believe will allow us to maintain a strong balance sheet, while also positioning RPC for long-term growth and strong financial returns. +In connection with the preparation of our financial statements for the quarter ended March 31, 2020, the Company recorded long-lived asset impairment and other charges of $205.5 million. See Note 3 of the consolidated financial statements for a discussion of the changes in our industry resulting in these charges. In addition, we are aware that our customers have been forced to conduct their operations with little or no access to outside capital for the first time in many years, and we anticipate that this aspect of exploration and production financing will remain in place for the foreseeable future, thereby impacting the volume of future drilling and completion of new wells. +21 +Results of Operations +Years Ended December 31, +2020 +2019 +2018 +(in thousands except per share amounts and industry data) +Consolidated revenues +$ +598,302 +$ +1,222,409 +$ +1,721,005 +Revenues by business segment: +Technical +$ +556,488 +$ +1,145,554 +$ +1,647,213 +Support +$ +41,814 +$ +76,855 +73,792 +Consolidated operating (loss) profit +$ +(309,635) +$ +(114,288) +$ +210,030 +Operating (loss) profit by business segment: +Technical +$ +(82,525) +$ +(32,993) +$ +216,703 +Support +(6,714) +10,016 +4,612 +Corporate expenses +(12,426) +(12,745) +(14,629) +Impairment and other charges (1)(2) +(217,493) +(82,273) +- +Gain on disposition of assets, net +$ +9,523 +$ +3,707 +$ +3,344 +Net (loss) income +$ +(212,192) +$ +(87,111) +$ +175,402 +(Loss) Earnings per share — diluted +$ +(1.00) +$ +(0.41) +$ +0.82 +Percentage of cost of revenues to revenues +80 +% +75 +% +69 +% +Percentage of selling, general and administrative expenses to revenues +21 +% +14 +% +10 +% +Percentage of depreciation and amortization expenses to revenues +16 +% +14 +% +10 +% +Effective income tax rate +31.4 +% +23.0 +% +20.7 +% +Average U.S. domestic rig count +436 +943 +1,032 +Average natural gas price (per thousand cubic feet (mcf)) +$ +2.03 +$ +2.57 +$ +3.18 +Average oil price (per barrel) +$ +39.50 +$ +56.90 +$ +65.02 +(1) Amount in 2020 represents $212,292 related to technical services, $4,660 related to pension settlement loss and the remainder related to corporate expenses. +(2) Amount in 2019 represents $80,263 related to technical services and $2,010 related to corporate expenses. +Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 +Revenues. Revenues in 2020 decreased $624.1 million or 51.1 percent compared to 2019 primarily due to the substantial decline in global demand for oil caused by the combined impact of the OPEC disputes and COVID-19 pandemic. The Technical Services segment revenues in 2020 decreased $589.1 million or 51.4 percent compared to the prior year. The decrease is due primarily to lower activity levels and lower pricing within most of our service lines as compared to the prior year. The Support Services segment revenues in 2020 decreased $35.0 million or 45.6 percent compared to 2019 due primarily to lower activity levels and pricing in the rental tools service line, which is the largest service line within this segment. Technical Services reported an operating loss of $82.5 million during 2020 compared to a loss of $33.0 million in the prior year, while Support Services reported an operating loss of $6.7 million in 2020 compared to income of $10.0 million in the prior year. The average price of oil decreased 30.6 percent and the average price of natural gas decreased 20.9 percent during 2020 compared to the prior year. The average domestic rig count during 2020 was 53.8 percent lower than 2019. International revenues, which decreased from $64.6 million in 2019 to $35.9 million in 2020, were six percent of consolidated revenues in 2020 compared to five percent 2019. International revenues decreased in 2020 primarily due to lower customer activity levels in Argentina, and Canada, partially offset by higher activity in Algeria compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2020 was $480.7 million compared to $919.6 million in 2019, a decrease of 47.7 percent primarily due to lower materials and supplies expenses and employment costs consistent with lower activity levels and as a result of RPC’s personnel headcount decreases and other expense reduction initiatives. As a percentage of revenues, cost of revenues increased to 80.4 percent in 2020 compared to 75.2 percent in 2019 primarily due to lower pricing and the negative leverage of certain fixed expenses over significantly lower revenues. +Selling, general and administrative expenses . Selling, general and administrative expenses decreased to $123.7 million in 2020 compared to $168.1 million in 2019. These expenses decreased due to lower employment costs, primarily the result of personnel headcount decreases and other cost reduction initiatives during the year. Selling, general and administrative expenses as a percentage of revenues increased to 20.7 percent of revenues in 2020 compared to 13.8 percent of revenues in 2019 due to the negative leverage of lower revenues over primarily fixed expenses. +22 +Depreciation and amortization. Depreciation and amortization were $95.5 million in 2020, a decrease of $74.9 million, compared to $170.4 million in 2019. Depreciation and amortization decreased significantly because of the asset impairment charges recorded during the first quarter of 2020. +Impairment and other charges. Impairment and other charges were $217.5 million in 2020 compared to $82.3 million in 2019. Impairment and other charges in 2020 is comprised primarily of the total amount by which several of our asset groups’ carrying amounts exceed their fair value, a non-cash pension settlement loss, costs to finalize the disposal of our former sand facility and employee severance costs. Impairment and other charges for 2019 was comprised primarily of equipment disposals, closing operating locations and employee severance. +Gain on disposition of assets, net. Gain on disposition of assets, net was $9.5 million in 2020 compared to $3.7 million in 2019. The gain on disposition of assets, net is generally comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other income, net was $0.1 million in 2020 compared to other expense, net of $0.4 million in 2019. +Interest expense and interest income. Interest expense was $0.4 million in 2020 compared to $0.3 million in 2019. Interest expense in 2020 and 2019 principally consists of fees on the unused portion of the credit facility. Interest income decreased to $0.5 million in 2020 compared to $1.9 million in 2019 due to lower interest rates earned on cash balances. +Income tax benefit. Income tax benefit was $97.2 million in 2020, compared to $26.0 million income tax benefit for the same period in 2019. The effective tax rate was 31.4 percent for 2020 compared to a 23.0 percent effective tax rate for 2019. The effective tax rate in 2020 reflects the benefit of the CARES Act allowing tax loss carrybacks including the beneficial revaluation of our 2019 net operating losses and the recording of our 2020 net operating losses both at 35 percent. +Net loss and diluted loss per share . Net loss was $212.2 million in 2020, or $1.00 loss per diluted share, compared to net loss of $87.1 million in 2019, or $0.41 earnings per diluted share. This increase in loss per share was due to lower profitability as average shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $84.5 million as of December 31, 2020, $50.0 million as of December 31, 2019 and $116.3 million as of December 31, 2018. +The following table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2020 +2019 +2018 +Net cash provided by operating activities +$ +77,958 +$ +209,141 +$ +389,009 +Net cash used for investing activities +(42,659) +(235,788) +(219,727) +Net cash used for financing activities +(826) +(39,592) +(144,070) +Cash provided by operating activities for 2020 decreased by $131.2 million compared to the prior year. This decrease is due primarily to an increase in net loss of $125.1 million partially offset by favorable changes in working capital during 2020, coupled with non-cash impairment charges of $211.0 million. The net favorable change in working capital is due primarily to favorable changes of $80.8 million in accounts receivable and $18.1 million in inventories, partially offset by unfavorable changes of $9.1 million in accounts payable and $58.8 million in income taxes receivable/(payable), (net). +Cash used for investing activities for 2020 decreased by $193.1 million compared to 2019, primarily because of a reduction in capital expenditures in response to lower industry activity levels, coupled with an increase in proceeds from the sale of assets. +Cash used for financing activities for 2020 decreased by $38.8 million primarily as a result of lower dividends paid to common stockholders as well as lower cost of repurchases of the Company’s shares both on the open market and for taxes related to the vesting of restricted shares. There were no dividends paid to common stockholders in 2020. +23 +Financial Condition and Liquidity +The Company’s financial condition as of December 31, 2020 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not expect to need our revolving credit facility to meet these liquidity requirements. +The Company currently has a $100 million revolving credit facility that matures in October 2023, as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On September 25, 2020, the Company further amended the revolving credit facility. Among other matters, the amendment (1) reduced the maximum amount available for borrowing from $125 million to $100 million, (2) decreased the minimum tangible net worth covenant level from not less than $600 million to not less than $400 million, and (3) increased the margin spreads and commitment fees payable by 37.5 and 5 basis points, respectively, at each pricing level of the applicable rate without any changes to the leverage ratios used to calculate such spreads. As of December 31, 2020, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $19.8 million; therefore, a total of $80.2 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of December 31, 2020. For additional information with respect to RPC’s facility, see Note 9 of the consolidated financial statements included in this report and which is incorporated herein by reference. +Cash Requirements +Capital expenditures were $65.1 million in 2020, and we currently expect capital expenditures to be approximately $56 million in 2021. We expect that a majority of these expenditures in 2021 will be directed mostly towards capitalized maintenance of our existing equipment, as well as upgrades of selected pressure pumping equipment for dual-fuel capability. The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. +The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated. +The Company’s Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon normal retirement at age 65 or early retirement at 59 1 / 2 to eligible employees. During, 2020, the Company made a cash contribution of $4,450,000 to the plan but does not currently expect to make any contributions to the plan during 2021. +As of December 31, 2020, the Company’s stock buyback program authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. No shares have been purchased on the open market during the twelve months ended December 31, 2020, and 8,248,184 shares remain available to be repurchased under the current authorization. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +24 +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable operating leases, purchase obligations and other long-term liabilities. The following table summarizes the Company’s significant contractual obligations as of December 31, 2020: +Contractual Obligations +Payments due by period +Less than +1-3 +3-5 +More than +(in thousands) +Total +1 year +years +years +5 years +Long-term debt obligations +$ +— +$ +— +$ +— +$ +— +$ +— +Interest on long-term debt obligations +— +— +— +— +— +Capital lease obligations +— +— +— +— +— +Operating leases (1) +32,647 +9,911 +11,024 +5,308 +6,404 +Purchase obligations (2) +229 +229 +— +— +— +Other long-term liabilities (3) +976 +351 +433 +192 +— +Total contractual obligations +$ +33,852 +$ +10,491 +$ +11,457 +$ +5,500 +$ +6,404 +(1) Operating leases include agreements for various office locations, office equipment, and certain operating equipment. +(2) Includes agreements to purchase raw materials, goods or services that have been approved and that specify all significant terms (pricing, quantity, and timing). As part of the normal course of business the Company occasionally enters into purchase commitments to manage its various operating needs. +(3) Includes expected cash payments for long-term liabilities reflected on the balance sheet where the timing of the payments is known. These amounts include incentive compensation, severance costs and estimated charges related to disposal of impaired assets. Also includes amounts related to the usage of corporate aircraft. These amounts exclude pension obligations with uncertain funding requirements and deferred compensation liabilities. +Fair Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive Retirement Plan (“SERP”) investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. Beginning in 2018, prices for the raw material comprising the Company’s single largest purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor costs declined throughout 2020 due to the significant decline in oilfield activity. However, during the fourth quarter of 2020 and early in the first quarter of 2021, the price of labor began to rise due to increasing oilfield activity and the departure of skilled labor from the domestic oilfield industry during 2020. Also, the prices of raw materials used in the Company’s operations began to increase because many suppliers of these materials ceased operations. During the first quarter of 2021, the Company is attempting to pass these price increases along to our customers, but due to the competitive nature of the oilfield services business, there is no assurance that these efforts will be successful. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +25 +Related Party Transactions +See “NOTE 14: RELATED PARTY TRANSACTIONS” of the consolidated financial statements, which is incorporated herein by reference, for a description of related party transactions. +Critical Accounting Policies +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting policies requiring significant judgements and estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +Credit loss allowance for accounts receivable — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our credit loss allowance is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Credit loss allowance for accounts receivable are recorded in selling, general and administrative expenses. Accounts are written off against the allowance when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2020, 2019 and 2018. We record specific provisions when we become aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated credit loss allowance is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.03 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages by 0.50 percentage points as of December 31, 2020 would have resulted in a change of $3.0 million in the recorded provision for current expected credit losses. +Insurance expenses —The Company self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2020, the Company estimates the range of exposure to be from $14.9 million to $20.1 million. The Company has recorded liabilities at December 31, 2020 of $17.3 million which represents management’s best estimate of probable loss. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. +For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining +26 +useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. +During the year ended December 31, 2020, the Company recorded an asset impairment loss totaling $205.5 million related to its long-lived asset groups, in response to the drastic decline in oilfield drilling and completion activities. See Note 3 of the consolidated financial statements for additional information which is incorporated herein by reference. +Defined benefit pension plan – In 2002, the Company ceased all future benefit accruals under the defined benefit plan, although the Company remains obligated to provide certain employees benefits earned through March 2002. The Company accounts for the defined benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) ASC 715, “Compensation – Retirement Benefits” and engages an outside actuary to assist management in calculating its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and adjusts these liabilities as necessary. +The Company chooses an expected rate of return on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views of our investment advisor. Differences between the expected long-term return on plan assets and the actual return are amortized over future years. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. The Company’s assumption for the expected return on plan assets was four percent for 2020, seven percent for 2019 and seven percent for 2018. +The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company utilizes a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the life of the plan are forecasted and then compared to a portfolio of investment grade corporate bonds that will mature at the same time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate bonds. A lower discount rate increases the present value of benefit obligations. The discount rate was 2.50 percent as of December 31, 2020, 3.60 percent as of December 31, 2019 and 4.65 percent in 2018. +As set forth in Note 13 to the Company’s financial statements, included among the asset categories for the Plan’s investments are fixed income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. These investments are measured at net asset value and are valued using significant non-observable inputs which do not have a readily determinable fair value. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness. +As of December 31, 2020, the defined benefit plan was over-funded and the recorded change within accumulated other comprehensive loss increased stockholders’ equity by $0.9 million after tax. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in a pre-tax increase or decrease of $1.1 million to the net loss related to pension reflected in accumulated other comprehensive loss. +The Company recognized pre-tax pension expense (income) of $5.7 million in 2020, $0.3 million in 2019 and $(0.2) million in 2018. Pension expense during 2020, includes $3.5 million related to the lump-sum payments to certain participants in the Company’s Retirement Income Plan. Based on the over-funded status of the defined benefit plan as of December 31, 2020, the Company expects to recognize pension income of $356 thousand in 2021. Holding all other factors constant, a change in the expected long-term rate of return on plan assets by 0.50 percentage points would result in an increase or decrease in pension expense of $189 thousand in 2021. Holding all other factors constant, a change in the discount rate used to measure plan liabilities by 0.25 percentage points would result in an increase or decrease in pension expense of $21 thousand in 2021. +27 +Recent Accounting Pronouncements +See Note 1 of the consolidated financial statements, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposre through borrowings on its revolving credit facility. As of December 31, 2020, there are no outstanding interest-bearing advances on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +28 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2020 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2020. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2020, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 30. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 26, 2021 +29 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 26, 2021 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 26, 2021 +30 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, statements of stockholders’ equity, and statements of cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2021 expressed an unqualified opinion. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Impairment of Long-Lived Assets under ASC 360 +As described in Note 7 of the consolidated financial statements, the gross amount of property, plant and equipment as of December 31, 2020 was $1.1 billion with related accumulated depreciation of $790.7 million. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In the first quarter of the year ended December 31, 2020, the Company identified a triggering event when the oil and gas industry experienced an unprecedented disruption due to the substantial decline in global demand for oil and the COVID-19 pandemic. The Company recognized an impairment charge related to property, plant and equipment totaling $204.8 million for the year ended December 31, 2020, as described in Note 3 to the consolidated financial statements. +We identified the evaluation, determination and assessment of the impairment charges of long-lived asset groups as a critical audit matter. There is a high degree of subjectivity in evaluating the significant assumptions used in determining the undiscounted cash flows needed to estimate the recoverability of the asset groups, which in turn led to a high degree of auditor judgment and effort in evaluating management’s assumptions, and to assess the fair value of the asset groups that indicated they were not recoverable using discounted +31 +cash flow. The significant assumptions specifically include the revenue growth rates, projected operating margin and the discount rate used. +The primary procedures we performed to address the critical audit matter included the following: We tested certain internal controls over the Company’s process to estimate the undiscounted cash flows of the asset groups, including controls related to the significant assumptions. We evaluated the Company’s development of the revenue growth rates and operating margin assumptions by identifying and assessing the sources of data that management used in their assessment. We evaluated the revenue growth rates and operating margin for consistency with relevant historical data, changes in the business, and external industry data. In addition, we involved valuation professionals with specialized skills and knowledge to assist with evaluating the selected discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable companies. +Determination and Assessment of Goodwill Impairment under ASC 350 +As discussed in Note 1 of the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company’s goodwill balance was $32.2 million as of December 31, 2020. The Company determined that the substantial decline in global demand for oil and the COIVD-19 pandemic constituted a triggering event that required an interim goodwill impairment assessment as of March 31, 2020 in addition to its annual test as of October 31, 2020. The Company performed a quantitative impairment test at each testing date by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). For the purpose of the impairment test, goodwill has been allocated to the Company's reporting units, which are consistent with their operating segments, and which represents the lowest level within the Company at which the goodwill is monitored for management purposes. +We identified the Company’s assessment of goodwill impairment as a critical audit matter as the process entails high estimation uncertainty due to significant judgments with respect to identification of reporting units and assumptions used to estimate the future revenues and cash flows, including revenue growth rates, operating margins, weighted average cost of capital, discount rates, and future market conditions, as well as valuation methodologies applied by the Company. +The primary procedures we performed related to goodwill impairment testing included the following, among others: We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment testing process. For example, we tested controls over the estimation of the fair values of the reporting units, including the Company’s controls over the valuation models, the mathematical accuracy of the valuation models and development of underlying assumptions used to develop such fair values of the reporting units. We also tested management’s review of the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the Company. We agreed the carrying value of each reporting unit to the underlying accounting records. Additionally, we evaluated the inputs and assumptions for the projections of revenues, expenses and cash flows as well as evaluated the assumptions and methodology used in determining the fair value of the reporting units. To test the estimated fair values of the Company’s reporting units, our audit procedures included, among others, assessing the valuation methodology and the underlying data used by the Company in its analysis, including testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model and other relevant factors. Further, we involved valuation professionals with specialized skills to assist with reviewing the methodologies and assumptions used by management in its valuation of identified reporting units, including a consideration of the consistency and application of methodologies and assumptions employed. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 26, 2021 +32 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2020 +2019 +ASSETS +Cash and cash equivalents +$ +84,496 +$ +50,023 +Accounts receivable, net +161,771 +242,574 +Inventories +82,918 +100,947 +Income taxes receivable +82,943 +24,145 +Prepaid expenses +9,124 +10,459 +Assets held for sale +4,032 +5,385 +Other current assets +3,075 +3,325 +Current assets +428,359 +436,858 +Property, plant and equipment, net +264,411 +516,727 +Operating lease right-of-use assets +27,270 +33,850 +Goodwill +32,150 +32,150 +Other assets +38,315 +33,633 +Total assets +$ +790,505 +$ +1,053,218 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +41,080 +$ +53,147 +Accrued payroll and related expenses +18,428 +19,641 +Accrued insurance expenses +5,489 +7,540 +Accrued state, local and other taxes +2,788 +2,427 +Income taxes payable +1,115 +1,534 +Current portion of operating lease liabilities +9,192 +10,625 +Other accrued expenses +1,473 +6,488 +Current liabilities +79,565 +101,402 +Long-term accrued insurance expenses +11,822 +14,040 +Long-term pension liabilities +33,080 +39,254 +Deferred income taxes +13,332 +37,319 +Long-term operating lease liabilities +21,090 +28,378 +Other long-term liabilities +49 +2,492 +Total liabilities +158,938 +222,885 +Commitments and contingencies (Note 12) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 214,951,093 and 214,422,979 shares issued and outstanding in 2020 and 2019, respectively +21,495 +21,443 +Capital in excess of par value +— +— +Retained earnings +627,778 +832,113 +Accumulated other comprehensive loss +( 17,706 ) +( 23,223 ) +Total stockholders’ equity +631,567 +830,333 +Total liabilities and stockholders’ equity +$ +790,505 +$ +1,053,218 +The accompanying notes are an integral part of these statements. +33 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2020 +2019 +2018 +REVENUES +$ +598,302 +$ +1,222,409 +$ +1,721,005 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown separately below) +480,739 +919,595 +1,183,048 +Selling, general and administrative expenses +123,698 +168,127 +168,151 +Impairment and other charges +217,493 +82,273 +— +Depreciation and amortization +95,530 +170,409 +163,120 +Gain on disposition of assets, net +( 9,523 ) +( 3,707 ) +( 3,344 ) +Operating (loss) profit +( 309,635 ) +( 114,288 ) +210,030 +Interest expense +( 373 ) +( 334 ) +( 489 ) +Interest income +496 +1,906 +2,426 +Other income (expense), net +81 +( 385 ) +9,313 +(Loss) income before income taxes +( 309,431 ) +( 113,101 ) +221,280 +Income tax (benefit) provision +( 97,239 ) +( 25,990 ) +45,878 +Net (loss) income +$ +( 212,192 ) +$ +( 87,111 ) +$ +175,402 +(LOSS) EARNINGS PER SHARE +Basic +$ +( 1.00 ) +$ +( 0.41 ) +$ +0.82 +Diluted +$ +( 1.00 ) +$ +( 0.41 ) +$ +0.82 +Dividends paid per share +— +$ +0.15 +$ +0.47 +The accompanying notes are an integral part of these statements. +34 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2020 +2019 +2018 +NET (LOSS) INCOME +$ +( 212,192 ) +$ +( 87,111 ) +$ +175,402 +OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES: +Pension adjustment +5,727 +( 5,030 ) +( 1,408 ) +Foreign currency translation +( 210 ) +553 +( 621 ) +COMPREHENSIVE (LOSS) INCOME +$ +( 206,675 ) +$ +( 91,588 ) +$ +173,373 +The accompanying notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2017 +216,544 +$ +21,654 +$ +— +$ +906,745 +$ +( 16,702 ) +$ +911,697 +Adoption of accounting standard (Note 1) +— +— +— +15 +( 15 ) +— +Stock issued for stock incentive plans, net +367 +37 +9,382 +— +— +9,419 +Stock purchased and retired +( 2,367 ) +( 237 ) +( 9,382 ) +( 33,382 ) +— +( 43,001 ) +Net income +— +— +— +175,402 +— +175,402 +Pension adjustment, net of taxes +— +— +— +— +( 1,408 ) +( 1,408 ) +Foreign currency translation +— +— +— +— +( 621 ) +( 621 ) +Dividends declared +— +— +— +( 101,069 ) +— +( 101,069 ) +Balance, December 31, 2018 +214,544 +21,454 +— +947,711 +( 18,746 ) +950,419 +Adoption of accounting standard (Note 1) +— +— +— +2,464 +( 2,732 ) +( 268 ) +Stock issued for stock incentive plans, net +667 +66 +8,564 +— +— +8,630 +Stock purchased and retired +( 788 ) +( 77 ) +( 8,564 ) +1,280 +— +( 7,361 ) +Net loss +— +— +— +( 87,111 ) +— +( 87,111 ) +Pension adjustment, net of taxes +— +— +— +— +( 2,298 ) +( 2,298 ) +Foreign currency translation +— +— +— +— +553 +553 +Dividends declared +— +— +— +( 32,231 ) +— +( 32,231 ) +Balance, December 31, 2019 +214,423 +21,443 +— +832,113 +( 23,223 ) +830,333 +Stock issued for stock incentive plans, net +716 +71 +8,664 +— +— +8,735 +Stock purchased and retired +( 188 ) +( 19 ) +( 8,664 ) +7,857 +— +( 826 ) +Net loss +— +— +— +( 212,192 ) +— +( 212,192 ) +Pension adjustment, net of taxes +— +— +— +— +5,727 +5,727 +Foreign currency translation +— +— +— +— +( 210 ) +( 210 ) +Balance, December 31, 2020 +214,951 +$ +21,495 +$ +— +$ +627,778 +$ +( 17,706 ) +$ +631,567 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2020 +2019 +2018 +OPERATING ACTIVITIES +Net (loss) income +$ +( 212,192 ) +$ +( 87,111 ) +$ +175,402 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +95,309 +172,607 +166,789 +Stock-based compensation expense +8,735 +8,630 +9,419 +Gain on disposition of assets, net +( 9,523 ) +( 2,645 ) +( 3,344 ) +Gain due to insurance recovery +— +— +( 9,646 ) +Gain due to benefit plan financing arrangement +( 891 ) +( 126 ) +( 1,020 ) +Deferred income tax (benefit) provision +( 25,845 ) +( 22,225 ) +21,395 +Impairment and other charges +211,043 +73,560 +— +(Increase) decrease in assets: +Accounts receivable +80,769 +81,094 +53,982 +Income taxes receivable +( 58,798 ) +11,687 +4,410 +Inventories +18,076 +20,962 +( 15,660 ) +Prepaid expenses +1,337 +( 692 ) +( 778 ) +Other current assets +227 +300 +3,375 +Other non-current assets +( 3,819 ) +( 3,024 ) +1,494 +Increase (decrease) in liabilities: +Accounts payable +( 9,130 ) +( 42,241 ) +( 7,754 ) +Income taxes payable +( 419 ) +( 3,172 ) +1,482 +Accrued payroll and related expenses +( 1,219 ) +( 6,103 ) +2,193 +Accrued insurance expenses +( 2,051 ) +1,357 +884 +Accrued state, local and other taxes +361 +( 654 ) +( 5,574 ) +Other accrued expenses +( 6,541 ) +( 2,089 ) +( 994 ) +Pension liabilities +( 3,249 ) +6,575 +( 7,862 ) +Long-term accrued insurance expenses +( 2,218 ) +1,968 +1,696 +Other long-term liabilities +( 2,004 ) +483 +( 880 ) +Net cash provided by operating activities +77,958 +209,141 +389,009 +INVESTING ACTIVITIES +Capital expenditures +( 65,065 ) +( 250,629 ) +( 242,610 ) +Proceeds from sale of assets +22,406 +14,841 +13,237 +Proceeds from insurance recovery +— +— +9,646 +Proceeds from benefit plan financing arrangement +1,566 +507 +2,218 +Re-investment in benefit plan financing arrangement +( 1,566 ) +( 507 ) +( 2,218 ) +Net cash used for investing activities +( 42,659 ) +( 235,788 ) +( 219,727 ) +FINANCING ACTIVITIES +Payment of dividends +— +( 32,231 ) +( 101,069 ) +Cash paid for common stock purchased and retired +( 826 ) +( 7,361 ) +( 43,001 ) +Net cash used for financing activities +( 826 ) +( 39,592 ) +( 144,070 ) +Net increase (decrease) in cash and cash equivalents +34,473 +( 66,239 ) +25,212 +Cash and cash equivalents at beginning of year +50,023 +116,262 +91,050 +Cash and cash equivalents at end of year +$ +84,496 +$ +50,023 +$ +116,262 +The accompanying notes are an integral part of these statements. +37 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts and transactions have been eliminated. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2020, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation . +Dividends +On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the credit loss allowance, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last three years. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2020, 2019 or 2018. Additionally, there was no customer that accounted for 10 percent or more of accounts receivable as of December 31, 2020 or 2019. +38 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2020, 2019 and 2018. Securities that are held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) are classified as trading. See Note 13 for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of a credit loss allowance. +Credit Loss Allowance for Accounts Receivable +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years ; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years ; software, 5 years ; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +During the year ended December 31, 2020, the Company recorded accelerated depreciation related to certain operating equipment that was retired. In addition, the Company recorded a write down for certain real estate that was classified as held for sale. See Note 3 for additional information. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reportable segment was as follows: +Years Ended December 31, +2020 +2019 +(in thousands) +Technical Services +$ +30,992 +$ +30,992 +Support Services +1,158 +1,158 +Goodwill +$ +32,150 +$ +32,150 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In 2020 and 2019, the Company performed a quantitative impairment test by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). The discounted cash flow analysis is based on management’s short-term and long-term forecast of operating results for each reporting unit and includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. Based on this analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore no impairment of goodwill occurred during the years ended December 31, 2020 and 2019. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 806,000 in 2020, $ 2,003,000 in 2019, and $ 2,220,000 in 2018 . +Insurance Expenses +RPC self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension plan that provides monthly benefits upon normal retirement at age 65 or early retirement at age 59 1 / 2 to eligible employees with at least one year of service prior to 2002. In 2002, the Company’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the defined benefit pension plan. See Note 13 for a full description of this plan and the related accounting and funding policies. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See Note 13 for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In thousands) +2020 +2019 +2018 +Net (loss) income available for stockholders +$ +( 212,192 ) +$ +( 87,111 ) +$ +175,402 +Less: Adjustments for losses attributable to participating securities +— +( 334 ) +( 1,839 ) +Net (loss) income used in calculating per share amounts +$ +( 212,192 ) +$ +( 87,445 ) +$ +173,563 +Weighted average shares outstanding (including participating securities) +215,063 +214,730 +215,198 +Adjustment for participating securities +( 2,571 ) +( 2,509 ) +( 2,453 ) +Shares used in calculating basic and diluted earnings (loss) per share +212,492 +212,221 +212,745 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 10 for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See Note 13 for additional information. +Recent Accounting Pronouncements +The FASB issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +● ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for recognition in place of the current incurred loss model. The Company adopted the +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +provisions of the standard in the first quarter of 2020 resulting in no adjustment to the opening balance of retained earnings. The Company plans to continue to record an allowance on its trade receivables based on aging at the end of each reporting period using current reasonable and supportable forecasted economic conditions and specifically identified judgmental reserves. See "Current Expected Credit Losses" in the notes to consolidated financial statements for expanded disclosures. +● ASU No. 2017-04 —Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted these provisions in the first quarter of 2020, on a prospective basis. +● ASU No. 2018-15 — Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The Company adopted these provisions in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +● ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis of goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The Company adopted these provisions in the first quarter of 2021 and the adoption did not have a material impact on its consolidated financial statements . +Note 2: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 15. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. +Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services. +Payment terms +RPC’s contracts with customer states the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See Note 15 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below: +(in thousands) +2020 +2019 +2018 +Oilfield services transferred at a point in time +$ +— +$ +— +$ +— +Oilfield services transferred over time +598,302 +1,222,409 +1,721,005 +Total revenues +$ +598,302 +$ +1,222,409 +$ +1,721,005 +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the consolidated balance sheets are shown below: +(in thousands) +2020 +2019 +Unbilled trade receivables +$ +29,754 +$ +52,052 +Substantially all of the unbilled trade receivables as of December 31, 2020 and December 31, 2019 were invoiced during the following quarter. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Note 3: Impairment and Other Charges +The Company recorded the following pre-tax charges during 2020 and 2019 as impairment and other charges in the consolidated statements of operations. +(in thousands) +2020 +2019 +Long-lived asset impairments (1) +$ +204,765 +$ +— +Abandonment of assets (2) +5,976 +35,861 +Pension settlement loss (3) +4,660 +— +Severance costs +1,882 +5,748 +Assets held for sale write down (4) +192 +14,326 +Retirement of equipment +— +17,218 +Inventory write-downs +— +9,077 +Other +18 +43 +Total +$ +217,493 +$ +82,273 +(1). +Relates solely to the Technical Services segment and primarily includes pressure pumping and coiled tubing assets. +(2). +Represents the final disposition of assets that were ceased to be used during 2019 and recorded at salvage value. Also includes interest costs related to leased assets that were impaired in 2019. +(3). +Represents the non-cash settlement loss related to the lump-sum payment window offered to certain participants in connection with the Company’s Retirement Income Plan. See Note 13 for further details. +(4). +Represents the final settlement on certain real estate properties that were recorded as held for sale. The Company continues to disclose the remaining real estate that are being held for sale at their carrying value on the consolidated balance sheets under the caption Assets held for sale. +During the first half of 2020, the Company experienced drastic declines in oilfield drilling and completion activities, with low levels of revenues not experienced by RPC or the industry for many years. This unprecedented disruption was caused by the substantial decline in global demand for oil caused by the COVID-19 pandemic as well as macroeconomic events such as the geopolitical tensions between the Organization of Petroleum Exporting Countries and Russia, regarding limits on oil production. These factors resulted in a significant drop in oil prices and a substantial deterioration of the Company’s public market capitalization. In response, the Company reduced headcount, furloughed employees and implemented compensation reductions for remaining active employees with the goal of adjusting its cost structure caused by low revenue levels. The Company determined these events constituted a triggering event that required a review of the recoverability of its long-lived assets and performed an interim goodwill impairment assessment as of March 31, 2020. +The Company used both income based and market based approaches to determine the fair value of its long-lived asset groups and its reporting units for goodwill impairment assessment. Under the income approach, the fair value for each of its asset groups and reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows and terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on its most recent views of the long-term outlook for each asset group and reporting units. For the market based valuation, the Company used comparable public company multiples. The selection of comparable businesses was based on the markets in which the asset groups and reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. Based on the concluded fair value of the asset groups, the Company measured and recorded an impairment loss that represents the amount by which the asset groups' carrying amounts exceeded their fair value. For purposes of the goodwill impairment assessment, the fair value of each reporting unit exceeded its net book value and therefore, goodwill was deemed to be not impaired. +The Company’s operating losses narrowed in the latter half of 2020 due to revenue increases and increased operational efficiency resulting from expense reduction measures. However, the Company continues its current strategy of minimal capital investment and continued expense scrutiny until financial returns improve. As market conditions evolve and the Company continues to develop its strategy to deal with such conditions, it may be necessary to record further asset impairments, or an impairment of the carrying value of goodwill. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Note 4: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2020 +2019 +(in thousands) +Trade receivables: +Billed +$ +135,201 +$ +191,579 +Unbilled +29,754 +52,052 +Other receivables +1,631 +4,124 +Total +166,586 +247,755 +Less: allowance for credit losses +( 4,815 ) +( 5,181 ) +Accounts receivable, net +$ +161,771 +$ +242,574 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Note 5: Current Expected Credit Losses +The Company adopted ASU No 2016-13, Current Expected Credit Losses (Topic 326) on January 1, 2020 on a prospective basis with an immaterial cumulative-effect adjustment to the opening balance of retained earnings. This ASU replaces the current loss model with an expected credit loss model for financial assets measured at amortized cost that includes accounts (trade) receivable. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of current expected credit losses was not significantly impacted. Estimates used to determine the allowance for current expected credit losses are based on an assessment of anticipated payment and all other historical, current and future information that is reasonably available. +The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected: +Years Ended December 31, +2020 +2019 +(in thousands) +Beginning balance +$ +5,181 +$ +4,813 +Adoption of ASC 326 +— +— +Provision (benefit) for current expected credit losses +342 +1,481 +Write-offs +( 739 ) +( 1,142 ) +Recoveries collected (net of expenses) +31 +29 +Ending balance +$ +4,815 +$ +5,181 +Note 6: Inventories +Inventories consist of raw materials, parts and supplies and totaled $ 82,918,000 at December 31, 2020 and $ 100,947,000 at December 31, 2019. The reserve for obsolete and slow moving inventory is $ 13,828,000 at December 31, 2020 and $ 10,467,000 at December 31, 2019. +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Note 7: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2020 +2019 +(in thousands) +Land +$ +19,474 +$ +18,945 +Buildings and leasehold improvements +122,289 +114,318 +Operating equipment +645,576 +1,194,071 +Computer software +24,681 +25,247 +Furniture and fixtures +6,692 +7,086 +Vehicles +236,411 +553,968 +Gross property, plant and equipment +1,055,123 +1,913,635 +Less: accumulated depreciation +( 790,712 ) +( 1,396,908 ) +Net property, plant and equipment +$ +264,411 +$ +516,727 +Depreciation expense was $ 95.3 million in 2020, $ 172.6 million in 2019, and $ 166.2 million in 2018. There were no capital leases outstanding as of December 31, 2020 and December 31, 2019. The Company had accounts payable for purchases of property and equipment of $ 3.9 million as of December 31, 2020, $ 6.8 million as of December 31, 2019, and $ 14.8 million as of December 31, 2018. The Company transferred inventory to property, plant and equipment totaling $ 8.6 million in 2020 and $ 20.8 million in 2019. +Note 8: Income Taxes +On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which among other changes, eliminated the taxable income limit for certain net operating losses ("NOL"), allowed businesses to carryback NOLs arising in 2018, 2019 and 2020 to the five prior years, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. These provisions enabled RPC to carryback federal tax losses related to 2019 and 2020. The Company recorded net tax benefits totaling $ 29 million in 2020 related to these provisions. +The Tax Cuts and Jobs Act (“the Act”) effective January 1, 2018, included a reduction to the US federal tax rate from 35 percent to 21 percent, and a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Act also resulted in an adjustment of deferred tax assets and liabilities for the new corporate tax rate, and adjustments to deductible compensation of our executive officers. In addition, the Act imposes a new tax on foreign earnings and profits in excess of a deemed return on tangible assets of foreign subsidiaries referred to as Global Low Taxed Intangible Income (“GILTI”), a new tax on certain payments between a U.S. corporation and its foreign subsidiaries referred to as Base Erosion and Anti-Abuse Minimum Tax (“BEAT”), and a new tax deduction on certain qualifying income related to export sales of property or services referred to as Foreign Derived Intangible Income (“FDII”). +In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, the Company completed its accounting for the provisional amounts recognized as of December 31, 2017 and recorded a reduction in tax expense of $ 5.1 million, recorded in 2018 as a discrete tax benefit. These adjustments were recorded as components of income tax expense from continuing operations. +The following table lists the components of the provision (benefit) for income taxes: +Years ended December 31, +2020 +2019 +2018 +(in thousands) +Current provision (benefit): +Federal +$ +( 74,841 ) +$ +( 3,548 ) +$ +13,708 +State +2,200 +( 3,185 ) +3,932 +Foreign +1,247 +2,968 +6,843 +Deferred provision (benefit): +Federal +( 16,376 ) +( 26,493 ) +23,203 +State +( 9,469 ) +4,268 +( 1,808 ) +Total income tax (benefit) provision +$ +( 97,239 ) +$ +( 25,990 ) +$ +45,878 +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2020 +2019 +2018 +Federal statutory rate +21.0 +% +21.0 +% +21.0 +% +State income taxes, net of federal benefit +1.5 +( 0.3 ) +2.6 +Tax credits +0.1 +0.3 +( 0.1 ) +Non-deductible expenses +( 0.1 ) +( 1.9 ) +1.8 +Adjustments related to CARES Act +8.5 +— +— +Adjustments related to the Act +— +— +( 2.3 ) +Adjustments related to vesting of restricted stock +( 0.8 ) +( 0.4 ) +( 0.8 ) +Other +1.2 +4.3 +( 1.5 ) +Effective tax rate +31.4 +% +23.0 +% +20.7 +% +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2020 +2019 +(in thousands) +Deferred tax assets: +Self-insurance +$ +4,773 +$ +5,729 +Pension +8,105 +9,617 +State net operating loss carryforwards +5,853 +1,445 +Bad debt +1,302 +1,392 +Stock-based compensation +2,291 +3,358 +Inventory reserve +3,226 +2,478 +Impairment reserve +338 +2,802 +Foreign tax credit carryforwards +— +3,086 +Federal net operating loss carryforwards +— +19,664 +Basis differences in consolidated limited liability company +486 +5,778 +All others +1,126 +2,191 +Gross deferred tax assets +27,500 +57,540 +Deferred tax liabilities: +Depreciation +( 33,486 ) +( 87,647 ) +Goodwill amortization +( 6,893 ) +( 6,763 ) +Basis differences in joint ventures +( 448 ) +( 444 ) +All others +( 5 ) +( 5 ) +Gross deferred tax liabilities +( 40,832 ) +( 94,859 ) +Net deferred tax liabilities +$ +( 13,332 ) +$ +( 37,319 ) +The Company’s current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +As of December 31, 2020, the Company had net operating losses related to federal income taxes of $ 95.5 million which will be carried back to 2015 due to the CARES Act. As of December 31, 2020, the Company has net operating loss carryforwards related to state income taxes of $ 60.2 million (gross) that will expire between 2021 and 2036, with a valuation allowance of $ 434 thousand. The valuation allowance is representing the tax-affected amount of loss carryforwards that the Company does not expect to utilize, against the corresponding deferred tax asset. +As of December 31, 2020, the Company has foreign tax credits of $ 4.8 million that the Company intends to carryback to the 2017 tax year. +Additionally, as of December 31, 2020, the Company has capital loss carryforwards of $ 56 thousand that are not expected to be utilized, and therefore has a full valuation allowance against the corresponding deferred tax asset. +Total net income tax payments (refunds) were $( 10.1 ) million in 2020, $( 11.8 ) million in 2019, and $ 18.0 million in 2018. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The Company and its subsidiaries are subject to U.S. federal and state income taxes in multiple jurisdictions. In many cases, our uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2016 through 2019 tax returns remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +As of December 31, 2020 and 2019, our liability for unrecognized tax benefits related to state income taxes was recorded as part of our 2020 effective rate, due to the expiration of the related state tax statute. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2020 +2019 +Balance at January 1 +$ +2,215,000 +$ +2,215,000 +Additions for tax positions of prior years +— +— +Reductions for tax positions of prior years +$ +( 2,215,000 ) +— +Balance at December 31 +— +$ +2,215,000 +It is reasonably possible that the amount of the unrecognized tax benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. These changes may result from, among other things, state tax settlements under voluntary disclosure agreements, or conclusions of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time. +The Company's policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2020, 2019, and 2018 were $ 17 thousand, $ 203 thousand, and $ 263 thousand, respectively. +Note 9: Long-Term Debt +The Company has a revolving Credit Agreement with Bank of America and five other lenders which provides for a line of credit of up to $ 100 million, including a $ 35 million letter of credit subfacility, and a $ 35 million swingline subfacility. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company’s 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. +The Credit Agreement's maturity date is July 26, 2023. On September 25, 2020, the Company entered into Amendment No. 5 to Credit Agreement (the “Amendment”). This Amendment (1) reduced the maximum amount available for borrowing under the credit facility from $ 125 million to $ 100 million, (2) decreased the minimum tangible net worth covenant level from not less than $ 600 million to not less than $ 400 million, and (3) increased the margin spreads and commitment fees payable by RPC by 37.5 and 5 basis points, respectively, at each pricing level of the applicable rate without any changes to the leverage ratios used to calculate such spreads. +The Credit Agreement includes the following covenants: (i) when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million, a maximum consolidated leverage ratio of 2.50 :1.00 and a minimum debt service coverage ratio of 2.00 :1.00, and (ii) when RPC's trailing fourth quarter EBITDA is less than $ 50 million, a minimum tangible net worth of no less than $ 400 million. As of December 31, 2020, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● the Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a margin ranging from 1.125 % to 2.125 % , based on a quarterly consolidated leverage ratio calculation; or +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Eurodollar Rate plus 1.00 % ; in each case plus a margin that ranges from 0.125 % to 1.125 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.20 % to 0.30 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $ 3.4 million. These costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of $ 0.3 million at December 31, 2020 is classified as part of non-current other assets. +As of December 31, 2020, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 18.3 million; therefore, a total of $ 81.7 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2020 +2019 +2018 +(in thousands) +Interest incurred +$ +276 +$ +256 +$ +390 +Interest paid +$ +160 +$ +162 +$ +241 +Note 10: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income consists of the following (in thousands): +Foreign +Pension +Currency +Adjustment +Translation +Total +Balance at December 31, 2018 +$ +( 15,878 ) +$ +( 2,868 ) +$ +( 18,746 ) +Change during 2019: +Before-tax amount +( 3,962 ) +553 +( 3,409 ) +Tax (expense) benefit +970 +— +970 +Adoption of accounting standard +( 2,732 ) +— +( 2,732 ) +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +694 +— +694 +Total activity in 2019 +( 5,030 ) +553 +( 4,477 ) +Balance at December 31, 2019 +$ +( 20,908 ) +$ +( 2,315 ) +$ +( 23,223 ) +Change during 2020: +Before-tax amount +1,940 +( 210 ) +1,730 +Tax (expense) benefit +( 475 ) +— +( 475 ) +Pension settlement loss +3,518 +— +3,518 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +744 +— +744 +Total activity in 2020 +5,727 +( 210 ) +5,517 +Balance at December 31, 2020 +$ +( 15,181 ) +$ +( 2,525 ) +$ +( 17,706 ) +(1) Reported as part of selling, general and administrative expenses. +Note 11: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2020 and 2019: +Fair Value Measurements at December 31, 2020 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ +132 +$ +132 +$ +— +$ +— +Investments measured at net asset value - trading securities +$ +32,039 +Fair Value Measurements at December 31, 2019 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Available-for-sale securities – equity securities +$ +237 +$ +237 +$ +— +$ +— +Investments measured at net asset value - trading securities +$ +28,476 +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 13, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2020 there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2020 and 2019. Outstanding balances based on the quote from the lender (level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable interest rates as described in Note 9. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The Company’s real estate classified as held for sale has been stated at fair value less costs to sell since the fair value less costs to sell is lower than its carrying amount. The non-recurring fair value measurement was completed in the third quarters of 2020 and 2019 and determined based on observable market data that includes price per square foot involving comparable properties in similar locations and reflected in the tables below: +Fair Value Measurements at December 31, 2020 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Assets held for sale +$ +4,032 +$ +— +$ +4,032 +$ +— +Fair Value Measurements at December 31, 2019 with: +Quoted prices +Significant +in active +other +Significant +markets for +observable +unobservable +(in thousands ) +Total +identical assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Assets held for sale +$ +5,385 +$ +— +$ +5,385 +$ +— +Note 12: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. Any probable and reasonable estimate of assessment costs are included in accrued state, local and other taxes. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 13: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon normal retirement at age 65 or early retirement at age 59 1 / 2 to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer. +In October 2020, the Company amended the Retirement Income Plan to add a limited lump-sum payment window for vested terminated participants who had terminated employment before July 1, 2020 and for active employees who reached age 59 ½ by December 1, 2020, with a vested balance. The participants could elect to receive their vested balance immediately as a lump-sum or a monthly annuity payment. The lump-sum payment window offering ended during the fourth quarter of 2020 and plan assets were used to fund participant elections. The resulting non-cash settlement charges represent the accelerated recognition of actuarial losses reflected in Accumulated Other Comprehensive Income (Loss) (AOCI). A settlement loss of $ 4.7 million associated with the +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +acceptance of these lump-sum payments is included as part of impairment and other charges. See Note 3 for additional information related to the settlement loss. +The Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by $ 2.1 million as of December 31, 2020. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2020 +2019 +(in thousands) +Accumulated benefit obligation at end of year +$ +41,120 +$ +48,519 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ +48,519 +$ +43,417 +Service cost +— +— +Interest cost +1,645 +1,960 +Amendments +— +— +Actuarial loss +3,066 +5,521 +Benefits paid +( 2,581 ) +( 2,379 ) +Settlement +( 9,529 ) +— +Projected benefit obligation at end of year +$ +41,120 +$ +48,519 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ +40,142 +$ +38,364 +Actual return on plan assets +6,586 +4,157 +Employer contribution +4,450 +— +Benefits paid +( 2,581 ) +( 2,379 ) +Settlements +( 9,529 ) +— +Fair value of plan assets at end of year +$ +39,068 +$ +40,142 +Funded status at end of year +$ +( 2,052 ) +$ +( 8,377 ) +December 31, +2020 +2019 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss +$ +20,108 +$ +27,693 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +20,108 +$ +27,693 +The accumulated benefit obligation for the Retirement Income Plan at December 31, 2020 and 2019 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan. +Amounts recognized in the consolidated balance sheets consist of: +December 31, +2020 +2019 +(in thousands) +Funded status of the Retirement Income Plan +$ +( 2,052 ) +$ +( 8,377 ) +SERP liability +( 31,028 ) +( 30,877 ) +Long-term pension liabilities +$ +( 33,080 ) +$ +( 39,254 ) +RPC’s funding policy is to contribute to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. The Company made a cash contribution of $ 4,450,000 to the plan in 2020. There were no contributions made to the plan in 2019. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows: +Years ended December 31, +2020 +2019 +2018 +(in thousands) +Service cost for benefits earned during the period +$ +— +$ +— +$ +— +Interest cost on projected benefit obligation +1,645 +1,960 +1,832 +Expected return on plan assets +( 1,581 ) +( 2,598 ) +( 2,837 ) +Amortization of net loss +986 +919 +824 +Settlement loss +4,660 +— +— +Net periodic benefit plan cost +$ +5,710 +$ +281 +$ +( 181 ) +The Company recognized pre-tax (increases) decreases to the funded status in accumulated other comprehensive loss of $ 6,863,000 in 2020, $ 3,043,000 in 2019, and $ 1,888,000 in 2018. There were no previously unrecognized prior service costs as of December 31, 2020, 2019 and 2018. The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2020, 2019 and 2018 are summarized as follows: +(in thousands) +2020 +2019 +2018 +Net (gain) loss +$ +( 1,217 ) +$ +3,962 +$ +2,712 +Amortization of net loss +( 986 ) +( 919 ) +( 824 ) +Net transition obligation (asset) +— +— +— +Settlement loss +( 4,660 ) +— +— +Amount recognized in accumulated other comprehensive loss +$ +6,863 +$ +3,043 +$ +1,888 +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2020 +2019 +2018 +Projected Benefit Obligation : +Discount rate +2.50 +% +3.60 +% +4.65 +% +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +3.60 +% +4.65 +% +4.00 +% +Expected return on plan assets +4.00 +% +7.00 +% +7.00 +% +Rate of compensation increase +N/A +N/A +N/A +The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company has concluded that its 2020 expected long-term return assumption of four percent is reasonable. +The plan’s weighted average asset allocation at December 31, 2020 and 2019 by asset category along with the target allocation for 2021 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2021 +2020 +2019 +Asset Category +Cash and cash equivalents +0 % - 5 +% +2.0 +% +1.3 +% +Fixed income securities +15 % - 100 +% +98.0 +% +91.7 +% +Investments measured at net asset value +— +% +— +% +7.0 +% +Total +100.0 +% +100.0 +% +100.0 +% +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The Company’s investments in 2020 consist primarily of fixed income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets while minimizing the level of risk to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. Although not required, Company management will evaluate contributing to the pension plan during 2021. +The following tables present our plan assets using the fair value hierarchy as of December 31, 2020 and 2019. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 11 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2020: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +736 +$ +736 +$ +— +Fixed Income Securities +(2) +38,332 +— +38,332 +Total Assets in the Fair Value Hierarchy +$ +39,068 +$ +736 +$ +38,332 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +39,068 +Fair Value Hierarchy as of December 31, 2019: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +505 +$ +505 +$ +— +Fixed Income Securities +(2) +36,813 +— +36,813 +Domestic Equity Securities +(3) +3 +3 +— +Total Assets in the Fair Value Hierarchy +$ +37,321 +$ +508 +$ +36,813 +Investments measured at Net Asset Value +2,821 +Investments at Fair Value +$ +40,142 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. +(3) Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. +The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2021 +$ +2,688 +2022 +2,646 +2023 +2,615 +2024 +2,614 +2025 +2,587 +2026‑2030 +$ +12,112 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $ 58.0 million as of December 31, 2020 and $ 55.3 million as of December 31, 2019. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $ 32,039,000 as of December 31, 2020 and $ 28,476,000 as of December 31, 2019. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading gains (losses) related to the SERP assets totaled $ 2,620,000 in 2020, $( 5,524,000 ) in 2019, and $( 2,282,000 ) in 2018. The SERP liability includes participant deferrals net of distributions and is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. +As a result of Company-owned life insurance policy claims, the Company recorded tax-free gains of $ 891,000 during 2020; these gains are recorded as an adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Proceeds received totaling $ 1,566,000 have been reinvested into mutual funds held as SERP assets. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. Effective January 1, 2020, the Company began making 100 percent matching contributions for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents $(0.50) for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. During 2019, the Company made matching contributions of fifty cents $(0.50) for each dollar $( 1.00 ) of a participant's contribution to the 401(k) Plan that did not exceed six percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 5,641,000 in 2020, $ 10,805,000 in 2019, and $ 5,704,000 in 2018. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2015. The 1994 plan expired in 2004 and the 2004 Plan expired in 2015. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2020, 4,012,780 shares were available for grant. As of December 31, 2019, 4,729,863 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense was $ 8,735,000 in 2020 $( 6,595,000 after tax), $ 8,630,000 in 2019 $( 6,516,000 after tax) and $ 9,419,000 in 2018 $( 7,111,000 after tax). +Stock Options +Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years , except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire in five years . +The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003. There were no stock options exercised during 2020, 2019 or 2018 and there are no stock options outstanding as of December 31, 2020 and 2019. +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Restricted Stock +The Company has granted certain employees time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse restricted shares issued to date vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2020: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2020 +2,393,557 +$ +13.23 +Granted +1,085,875 +4.59 +Vested +( 875,202 ) +14.96 +Forfeited +( 369,051 ) +13.60 +Non-vested shares at December 31, 2020 +2,235,179 +$ +6.81 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2019: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2019 +2,352,150 +$ +17.15 +Granted +858,150 +11.39 +Vested +( 625,465 ) +14.73 +Forfeited +( 191,278 ) +15.90 +Non-vested shares at December 31, 2019 +2,393,557 +$ +13.23 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 4.59 for 2020, $ 11.39 for 2019 and $ 25.13 for 2018. The total fair value of shares vested was $ 3,474,000 during 2020, $ 7,026,000 during 2019 and $ 16,483,000 during 2018. +The consolidated statements of cash flows reflect discrete income tax adjustments that resulted in no detrimental impact in 2020 and $ 442,000 of detrimental impact in 2019 realized from tax compensation deductions and classified within operating activities as part of net income. +Other Information +As of December 31, 2020, total unrecognized compensation cost related to non-vested restricted shares was $ 40,891,000 which is expected to be recognized over a weighted-average period of 3.8 years. +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 846,000 in 2020, $ 865,000 in 2019, and $ 873,000 in 2018. The Company’s receivable due from Marine Products for these services was $ 49,000 as of December 31, 2020 and $ 55,000 as of December 31, 2019. Many of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,030,000 in 2020, $ 1,625,000 in 2019 and $ 1,467,000 in 2018. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include office space, selected administration services for certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2020, $ 104,000 in 2019 and $ 101,000 in 2018. +A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200,000 in 2020 and $ 199,000 in 2019 and 2018 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.2 million as of December 31, 2020 and $ 1.0 million as of December 31, 2019. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2020, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 462,440 . +Note 15: Business Segment and Entity wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Segment Revenues: +RPC’s operating segment revenues by major service lines are shown in the following table: +(in thousands) +2020 +2019 +2018 +Technical Services: +Pressure Pumping +$ +221,597 +$ +519,543 +$ +945,919 +Downhole Tools +195,052 +414,352 +423,811 +Coiled Tubing +51,616 +80,758 +100,049 +Nitrogen +30,213 +45,658 +49,198 +Snubbing +8,016 +14,520 +17,818 +All other +49,994 +70,723 +110,418 +Total Technical Services +$ +556,488 +$ +1,145,554 +$ +1,647,213 +Support Services: +Rental Tools +$ +25,280 +$ +51,792 +$ +50,809 +All other +16,534 +25,063 +22,983 +Total Support Services +$ +41,814 +$ +76,855 +$ +73,792 +Total Revenues +$ +598,302 +$ +1,222,409 +$ +1,721,005 +The accounting policies of the reportable segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2020, 2019 and 2018 are shown in the following table: +Gain on +Impairment +Technical +Support +disposition of +and other +(in thousands) +Services +Services +Corporate +assets, net +charges +Total +2020 +Revenues +$ +556,488 +$ +41,814 +$ +— +$ +— +$ +— +$ +598,302 +Operating (loss) profit +( 82,525 ) +( 6,714 ) +( 12,426 ) +9,523 +( 217,493 ) +(1) +( 309,635 ) +Capital expenditures +54,327 +10,224 +514 +— +— +65,065 +Depreciation and amortization +80,877 +14,377 +276 +— +— +95,530 +Identifiable assets +499,764 +64,457 +226,284 +— +— +790,505 +2019 +Revenues +$ +1,145,554 +$ +76,855 +$ +— +$ +— +$ +— +$ +1,222,409 +Operating (loss) profit +( 32,993 ) +10,016 +( 12,745 ) +3,707 +( 82,273 ) +(2) +( 114,288 ) +Capital expenditures +237,950 +10,330 +2,349 +— +— +250,629 +Depreciation and amortization +154,776 +15,328 +305 +— +— +170,409 +Identifiable assets +848,264 +72,351 +132,603 +— +— +1,053,218 +2018 +Revenues +$ +1,647,213 +$ +73,792 +$ +— +$ +— +$ +— +$ +1,721,005 +Operating profit (loss) +216,703 +4,612 +( 14,629 ) +3,344 +— +210,030 +Capital expenditures +230,262 +10,364 +1,984 +— +— +242,610 +Depreciation and amortization +150,508 +12,174 +438 +— +— +163,120 +Identifiable assets +925,305 +78,413 +195,862 +— +— +1,199,580 +(1) Represents $ 212,292 related to technical services, $ 4,660 related to pension settlement loss and the remainder related to corporate expenses. +(2) Represents $ 80,263 related to technical services and $ 2,010 related to corporate expenses. +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2020, 2019 and 2018. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +Years ended December 31, +2020 +2019 +2018 +(in thousands) +United States Revenues +$ +562,390 +$ +1,157,760 +$ +1,630,569 +International Revenues +35,912 +64,649 +90,436 +$ +598,302 +$ +1,222,409 +$ +1,721,005 +Note 16: Leases +The Company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 and recognized leases with duration greater than 12 months on the balance sheet using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for a carry-forward of the historical lease classification. For leases with terms greater than 12 months, the Company has recorded the related Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. A few of the leases include rental escalation clauses or renewal options and they have been factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement, to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, railcars, storage containers and office equipment. The Company does not have any finance leases. The Company has a significant population of month-to-month real estate leases that have been classified as short-term leases, and therefore has not recognized a ROU asset or lease liability related to them. The Company determines at contract inception, if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2020, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2020, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +Lease position: +The table below presents the assets and liabilities related to operating leases recorded on the consolidated balance sheets: +December 31, +2020 +2019 +(in thousands) +Assets: +Operating lease right-of-use assets +$ +27,270 +$ +33,850 +Liabilities: +Current portion of operating leases +$ +9,192 +$ +10,625 +Long-term operating lease liabilities +21,090 +28,378 +Total lease liabilities +$ +30,282 +$ +39,003 +During the year ended December 31, 2019, the Company recorded an impairment totaling $ 4,903 representing the acceleration of depreciation on the remaining balance of the ROU assets related to leases that have been abandoned. The Company has not terminated these leases and continues to carry the present value of lease liability related to these payments. +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +Lease costs: +The components of lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations as disclosed below +Year ended December 31, +2020 +2019 +(in thousands) +Operating lease cost +$ +8,373 +$ +14,109 +Short-term lease cost +2,577 +7,254 +Variable lease cost +624 +521 +Sublease income +( 295 ) +( 72 ) +Total lease cost +$ +11,279 +$ +21,812 +Total rental expense, including short-term rentals charged to operations related to operating leases under the previous lease standard, was $ 21.6 million in 2018. +Other information: +As of December 31, +2020 +2019 +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +11,922 +$ +12,863 +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +3,202 +$ +7,992 +Weighted average remaining lease term – operating leases (years) +5.2 +5.5 +Weighted average discount rate – operating leases +2.82 +% +3.58 +% +Lease Commitments: +Maturity of lease liabilities - Operating Leases: +As of December 31, +2020 +2019 +(in thousands) +2020 +$ +— +$ +12,091 +2021 +9,911 +9,623 +2022 +6,889 +6,608 +2023 +4,135 +4,153 +2024 +3,127 +3,078 +2025 +2,181 +_ +Thereafter +6,404 +9,132 +Total lease payments +32,647 +44,685 +Less: Amounts representing interest +( 2,365 ) +( 5,682 ) +Present value of lease liabilities +$ +30,282 +$ +39,003 +60 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2020 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 29 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2020 and issued a report thereon which is included on page 30 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +61 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and executive officers will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the section titled “Election of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on Page 15 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the sections titled “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated herein by reference. +62 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the sections “Capital Stock” and “Election of Directors.” This information is incorporated herein by reference. +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2020. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A)) +Equity compensation plans approved by securityholders +— +$ +— +4,012,780 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +4,012,780 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 13 to the consolidated financial statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to consolidated financial statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to consolidated financial statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1 2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004) . +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +63 +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed on February 2, 2021). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +4.2 +Description of Registrant's Securities. (incorporated herein by reference to Exhibit 4.2 to the Form 10-K filed on February 28, 2020). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +64 +Exhibit +Number +Description +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +10.22 +Amendment to No. 5 to Credit Agreement dated as of July 26, 2020 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Current Report on Form 8-K filed on October 1, 2020). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +65 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 26, 2021 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 26, 2021 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 26, 2021 +The Directors of RPC (listed below) executed a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +Gary W. Rollins, Director +Amy R. Kreisler, Director +Jerry W. Nix, Director +Pamela R. Rollins, Director +Harry J. Cynkus, Director +Patrick J. Gunning, Director +Susan R. Bell, Director +/s/ +Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 26, 2021 +66 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +29 +Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting +30 +Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements +31 +Consolidated Balance Sheets as of December 31, 2020 and 2019 +33 +Consolidated Statements of Operations for each of the three years ended December 31, 2020 +34 +Consolidated Statements of Comprehensive (Loss) Income for each of the three years ended December 31, 2020 +35 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2020 +36 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2020 +37 +Notes to Consolidated Financial Statements +38 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +68 +Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +67 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2020, 2019 and 2018 +Balance at +Charged to +Balance +Beginning +Costs and +Net (Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries +Period +Year ended December 31, 2020 +Credit loss allowance for accounts receivable +$ +5,181 +$ +342 +$ +( 708 ) +(1) +$ +4,815 +Deferred tax asset valuation allowance +$ +471 +$ +— +$ +19 +(2) +$ +490 +Reserve for obsolete or slow moving inventory +$ +10,467 +$ +5,826 +$ +( 2,464 ) +(3) +$ +13,829 +Year ended December 31, 2019 +Credit loss allowance for accounts receivable +$ +4,813 +$ +1,481 +$ +( 1,113 ) +(1) +$ +5,181 +Deferred tax asset valuation allowance +$ +445 +$ +— +$ +26 +(2) +$ +471 +Reserve for obsolete or slow moving inventory +$ +10,169 +$ +6,467 +$ +( 6,169 ) +(3) +$ +10,467 +Year ended December 31, 2018 +Credit loss allowance for accounts receivable +$ +4,471 +$ +588 +$ +( 246 ) +(1) +$ +4,813 +Deferred tax asset valuation allowance +$ +3,994 +$ +— +$ +( 3,549 ) +(2) +$ +445 +Reserve for obsolete or slow moving inventory +$ +3,875 +$ +8,088 +$ +( 1,794 ) +(3) +$ +10,169 +(1) Net (deductions) recoveries in the credit loss allowance principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the net operating losses, foreign tax credits and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory. +68 \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/filing_metadata.csv b/raw/filings/0000742278/2020/0001104659-21-029211/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..324d0ebf2dbca68e145e1304fd07b49890e3f4eb --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2021-02-26,2020-12-31,2021-02-26T21:22:58.000Z,0001104659-21-029211,res-20201231x10k.htm,FORM 10-K,12304527,1,1,https://www.sec.gov/Archives/edgar/data/742278/000110465921029211/res-20201231x10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000110465921029211/,2020,2020,1 diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/item1.txt b/raw/filings/0000742278/2020/0001104659-21-029211/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c9e102574d693dc267d39bfe29dee8e2f3165666 --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/item1.txt @@ -0,0 +1,101 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2020, RPC had approximately 2,000 employees. +2 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2020, less than five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2020, we also estimate that 75 percent of our revenues were related to drilling and production activities for oil, while 25 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 37 percent of 2020 revenues, 42 percent of 2019 revenues and 55 percent of 2018 revenues are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +3 +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 34 percent of revenues in 2020, 34 percent of revenues in 2019 and 25 percent of 2018 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in 2020, seven percent of revenues in 2019 and six percent of revenues in 2018, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for one percent of revenues in 2020, one percent of revenues in 2019 and one percent of revenues in 2018, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for five percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these +4 +pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. +5 +Patterson Rental Tools offers a broad range of rental tools including: +Blowout Preventors +Diverters +High Pressure Manifolds and Valves +Drill Pipe +Hevi-wate Drill Pipe +Drill Collars +Tubing +Handling Tools +Production Related Rental Tools +Coflexip® Hoses +Pumps +Wear Knot TM Drill Pipe +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 95 percent from its peak in 1981. However, due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of both oil and natural gas rose to record levels in the fourth quarter of 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and early in the first quarter of 2021, the U.S. domestic rig count rose by approximately 63 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completions in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,394 wells were completed, the lowest number of annual well completions recorded during the seven years that these data have been reported. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the +6 +first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas decreased by approximately 20.9 percent during 2020 as compared with 2019. Early in the first quarter of 2021, the price of natural gas was approximately 8.9 percent higher than the price at the end of 2020. RPC does not believe that the current price of natural gas is sufficient to encourage increasing levels of natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2020 the average price of benchmark natural gas liquids decreased by approximately 14.4 percent compared with 2019. Early in the first quarter of 2021, however, the price of natural gas liquids increased by approximately 85.5 percent compared to the average price in 2020. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become a source of demand for U.S. natural gas, while the price of natural gas generally has fallen in recent years. Unlike oil demand, which is impacted by numerous global factors, the demand for natural gas is determined by U.S. domestic and export demand. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for six percent of RPC’s consolidated revenues in 2020, five percent in 2019 and five percent in 2018. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues decreased 44.5 percent in 2020 compared to the prior year primarily due to lower customer activity levels in Argentina, and Canada, partially offset by higher activity in Algeria. During 2020, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2021. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist +7 +opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2020. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2020, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2020 or 2019 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn of 2015 and 2016, a number of smaller oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated the formation of new companies and allowed existing companies to expand their operations. Pricing for our services improved significantly during 2017 but declined during the fourth quarter of 2017 and throughout the following years before achieving some level of stability early in 2021. RPC believes that expanded service capacity during the three years prior to 2020 increased competitive pressures and caused labor price increases because these companies hired experienced personnel from more established companies such as RPC. During this period, improving completion services efficiency also served to increase effective capacity and impose another catalyst for declining pricing. As in the oilfield downturn of 2015 and 2016, several oilfield services companies became insolvent or sought bankruptcy protection during 2020 as the impact of the COVID-19 pandemic drove oilfield activity to historically low levels. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Basic Energy Services, Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProPetro Holding Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors. +8 +Human Capital +The table below shows the number of employees at December 31, 2020 and 2019: +At December 31, +2020 +2019 +Employees +2,005 +2,656 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce reflects the diversity of the communities in which it operates. Our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a diversity committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). Annual review of the Code is required which prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, education tuition assistance and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. In addition, a component of our field employee compensation plans is based on safety measures. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +9 +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities in The Woodlands, Texas, and Midland, Texas that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Oklahoma City, Oklahoma that includes operations, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/item13.txt b/raw/filings/0000742278/2020/0001104659-21-029211/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3db8bbd6ca1aa3fa78518c9c4de7ceddc7c5bda --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/item9a.txt b/raw/filings/0000742278/2020/0001104659-21-029211/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..516a2479d1c155f1d4a9cbc29114be0ac1a46cf1 --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2020 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 29 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2020 and issued a report thereon which is included on page 30 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/rp_note.txt b/raw/filings/0000742278/2020/0001104659-21-029211/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e16f8810704e7636074b1f42a9ef139f8c0e8db8 --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/rp_note.txt @@ -0,0 +1,13 @@ +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2020, 2019 and 2018 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 846,000 in 2020, $ 865,000 in 2019, and $ 873,000 in 2018. The Company’s receivable due from Marine Products for these services was $ 49,000 as of December 31, 2020 and $ 55,000 as of December 31, 2019. Many of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,030,000 in 2020, $ 1,625,000 in 2019 and $ 1,467,000 in 2018. +RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include office space, selected administration services for certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2020, $ 104,000 in 2019 and $ 101,000 in 2018. +A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200,000 in 2020 and $ 199,000 in 2019 and 2018 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.2 million as of December 31, 2020 and $ 1.0 million as of December 31, 2019. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2020, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 462,440 . \ No newline at end of file diff --git a/raw/filings/0000742278/2020/0001104659-21-029211/rpt_disclosure.txt b/raw/filings/0000742278/2020/0001104659-21-029211/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..69d4c839f5ea950314b16bb33dce22431cbed607 --- /dev/null +++ b/raw/filings/0000742278/2020/0001104659-21-029211/rpt_disclosure.txt @@ -0,0 +1,8 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months’ notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $867,000 in 2021. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2021, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $200,000 for the corporate aircraft. +During 2021, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. Gary W. Rollins, Non-Executive Chairman, is an officer, director and controlling stockholder of LOR, Inc. In 2021, payments totaling approximately $1,210,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services from Rollins, Inc., a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates. The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $108,000 in 2021. +A group that includes the Company’s Non-Executive Chairman of the Board, Mr. Gary W. Rollins, and certain companies under his control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, Board of Directors and Corporate Governance. The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. +33 +Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. 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+FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +☐ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31 , 2021 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ◻ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 355,427,058 based on the closing price on the New York Stock Exchange on June 30, 2021 of $4.95 per share. +RPC, Inc. had 216,586,626 shares of Common Stock outstanding as of February 18, 2022. +Documents Incorporated by Reference +Portions of the Proxy Statement for the 2022 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business and financial strategies, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report also include without limitation statements regarding: our belief that the demand for our oil and gas services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or addressing well control issues; our belief that the common drivers of operational and financial success of Technical Services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment; our belief that the primary drivers of operational success for services and equipment provided off the well site without our personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics; our belief that the primary drivers of operational success for other Support Services relate to meeting customer needs off the well site and competitive marketing of such services; our belief that demand for equipment and services offered tends to be influenced primarily by customer drilling-related activity levels; our belief that our supply sources are adequate; our belief that customer activity levels are influenced by their decisions about capital investment toward the development and product of oil and gas reserves; natural gas prices, production levels and drilling activities; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future; our continued belief in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market; our belief that unconventional wells will continue to comprise the majority of drilling activity because of their high initial production rates; our belief that the advent of unconventional drilling in the U.S. domestic market will be a permanent change and will continue to have a positive impact on the demand for our services; our expectation to continue to focus on the selected development of international business opportunities in current and other international markets and our belief that international revenues will continue to be less than ten percent of total revenues in 2022; our primary objective, which is to generate excellent long-term returns on investment through the effective and conservative management of our invested capital to generate strong cash flow; our plans to continue to pursue such primary objective through strategic investments and opportunities designed to enhance the long-term value of our company while improving market share, product offerings and the profitability of existing businesses; our expectations regarding acquisition targets in our industry; our belief that the principal competitive factors in the market areas that we serve are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency and price; our belief that our facilities are adequate for our current operations and reasonably anticipated future needs; our belief that oil production in the United States has become an increasingly important determinant of global oil prices; our belief that statistics regarding well completions are meaningful indicators of the outlook for our activity levels and revenues; our belief that current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity; the adequacy of our insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our belief that recent price increases have encouraged our customers to increase drilling and completion activities; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that natural gas-directed drilling has increased and will continue to increase in natural gas-directed basins in the United States due to the current and projected high prices of natural gas and our belief that this trend should be favorable for the demand for our services in such basins; our belief that the competitive market for our services will improve during the near term; our belief that our response to the near-term potential of lower activity levels and competitive pricing will allow us to maintain a strong balance sheet and position us for long-term growth and strong financial results;; our belief that the liquidity provided by our cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our expectation that we will not need our revolving credit facility to meet liquidity requirements in the near term; our expectations about cash contributions to the defined benefit pension plan in 2022; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual obligations for future periods; our expectations to resume payments of cash dividends; our expectations regarding the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition. +The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections.. +2 +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2021, RPC had approximately 2,250 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2021, less than five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2021, we also estimate that 65 percent of our revenues were related to drilling and production activities for oil, while 35 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 43 percent of 2021 revenues, 37 percent of 2020 revenues and 42 percent of 2019 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical +3 +additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 29 percent of revenues in 2021, 34 percent of revenues in 2020 and 34 percent of 2019 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for ten percent of revenues in 2021, nine percent of revenues in 2020 and seven percent of revenues in 2019, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in 2021, one percent of revenues in 2020 and one percent of revenues in 2019, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for four percent of revenues in 2021, five percent of revenues in 2020 and four percent of revenues in 2019. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2021, four percent of revenues in 2020 and four percent of revenues in 2019. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region and the Appalachian region. +5 +Patterson Rental Tools offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s. Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and early in the first quarter of 2022, the U.S. domestic rig count rose by approximately 138 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,387 wells were completed, the lowest number of annual well completions recorded during the seven years that these data have been reported. During 2021, reported well completions increased to 9,810, an increase of 2,423 wells or 32.8 percent compared to 2020. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas increased by approximately 93 percent during 2021 as compared with 2020. Early in the first quarter of 2022, the price of natural gas was approximately 19.9 percent higher than the price at the end of 2021. RPC believes that the recent increase in the price of natural gas is sufficient to encourage increasing levels of natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2021 the average price of benchmark natural gas liquids increased by approximately 97 percent compared with 2020. Early in the first quarter of 2022, the price of natural gas liquids increased by approximately 7.0 percent compared to the average price in 2021. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. +6 +Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become a source of demand for U.S. natural gas, the price of natural gas generally has fallen in recent years. Unlike oil demand, which is impacted by numerous global factors, the demand for natural gas is determined by U.S. domestic and export demand. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for four percent of RPC’s consolidated revenues in 2021, six percent in 2020 and five percent in 2019. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues decreased 13.0 percent in 2021 compared to the prior year primarily due to lower customer activity levels in Algeria and Saudi Arabia, partially offset by higher activity in Canada. During 2021, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2022. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was +7 +no outstanding balance on this credit facility as of December 31, 2021. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2021, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2021 or 2020 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn that began in 2015, a number of oilfield services companies reduced the scope of their operations or became insolvent. During the most recent downturn that began in 2019, fewer oilfield services companies became insolvent than in the previous downturn, partially because of COVID-19 – related Federal stimulus that supported operations that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. In addition, improving completion services efficiency during this period served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services have caused the oilfield services business to remain competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc. and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. +Human Capital +The table below shows the number of employees at December 31, 2021 and 2020: +At December 31, +2021 +2020 +Employees +2,250 +2,005 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce reflects the diversity of the communities in which it operates. Our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +8 +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). Annual review of the Code is required, and the code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. In addition, a component of our field employee compensation plans is based on safety measures. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing +9 +laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Risks Related to our Business. +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 40 percent of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2021, 2020 or 2019. In addition, there was no customer as of December 31, 2021 or 2020 that accounted for 10 percent or more of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations which could cause us to experience increased credit losses for accounts receivable. +10 +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. Early in the first quarter of 2022, the Company and our industry is being affected by shortages of skilled labor. If labor shortages continue or a significant increase in wages occur, our capacity and profitability could be diminished, and our growth potential could be impaired. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries +11 +of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility, as amended September 25, 2020, provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +Our financial results could continue to be negatively impacted by the COVID-19 pandemic. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic. Although global demand began to rebound in 2021, a worsening of the pandemic could continue to impact the economic conditions in the United States, as federal, state and local governments react to the public health crisis, creating uncertainties in the United States, as well as the global economy. RPC instituted strict procedures to assess employee health and safety while in its facilities or on operational locations and attempted to hire redundant crews in order to continue to provide services to its customers. These measures increased the Company’s operating expenses, and such higher operating expenses could continue if the COVID-19 pandemic continues during 2022. +Risk Management Risks. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it +12 +occurred, but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +Compliance with federal and state regulations relating to hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry. In spite of these favorable empirical data, the current administration imposed a temporary suspension of new oil and gas leasing permits on federal oil and gas drilling areas. This suspension has been challenged in court and was blocked in the fourth quarter of 2021. Early in 2022 a final decision was still pending. This legislation has had a minimal impact on RPC’s Technical Services Segment’s revenues. Furthermore, we do not believe that this ban, or any similar future ban, would impact RPC’s Technical Services Segment’s revenues because this or similar bans would only apply to drilling and completion on Federal lands, which account for less than 10 percent of U.S. oilfield activity. +General Risks. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Risks Related to our Capital and Ownership Structure. +Our management has a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control (the “Controlling Group”), controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of independent directors, and independent compensation and nominating committees. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 67 percent of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +The Controlling Group could take actions that could negatively impact our results of operations, financial condition or stock price. +The Controlling Group may from time to time and at any time, in their sole discretion, acquire or cause to be acquired, additional equity or other instruments of the Company, its subsidiaries or affiliates, or derivative instruments the value of which is linked to Company securities, or dispose or cause to be disposed, such equity or other securities or instruments, in any amount that the Controlling Group may determine in their sole discretion, through open market transactions, privately negotiated transactions or otherwise. In addition, depending upon a variety of factors, the Controlling Group may at any time engage in discussions with the +13 +Company and its affiliates, and other persons, including retained outside advisers, concerning the Company’s business, management, strategic alternatives and direction, and in their sole discretion, consider, formulate and implement various plans or proposals intended to enhance the value of their investment in the Company. In the event the Controlling Group were to engage in any of these actions, our common stock price could be negatively impacted, such actions could cause volatility in the market for our common stock or could have a material adverse effect on our results of operations and our financial condition. +Our management has a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC's certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and director nominations, and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Risks Related to Digital operations, Cybersecurity and Business Disruption. +Our operations rely on digital systems and processes that are subject to cyber-attacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyber-attacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for all employees, simulate phishing assessments and closely manage the accounts and privileges of all employees and contractors. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents. We have experienced cyberattacks, including phishing and other attempts to gain unauthorized access to our network. To date, these attacks have not had a material impact on our operations. +If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Item 1B. Unresolved Staff Comments +None. +14 +Item 2. Properties +RPC owns or leases approximately 65 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” contained in Item 7. As of December 31, 2021, the lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yard +Elk City, Oklahoma — Operations, sales and equipment storage yard +Houma, Louisiana — Administrative office +Channelview, Texas — Pipe storage yard and inspection services +Odessa, Texas — Pumping services facility +Rock Springs, Wyoming — Operations, sales and equipment storage yard +Vernal, Utah — Operations, sales and equipment storage yards +Newcastle, Oklahoma — Operations, sales and administrative offices +Leased Locations +Midland, Texas — Operations, sales and administrative offices +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Odessa, Texas — Pumping services facility +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K. +Item 4A. Information About Our Executive Officers +In April of 2021, the Executive Officers of the Company were elected by the Board of Directors to serve at least one year, or until the April 2022 Board of Directors’ meeting, or until their earlier removal by the Board of Directors or their resignation. The following table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +Richard A. Hubbell (1) +77 +4/22/03 +President and Chief Executive Officer +Ben M. Palmer (2) +61 +7/8/96 +Vice President, Chief Financial Officer and Corporate Secretary +(1) Richard A. Hubbell has been the President of RPC since 1987 and Chief Executive Officer since 2003. He has also been the President and Chief Executive Officer of Marine Products Corporation since it was spun off from RPC in 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. +15 +(2) Ben M. Palmer has been the Vice President and Chief Financial Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation in July 2017. +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 18, 2022 there were 216,586,626 shares of common stock outstanding and approximately 10,700 beneficial holders of our common stock. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchases in the fourth quarter of 2021 are outlined below. +Total Number +Maximum +of Shares (or +Number (or +Units) +Approximate +Purchased as +Dollar Value) of +Part of +Shares (or Units) +Total Number of +Average Price +Publicly +that May Yet Be +Shares +Paid Per +Announced +Purchased Under +(or Units) +Share +Plans or +the Plans or +Period +Purchased +(or Unit) +Programs (1) +Programs (1) +October 1, 2021 to October 31, 2021 +— +$ +— +— +8,248,184 +November 1, 2021 to November 30, 2021 +— +— +— +8,248,184 +December 1, 2021 to December 31, 2021 +— +— +— +8,248,184 +Totals +— +$ +— +— +8,248,184 +(1) The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 and 2019 that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10,000,000 shares. There were no shares repurchased as part of this program during the fourth quarter of 2021. As of December 31, 2021, there are 8,248,184 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index. +16 +The Company was a component of the Russell 2000 during 2021. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2021 of $3.0 billion, and a median market capitalization of $1.3 billion. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International plc, Oil States International, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. The peer group used in the immediately preceding fiscal year (“the Former Peer Group”) included Weatherford International, Inc., Superior Energy Services, Inc., Patterson-UTI Energy, Inc., and Halliburton Company. Superior Energy Services, Inc., was included in the Former Peer Group but not the Peer Group because its common stock no longer trades on a recognized exchange. The Company included Oil States International, Inc. in the Peer Group because it engages in similar oilfield businesses. +Item 6. Reserved +17 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with “Selected Financial Data” and the consolidated financial statements included elsewhere in this document. See also “Forward-Looking Statements” on page 2. Discussions of year-to-year comparisons of 2020 and 2019 items that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2020, which Item is incorporated herein by reference. +RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain capital strength sufficient to allow us to remain a going concern and maintain our operational strength during protracted industry downturns. +- To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of raw materials used in our operations. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic. Although global demand began to rebound in 2021, the pandemic could continue to impact the economic conditions in the United States, as federal, state and local governments react to the public health crisis, creating uncertainties in the United States, as well as the global economy. RPC instituted strict procedures to assess employee health and +18 +safety in its facilities and operational locations and attempted to hire redundant crews in order to continue to provide services to its customers. +Current industry conditions are characterized by oil prices which have risen from less than $20 per barrel in the second quarter of 2020 to approximately $86 per barrel early in the first quarter of 2022, the highest recorded oil price since the fourth quarter of 2014. While there are many factors influencing the price of oil, we note that the global oil market was oversupplied by approximately six percent during the second and third quarters of 2020 but was undersupplied by approximately two percent during the third and fourth quarters of 2020 and throughout 2021. We believe that the imbalance in global supply and demand have been an important catalyst for the significant increase in the price of oil since the cyclical low during the second quarter of 2020. In response to this significant increase in the price of oil, the U.S. domestic rig count has risen from a low of 244 in the third quarter of 2020 to 610 early in the first quarter of 2022. In addition, well completions have increased from 1,110 in the third quarter of 2020 to 2,578 in the fourth quarter of 2021. +RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States has grown to be the world’s largest producer of oil and is more flexible in its ability to increase or decrease drilling and production activities more rapidly than the state-owned oil companies which comprise OPEC membership. During the past several years, improving drilling and completion activity have caused U.S. domestic oil production to continue to rise to a record production level in December 2019. Oil production fell during 2020 during the downturn caused by the COVID-19 pandemic, but by the end of 2021 had increased by approximately 17 percent compared to the lowest oil production recorded during the second quarter of 2020. Customer activities directed towards natural gas drilling and production have been weak for several years because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. One of these factors has been mitigated by the decline in oil-directed drilling. As a result, the price of natural gas has recovered from a low of $1.63 per Mcf during the second quarter of 2020 to $4.30 per Mcf early in the first quarter of 2022. The price increases in natural gas during the 2021 and early 2022 are encouraging, and RPC believes that they have encouraged our customers to increase drilling and completion activities. +The Company’s strategy of utilizing equipment in unconventional basins continued. During 2021, we made capital expenditures, excluding the equipment acquired under a finance lease, totaling $67.6 million, an increase of $2.6 million compared to the prior year. Capital expenditures during 2021 were primarily directed towards capitalized maintenance and selected growth opportunities. +Revenues during 2021 totaled $864.9 million, an increase of 44.6 percent compared to 2020. This increase was primarily due to higher customer activity levels during 2021 compared to the prior year which was negatively impacted by COVID-19 shutdowns. Cost of revenues increased $182.5 million in 2021 compared to the prior year primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. As a percentage of revenues, cost of revenues decreased to 76.7 percent in 2021 compared to 80.4 percent in 2020 due to the leverage of higher revenues over direct employment costs and improved pricing for RPC’s services. +Selling, general and administrative expenses as a percentage of revenues decreased to 14.3 percent in 2021 compared to 20.7 percent in 2020, primarily due to leverage of higher revenues over costs that are relatively fixed during the short term. +Income before income taxes was $16.4 million for 2021 compared to loss before income taxes of $309.4 million in 2020. Net income for 2021 was $7.2 million, or $0.03 earnings per share compared to net loss of $212.2 million, or $1.00 loss per share in 2020. The net loss in 2020 includes non cash charges of $211.0 million related primarily to asset impairments. +Cash flows from operating activities decreased to $47.7 million in 2021 compared to $78.0 million in 2020 primarily due to increased working capital requirements in 2021 compared to decreased working capital requirements in 2020. As of December 31, 2021, there were no outstanding borrowings under our credit facility. +Outlook +Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018. Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77 percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. +RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig +19 +count; therefore, the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions during 2018 increased by approximately 25 percent compared to 2017, and by approximately five percent in 2019 compared to 2018. Well completions in 2020 decreased by approximately 49 percent compared to 2019. However, well completions in 2021 increased by approximately 33 percent compared to 2020. +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil has risen by more than 215 percent early in the first quarter of 2022 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by approximately 150 percent during the same time period, due to steady demand for natural gas and normal seasonal demand in the first quarter of 2022. Following a low price of $0.23 per gallon in the first quarter of 2020, the price of benchmark natural gas liquids has risen to $1.18 per gallon early in the first quarter of 2022. The price increases in these commodities during the past year are encouraging, and RPC believes that they have encouraged our customers to increase drilling and completion activities. +The majority of the U.S. domestic rig count remains directed towards oil. Early in the first quarter of 2022, approximately 82 percent of the U.S. domestic rig count was directed towards oil, an increase compared with approximately 77 percent during the same period in the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. However, we believe that natural gas-directed drilling has increased and will continue to increase in natural gas-directed basins in the United States due to the current and projected high prices of natural gas. This trend should be favorable for the demand for RPC’s services in these basins. +We continue to monitor the market for our services and the competitive environment, including the current trends and expectations with regard to environmental concerns and related impact on our fleets. The growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market. We believe that most of the feasible efficiency gains have been realized, and a number of our smaller competitors have ceased operations. These factors, combined with the increase in drilling and completion and the improvement in commodity prices, leads us to believe that the competitive market for our services will improve during the near term. +During the third quarter of 2021, RPC entered into an agreement for a new Tier IV dual-fuel pressure pumping fleet, which immediately went to work at the beginning of the fourth quarter. In 2019, RPC expanded its fleet of revenue-producing equipment, while also retiring older equipment which could no longer function effectively in service-intensive operating environments. We continue to selectively upgrade our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. We will continue to monitor current and expected customer activity levels and projected financial returns as we consider activating additional idle equipment during the near term. Our consistent response to the near-term potential of lower activity levels and competitive pricing has been to undertake moderate fleet expansions which we believe will allow us to maintain a strong balance sheet, while also positioning RPC for long-term growth and strong financial returns. +20 +Results of Operations +2021 +2020 +2019 +Consolidated revenues [in thousands] +$ +864,929 +$ +598,302 +$ +1,222,409 +Revenues by business segment [in thousands]: +Technical +$ +815,046 +$ +556,488 +$ +1,145,554 +Support +$ +49,883 +$ +41,814 +76,855 +Consolidated operating income (loss) [in thousands] +$ +16,291 +$ +(309,635) +$ +(114,288) +Operating income (loss) by business segment [in thousands]: +Technical +$ +24,434 +$ +(82,525) +$ +(32,993) +Support +(2,725) +(6,714) +10,016 +Corporate +(13,300) +(12,426) +(12,745) +Impairment and other charges (1)(2) +— +(217,493) +(82,273) +Gain on disposition of assets, net +$ +10,882 +$ +9,523 +$ +3,707 +Net income (loss) +$ +7,217 +$ +(212,192) +$ +(87,111) +Earnings (Loss) per share — diluted +$ +0.03 +$ +(1.00) +$ +(0.41) +Percentage cost of revenues to revenues +77 +% +80 +% +75 +% +Percentage selling, general & administrative expenses to revenues +14 +% +21 +% +14 +% +Percentage depreciation and amortization expense to revenues +8 +% +16 +% +14 +% +Effective income tax rate +56.1 +% +31.4 +% +23.0 +% +Average U.S. domestic rig count +478 +436 +943 +Average natural gas price (per thousand cubic feet (mcf)) +$ +3.92 +$ +2.03 +$ +2.57 +Average oil price (per barrel) +$ +68.13 +$ +39.50 +$ +56.90 +(1) Amount in 2020 includes $212,292 related to technical services, $4,660 related to pension settlement loss and the remainder related to corporate expenses. +(2) Amount in 2019 includes $80,263 related to technical services and $2,010 related to corporate expenses. +Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 +Revenues. Revenues in 2021 increased $266.6 million or 44.6 percent compared to 2020 primarily due to higher activity levels as 2020 was negatively impacted by COVID-19 shutdowns. The Technical Services segment revenues in 2021 increased $258.6 million or 46.5 percent compared to the prior year. The increase is due primarily to higher activity levels and higher pricing within most of our service lines as compared to the prior year. The Support Services segment revenues in 2021 increased $8.1 million or 19.3 percent compared to 2020 due primarily to higher activity levels in the rental tools service line, which is the largest service line within this segment. Technical Services reported operating income of $24.4 million during 2021 compared to an operating loss of $82.5 million in the prior year, while Support Services reported an operating loss of $5.7 million in 2021 compared to an operating loss of $6.7 million in the prior year. The average price of oil increased 72.5 percent and the average price of natural gas increased 93.0 percent during 2021 compared to the prior year. The average domestic rig count during 2021 was 9.5 percent higher than 2020. International revenues, which decreased from $35.9 million in 2020 to $31.2 million in 2021, were four percent of consolidated revenues in 2021 compared to six percent in 2020. International revenues decreased in 2021 primarily due to lower customer activity levels in Algeria, and Saudi Arabia, partially offset by higher activity in Canada compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2021 increased $182.5 million or 38.0 percent compared to 2020 primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. As a percentage of revenues, cost of revenues decreased to 76.7 percent in 2021 compared to 80.4 percent in 2020 due to the leverage of higher revenues over direct employment costs and improved pricing for RPC’s services. +Selling, general and administrative expenses . Selling, general and administrative expenses decreased slightly to $123.6 million in 2021 compared to $123.7 million in 2020. Selling, general and administrative expenses as a percentage of revenues decreased to 14.3 percent of revenues in 2021 compared to 20.7 percent of revenues in 2020 due to higher revenues over costs that are relatively fixed during the short term. +Depreciation and amortization. Depreciation and amortization were $72.7 million in 2021, a decrease of $22.8 million, compared to $95.5 million in 2020. Depreciation and amortization decreased significantly because of the asset impairment charges recorded during the first quarter of 2020. +21 +Impairment and other charges. There were no impairment and other charges for the year ended December 31, 2021 compared to $217.5 million in 2020. Impairment and other charges in 2020 was comprised primarily of the total amount by which several of our asset groups’ carrying amounts exceeded their fair value, a non-cash pension settlement loss, costs to finalize the disposal of our former sand facility and employee severance costs. +Gain on disposition of assets, net. Gain on disposition of assets, net was $10.9 million in 2021 compared to $9.5 million in 2020. The gain on disposition of assets, net is generally comprised of gains or losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income (expense), net. Other income, net was $2.0 million in 2021 compared to other expense, net of $0.1 million in 2020. +Interest expense and interest income. Interest expense was $1.9 million in 2021 compared to $0.4 million in 2020. The increase in interest expense during 2021compared to the same period in the prior year is primarily due to interest expense related to the resolution of a long-term contractual dispute with a vendor and an indirect tax audit assessment. Interest expense in 2021 and 2020 also includes fees on the unused portion of the credit facility. Interest income decreased to $0.1 million in 2021 compared to $0.5 million in 2020 due to lower interest rates earned on cash balances. +Income tax provision (benefit). Income tax provision was $9.2 million in 2021, compared to an income tax benefit of $97.2 million in 2020. The effective tax rate was 56.1 percent for 2021 compared to 31.4 percent for 2020. The effective tax rate in 2021 results from low income before income taxes coupled with unfavorable discrete tax adjustments. +Net income (loss) and diluted earnings (loss) per share . Net income was $7.2 million in 2021, or $0.03 diluted earnings per share, compared to net loss of $212.2 million in 2020, or $1.00 diluted loss per share. This improvement in earnings per share was due to higher profitability, partially due to impairment charges recorded in 2020, as average shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $82.4 million as of December 31, 2021, $84.5 million as of December 31, 2020 and $50.0 million as of December 31, 2019. +The following table sets forth the historical cash flows for the years ended December 31: +(in thousands) +2021 +2020 +2019 +(In thousands) +Net cash provided by operating activities +$ +47,719 +$ +77,958 +$ +209,141 +Net cash used for investing activities +(47,631) +(42,659) +(235,788) +Net cash used for financing activities +(2,151) +(826) +(39,592) +Cash provided by operating activities for 2021 decreased by $30.2 million compared to the prior year. Cash provided by operating activities during 2021 resulted from net income of $7.2 million coupled with an unfavorable change in accounts receivable of $91.1 million, partially offset by favorable changes in other components of our working capital (accounts payable and taxes receivable) of $57.3 million. Working capital increased primarily due to higher activity levels, partially offset by receipts of income tax refunds related to net operating loss carrybacks. +Cash used for investing activities for 2021 increased by $4.0 million compared to 2021, primarily due to an increase in capital expenditures, partially offset by a decrease in proceeds from the sale of assets. +Cash used for financing activities for 2021 increased by $1.3 million primarily as a result of cash paid for a finance lease, partially offset by lower cost of repurchases of the Company’s shares for taxes related to the vesting of restricted shares. There were no dividends paid to common stockholders in 2021 or 2020. +Financial Condition and Liquidity +The Company’s financial condition as of December 31, 2021 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the +22 +next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not expect to need our revolving credit facility to meet these liquidity requirements in the near term. +The Company currently has a $100 million revolving credit facility that matures in October 2023, as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On September 25, 2020, the Company further amended the revolving credit facility. Among other matters, the amendment (1) reduced the maximum amount available for borrowing from $125 million to $100 million, (2) decreased the minimum tangible net worth covenant level from not less than $600 million to not less than $400 million, and (3) increased the margin spreads and commitment fees payable by 37.5 and 5 basis points, respectively, at each pricing level of the applicable rate without any changes to the leverage ratios used to calculate such spreads. As of December 31, 2021, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $16.3 million; therefore, a total of $83.7 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of December 31, 2021. For additional information with respect to RPC’s facility, see Note 9 of the consolidated financial statements. +Cash Requirements +Capital expenditures were $67.6 million in 2021, and we currently expect capital expenditures to be approximately $120 million in 2022, comprised primarily of capitalized maintenance for existing equipment and selected growth opportunities. During the third quarter of 2021, RPC made the strategic decision to add a Tier IV dual-fuel fleet. This fleet was put into service late in the third quarter and is reflected as a finance lease with a balloon payment at the end of 12 months. The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. +The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated. See Note 12 for additional information. +During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan and as such, the year-end pension obligation has been valued on a termination basis. Specifically, the actuaries utilized an approach based on their experience with other plan terminations that (i) estimated a take rate for lump sums; (ii) for those participants electing a lump-sum, calculated the amount using the November 2021 IRS segment rates and (iii) for those participants with annuities purchased, calculated the amount using estimated insurance settlement rates. The Company currently expects to make no cash contributions to the plan in 2022 and approximately $6.0 million in final cash contribution to the benefit plan in early 2023 as part of termination. +As of December 31, 2021, the Company’s stock buyback program authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. No shares were purchased on the open market during the twelve months ended December 31, 2021, and 8,248,184 shares remain available to be repurchased under the current authorization. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends. +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable leases, purchase obligations, amounts related to the usage of corporate aircraft and other long-term liabilities. See note 16 for details regarding RPC’s lease obligations. +F air Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive +23 +Retirement Plan (“SERP”) investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. Beginning in 2018, prices for the raw material comprising the Company’s single largest purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor costs declined throughout 2020 due to the significant decline in oilfield activity. However, during the fourth quarter of 2020 and throughout 2021, the price of labor began to rise due to increasing oilfield activity and the departure of skilled labor from the domestic oilfield industry during 2020. Early in the first quarter of 2022, market prices of some raw materials have increased significantly. We have successfully passed some of these costs to customers, but due to the competitive nature of the oilfield services business, there is no assurance that we will continue to so in the future. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +Related Party Transactions +See “NOTE 14: RELATED PARTY TRANSACTIONS” of the consolidated financial statements, which is incorporated herein by reference, for a description of related party transactions. +Critical Accounting Policies and Estimates +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting policies requiring significant judgements and estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +Credit loss allowance for accounts receivable — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our credit loss allowance is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Credit loss allowance for accounts receivable are recorded in selling, general and administrative expenses. Accounts are written off against the allowance when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2021, 2020 and 2019. We record specific provisions when we become aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated credit loss allowance is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.03 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages by 0.50 percentage points as of December 31, 2021 would have resulted in a change of $4.3 million in the recorded provision for current expected credit losses. +24 +Insurance expenses —The Company self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2021, the Company estimates the range of exposure to be from $19.4 million to $24.5 million. The Company has recorded liabilities at December 31, 2021 of $21.9 million which represents management’s best estimate of probable loss. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. +For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. +During the year ended December 31, 2020, the Company recorded an asset impairment loss totaling $204.8 million related to its long-lived asset groups, in response to the drastic decline in oilfield drilling and completion activities that began in the first quarter of 2020. See Note 3 of the consolidated financial statements for additional information which is incorporated herein by reference. +Recent Accounting Pronouncements +See Note 1 of the consolidated financial statements, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its revolving credit facility. As of December 31, 2021, there are no outstanding interest-bearing advances on our credit facility which bear interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +25 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2021 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2021. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2021, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 27. +/s/ Richard A. Hubbell +/s/ Ben M. Palmer +Richard A. Hubbell +President and Chief Executive Officer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2022 +26 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2021, and our report dated February 28, 2022 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2022 +27 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2022 expressed an unqualified opinion. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2022 +28 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +2021 +2020 +ASSETS +Cash and cash equivalents +$ +82,433 +$ +84,496 +Accounts receivable, net of allowance for doubtful accounts of $ 6,765 in 2021 and $ 4,815 in 2020 +258,635 +161,771 +Inventories +78,983 +82,918 +Income taxes receivable +58,504 +82,943 +Prepaid expenses +9,773 +9,124 +Assets held for sale +692 +4,032 +Other current assets +2,990 +3,075 +Total current assets +492,010 +428,359 +Property, plant and equipment, less accumulated depreciation of $ 763,304 in 2021 and $ 790,712 in 2020 +254,408 +264,411 +Operating lease right-of-use assets +24,572 +27,270 +Finance lease right-of-use assets +20,327 +— +Goodwill +32,150 +32,150 +Other assets +40,898 +38,315 +Total assets +$ +864,365 +$ +790,505 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +74,404 +$ +41,080 +Accrued payroll and related expenses +15,350 +18,428 +Accrued insurance expenses +10,129 +5,489 +Accrued state, local and other taxes +1,905 +2,788 +Income taxes payable +656 +1,115 +Current portion of operating lease liabilities +6,387 +9,192 +Current portion of finance lease liabilities +20,194 +— +Other accrued expenses +1,824 +1,473 +Total current liabilities +130,849 +79,565 +Long-term accrued insurance expenses +11,770 +11,822 +Long-term pension liabilities +35,376 +33,080 +Deferred income taxes +17,749 +13,332 +Long-term operating lease liabilities +19,719 +21,090 +Other long-term liabilities +7,111 +49 +Total liabilities +222,574 +158,938 +Commitments and contingencies (Note 12) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 215,628,716 and 214,951,093 shares issued and outstanding in 2021 and 2020, respectively +21,563 +21,495 +Capital in excess of par value +— +— +Retained earnings +640,936 +627,778 +Accumulated other comprehensive loss +( 20,708 ) +( 17,706 ) +Total stockholders’ equity +641,791 +631,567 +Total liabilities and stockholders’ equity +$ +864,365 +$ +790,505 +The accompanying notes are an integral part of these statements. +29 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2021 +2020 +2019 +Revenues +$ +864,929 +$ +598,302 +$ +1,222,409 +COSTS AND EXPENSES: +Cost of revenues (exclusive of items shown below) +663,262 +480,739 +919,595 +Selling, general and administrative expenses +123,572 +123,698 +168,127 +Impairment and other charges +— +217,493 +82,273 +Depreciation and amortization +72,686 +95,530 +170,409 +Gain on disposition of assets, net +( 10,882 ) +( 9,523 ) +( 3,707 ) +Operating income (loss) +16,291 +( 309,635 ) +( 114,288 ) +Interest expense +( 1,929 ) +( 373 ) +( 334 ) +Interest income +59 +496 +1,906 +Other income (expense), net +2,027 +81 +( 385 ) +Income (loss) before income taxes +16,448 +( 309,431 ) +( 113,101 ) +Income tax provision (benefit) +9,231 +( 97,239 ) +( 25,990 ) +Net income (loss) +$ +7,217 +$ +( 212,192 ) +$ +( 87,111 ) +Earnings (loss) per share +Basic +$ +0.03 +$ +( 1.00 ) +$ +( 0.41 ) +Diluted +$ +0.03 +$ +( 1.00 ) +$ +( 0.41 ) +Dividends paid per share +— +$ +— +$ +0.15 +The accompanying notes are an integral part of these statements. +30 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2021 +2020 +2019 +Net income (loss) +$ +7,217 +$ +( 212,192 ) +$ +( 87,111 ) +Other comprehensive income (loss): +Pension adjustment and reclassification adjustment, net of taxes +( 2,890 ) +5,727 +( 5,030 ) +Foreign currency translation +( 112 ) +( 210 ) +553 +Comprehensive income (loss) +$ +4,215 +$ +( 206,675 ) +$ +( 91,588 ) +The accompanying notes are an integral part of these statements. +31 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2018 +214,544 +$ +21,454 +$ +— +$ +947,711 +$ +( 18,746 ) +$ +950,419 +Adoption of accounting standard (Note 1) +— +— +— +2,464 +( 2,732 ) +( 268 ) +Stock issued for stock incentive plans, net +667 +66 +8,564 +— +— +8,630 +Stock purchased and retired +( 788 ) +( 77 ) +( 8,564 ) +1,280 +— +( 7,361 ) +Net loss +— +— +— +( 87,111 ) +— +( 87,111 ) +Pension adjustment, net of taxes +— +— +— +— +( 2,298 ) +( 2,298 ) +Foreign currency translation +— +— +— +— +553 +553 +Dividends declared +— +— +— +( 32,231 ) +— +( 32,231 ) +Balance, December 31, 2019 +214,423 +21,443 +— +832,113 +( 23,223 ) +830,333 +Stock issued for stock incentive plans, net +716 +71 +8,664 +— +— +8,735 +Stock purchased and retired +( 188 ) +( 19 ) +( 8,664 ) +7,857 +— +( 826 ) +Net loss +— +— +— +( 212,192 ) +— +( 212,192 ) +Pension adjustment, net of taxes +— +— +— +— +5,727 +5,727 +Foreign currency translation +— +— +— +— +( 210 ) +( 210 ) +Balance, December 31, 2020 +214,951 +21,495 +— +627,778 +( 17,706 ) +631,567 +Stock issued for stock incentive plans, net +819 +82 +6,494 +— +— +6,576 +Stock purchased and retired +( 141 ) +( 14 ) +( 6,494 ) +5,941 +— +( 567 ) +Net income +— +— +— +7,217 +— +7,217 +Pension adjustment, net of taxes +— +— +— +— +( 2,890 ) +( 2,890 ) +Foreign currency translation +— +— +— +— +( 112 ) +( 112 ) +Balance, December 31, 2021 +215,629 +$ +21,563 +$ +— +$ +640,936 +$ +( 20,708 ) +$ +641,791 +The accompanying notes are an integral part of these statements. +32 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, Inc. and Subsidiaries +(in thousands) +Years ended December 31, +2021 +2020 +2019 +OPERATING ACTIVITIES +Net income (loss) +$ +7,217 +$ +( 212,192 ) +$ +( 87,111 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +72,506 +95,309 +172,607 +Stock-based compensation expense +6,576 +8,735 +8,630 +Gain on disposition of assets, net +( 10,882 ) +( 9,523 ) +( 2,645 ) +Gain due to benefit plan financing arrangement +— +( 891 ) +( 126 ) +Deferred income tax provision (benefit) +4,888 +( 25,845 ) +( 22,225 ) +Impairment and other non-cash charges +— +211,043 +73,560 +(Increase) decrease in assets: +Accounts receivable +( 91,082 ) +80,769 +81,094 +Income taxes receivable +24,439 +( 58,798 ) +11,687 +Inventories +3,951 +18,076 +20,962 +Prepaid expenses +( 650 ) +1,337 +( 692 ) +Other current assets +90 +227 +300 +Other non-current assets +( 1,170 ) +( 3,819 ) +( 3,024 ) +Increase (decrease) in liabilities: +Accounts payable +32,900 +( 9,130 ) +( 42,241 ) +Income taxes payable +( 459 ) +( 419 ) +( 3,172 ) +Accrued payroll and related expenses +( 3,080 ) +( 1,219 ) +( 6,103 ) +Accrued insurance expenses +4,640 +( 2,051 ) +1,357 +Accrued state, local and other taxes +( 883 ) +361 +( 654 ) +Other accrued expenses +( 4,061 ) +( 6,541 ) +( 2,089 ) +Pension liabilities +( 1,065 ) +( 3,249 ) +6,575 +Long-term accrued insurance expenses +( 52 ) +( 2,218 ) +1,968 +Other long-term liabilities +3,896 +( 2,004 ) +483 +Net cash provided by operating activities +47,719 +77,958 +209,141 +INVESTING ACTIVITIES +Capital expenditures +( 67,645 ) +( 65,065 ) +( 250,629 ) +Proceeds from sale of assets +20,014 +22,406 +14,841 +Proceeds from benefit plan financing arrangement +— +1,566 +507 +Re-investment in benefit plan financing arrangement +— +( 1,566 ) +( 507 ) +Net cash used for investing activities +( 47,631 ) +( 42,659 ) +( 235,788 ) +FINANCING ACTIVITIES +Payment of dividends +— +— +( 32,231 ) +Cash paid for common stock purchased and retired +( 567 ) +( 826 ) +( 7,361 ) +Cash paid for finance lease +( 1,584 ) +— +— +Net cash used for financing activities +( 2,151 ) +( 826 ) +( 39,592 ) +Net (decrease) increase in cash and cash equivalents +( 2,063 ) +34,473 +( 66,239 ) +Cash and cash equivalents at beginning of period +84,496 +50,023 +116,262 +Cash and cash equivalents at end of period +$ +82,433 +$ +84,496 +$ +50,023 +Supplemental cash flows disclosure: +Income taxes refund, net +$ +( 20,903 ) +$ +( 10,051 ) +$ +( 11,817 ) +Interest paid +166 +160 +162 +Supplemental disclosure of noncash investing activities: +Capital expenditures included in accounts payable +$ +4,282 +$ +3,859 +$ +6,795 +The accompanying notes are an integral part of these statements. +33 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts and transactions have been eliminated. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2021, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation . +Dividends +On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the credit loss allowance, income taxes, goodwill impairment, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last three years. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2021, 2020 or 2019. Additionally, there was no customer that accounted for 10 percent or more of accounts receivable as of December 31, 2021 or 2020. +34 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2021, 2020 and 2019. Securities that are held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) are classified as trading. See Note 13 for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of a credit loss allowance. +Credit Loss Allowance for Accounts Receivable +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years ; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years ; software, 5 years ; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +35 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +During the year ended December 31, 2020, the Company recorded accelerated depreciation related to certain operating equipment that was retired. In addition, the Company recorded a write down for certain real estate that was classified as held for sale. See Note 3 for additional information. The Company did not record accelerated depreciation related to impairment for the year ended December 31, 2021. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reporting unit was as follows: +Years Ended December 31, +2021 +2020 +(in thousands) +Technical Services +$ +30,992 +$ +30,992 +Support Services +1,158 +1,158 +Goodwill +$ +32,150 +$ +32,150 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In 2021 and 2020, the Company performed a quantitative impairment test by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). The discounted cash flow analysis is based on management’s short-term and long-term forecast of operating results for each reporting unit and includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. Based on this analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore no impairment of goodwill occurred during the years ended December 31, 2021 and 2020. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 1,099,000 in 2021, $ 806,000 in 2020, and $ 2,003,000 in 2019 . +Insurance Expenses +RPC self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +36 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension plan that provides monthly benefits upon normal retirement at age 65, or reduced early retirement benefits at age 59 ½ or at age 55 or older with 15 or more years of service, to substantially all employees with at least one year of service prior to 2002. In 2002, RPC’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the defined benefit pension plan. During the fourth quarter of 2021, the Company resolved to terminate the defined benefit pension plan. See Note 13 for a full description of this plan and the related accounting and funding policies. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, and discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See Note 13 for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(In thousands) +2021 +2020 +2019 +Net income (loss) available for stockholders: +$ +7,217 +$ +( 212,192 ) +$ +( 87,111 ) +Less: Adjustments for earnings attributable to participating securities +( 89 ) +— +( 334 ) +Net income (loss) used in calculating earnings per share +$ +7,128 +$ +( 212,192 ) +$ +( 87,445 ) +Weighted average shares outstanding (including participating securities) +215,646 +215,063 +214,730 +Adjustment for participating securities +( 2,656 ) +( 2,571 ) +( 2,509 ) +Shares used in calculating basic and diluted earnings per share +212,990 +212,492 +212,221 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 11 for additional information. +37 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See Note 13 for additional information. +Leases +The Company determines at contract inception, if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, storage containers, office equipment and operating equipment. The Company’s population of month-to-month real estate leases have been classified as short-term leases, and therefore the Company has not recognized a right-of-use (ROU) asset or lease liability related to them. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. During 2021, the Company entered into an agreement with an industrial manufacturer for certain operating equipment rentals. This agreement is classified as a finance lease. See note 16 for additional information. +Recent Accounting Pronouncements +The Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +• Accounting Standards Update (ASU) No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The Company adopted these provisions in the first quarter of 2021 and the adoption did not have a material impact on its consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +● ASU No. 2020-04 — Reference Rate Reform (Topic 848): The amendments in this ASU, provides optional guidance for a limited time to ease the impact of the reference rate reform on financial reporting. The amendments, which are elective, provide expedients to contract modifications, affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or other reference rate that is expected to be discontinued due to reference rate reform. This ASU is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company will adopt these provisions when LIBOR is discontinued and does not expect adoption to have a material impact on its consolidated financial statements. +● ASU No. 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: The amendments in this ASU address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination, by adopting guidance requiring an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would recognize and measure the acquired contract assets and contract liabilities in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. These amendments are effective beginning in the first quarter of 2023 with early implementation permitted and should be applied prospectively to business combinations occurring on or after January 1, 2023. The company is currently evaluating the impact of adopting these provisions on its consolidated financial statements . +38 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Note 2: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 15. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. +Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services. +Payment terms +RPC’s contracts with customers states the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Disaggregation of revenues +See Note 15 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below: +(in thousands) +2021 +2020 +2019 +Oilfield services transferred at a point in time +$ +— +$ +— +$ +— +Oilfield services transferred over time +864,929 +598,302 +1,222,409 +Total revenues +$ +864,929 +$ +598,302 +$ +1,222,409 +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the consolidated balance sheets are shown below: +(in thousands) +2021 +2020 +Unbilled trade receivables +$ +70,353 +$ +29,574 +Substantially all of the unbilled trade receivables as of December 31, 2021 and December 31, 2020 were invoiced during the following quarter. +Note 3: Impairment and Other Charges +The Company recorded the following pre-tax charges during 2021 and 2020 as impairment and other charges in the consolidated statements of operations. +(in thousands) +2021 +2020 +Long lived asset impairments (1) +$ +— +$ +204,765 +Abandonment of assets (2) +— +5,976 +Pension settlement loss (3) +— +4,660 +Severance costs +— +1,882 +Assets held for sale write down (4) +— +192 +Other +— +18 +Total +$ +— +$ +217,493 +(1). +Relates solely to the Technical Services segment and primarily includes pressure pumping and coiled tubing assets. +(2). +Represents the final disposition of assets that were ceased to be used during 2019 and recorded at salvage value. Also includes interest costs related to leased assets that were impaired in 2019. +(3). +Represents the non-cash settlement loss related to the lump-sum payment window offered to certain participants in connection with the Company’s Retirement Income Plan. See Note 13 for further details. +(4). +Represents the final settlement on certain real estate properties that were recorded as held for sale. The Company continues to disclose the remaining real estate properties that are being held for sale at their carrying value on the consolidated balance sheets under the caption Assets held for sale. +During the first half of 2020, the Company experienced drastic declines in oilfield drilling and completion activities, with low levels of revenues not experienced by RPC or the industry for many years. This unprecedented disruption was caused by the substantial decline in global demand for oil caused by the COVID-19 pandemic as well as macroeconomic events such as the geopolitical tensions between the Organization of Petroleum Exporting Countries and Russia, regarding limits on oil production. These factors resulted in a significant drop in oil prices and a substantial deterioration of the Company’s public market capitalization. In response, the Company reduced headcount, furloughed employees and implemented compensation reductions for remaining active employees with the goal of adjusting its cost structure caused by low revenue levels. The Company determined these events constituted a triggering event that required a review of the recoverability of its long-lived assets and performed an interim goodwill impairment assessment as of March 31, 2020. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +The Company used both income based and market based approaches to determine the fair value of its long-lived asset groups and its reporting units for goodwill impairment assessment. Under the income approach, the fair value for each of its asset groups and reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows and terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on its most recent views of the long-term outlook for each asset group and reporting units. For the market based valuation, the Company used comparable public company multiples. The selection of comparable businesses was based on the markets in which the asset groups and reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. Based on the concluded fair value of the asset groups, the Company measured and recorded an impairment loss that represents the amount by which the asset groups' carrying amounts exceeded their fair value. For purposes of the goodwill impairment assessment, the fair value of each reporting unit exceeded its net book value and therefore, goodwill was deemed to be not impaired. +Note 4: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2021 +2020 +(in thousands) +Trade receivables: +Billed +$ +181,500 +$ +135,201 +Unbilled +70,353 +29,754 +Other receivables +13,547 +1,631 +Total +265,400 +166,586 +Less: allowance for credit losses +( 6,765 ) +( 4,815 ) +Accounts receivable, net +$ +258,635 +$ +161,771 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Note 5: Current Expected Credit Losses +The Company adopted ASU No 2016-13, Current Expected Credit Losses (Topic 326) on January 1, 2020 on a prospective basis with an immaterial cumulative-effect adjustment to the opening balance of retained earnings. This ASU replaces the current loss model with an expected credit loss model for financial assets measured at amortized cost that includes accounts (trade) receivable. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of current expected credit losses was not significantly impacted. Estimates used to determine the allowance for current expected credit losses are based on an assessment of anticipated payment and all other historical, current and future information that is reasonably available. +The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected: +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Years Ended December 31, +2021 +2020 +(in thousands) +Beginning balance +$ +4,815 +$ +5,181 +Provision for current expected credit losses +4,019 +342 +Write-offs +( 2,098 ) +( 739 ) +Recoveries collected (net of expenses) +29 +31 +Ending balance +$ +6,765 +$ +4,815 +Note 6: Inventories +Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using either the first-in, first-out, or the weighted average cost method. +December 31, +2021 +2020 +(in thousands) +Raw materials and supplies +$ +77,709 +$ +81,403 +Finished goods +1,274 +1,515 +Total Inventory +$ +78,983 +$ +82,918 +Note 7: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2021 +2020 +(in thousands) +Land +$ +18,180 +$ +19,474 +Buildings and leasehold improvements +120,649 +122,289 +Operating equipment +606,089 +645,576 +Computer software +22,925 +24,681 +Furniture and fixtures +6,222 +6,692 +Vehicles +243,647 +236,411 +Gross property, plant and equipment +1,017,712 +1,055,123 +Less: accumulated depreciation +( 763,304 ) +( 790,712 ) +Net property, plant and equipment +$ +254,408 +$ +264,411 +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Depreciation expense was $ 72.7 million in 2021, $ 95.3 million in 2020, and $ 172.6 million in 2019. The Company had accounts payable for purchases of property and equipment of $ 4.3 million as of December 31, 2021 and $ 3.9 million as of December 31, 2020. The Company transferred inventory to property, plant and equipment totaling $ 11.1 million in 2021 and $ 8.6 million in 2020. +Note 8: Income Taxes +The following table lists the components of the provision (benefit) for income taxes: +Years ended December 31, +2021 +2020 +2019 +(in thousands) +Current provision (benefit): +Federal +$ +4,946 +$ +( 74,841 ) +$ +( 3,548 ) +State +( 1,387 ) +2,200 +( 3,185 ) +Foreign +784 +1,247 +2,968 +Deferred provision (benefit): +Federal +2,287 +( 16,376 ) +( 26,493 ) +State +2,601 +( 9,469 ) +4,268 +Total income tax provision (benefit) +$ +9,231 +$ +( 97,239 ) +$ +( 25,990 ) +The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in 2020, among other changes, eliminated the taxable income limit for certain net operating losses (“NOL”). This allowed businesses to carryback NOLs arising in 2018, 2019 and 2020 to the five prior years, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. These provisions enabled a carryback of federal tax losses related to 2019 and 2020. The Company recorded net tax benefits totaling $ 29 million in 2020 related to certain of these provisions. +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2021 +2020 +2019 +Federal statutory rate +21.0 +% +21.0 +% +21.0 +% +State income taxes, net of federal benefit +2.9 +1.5 +( 0.3 ) +Foreign taxes, net of federal benefit +5.1 +( 0.4 ) +( 0.2 ) +Tax credits +( 3.5 ) +0.1 +0.3 +Change in contingencies +8.6 +— +— +Non-deductible expenses +( 2.8 ) +( 0.1 ) +( 1.9 ) +Adjustments related to CARES Act +3.2 +8.5 +— +Change in estimated deferred rate +10.2 +— +— +Adjustments related to vesting of restricted stock +7.1 +( 0.8 ) +( 0.4 ) +Other +4.3 +1.6 +4.5 +Effective tax rate +56.1 +% +31.4 +% +23.0 +% +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2021 +2020 +(in thousands) +Deferred tax assets: +Self-insurance +$ +5,673 +$ +4,773 +Pension +7,982 +8,105 +State net operating loss carryforwards +5,558 +5,853 +Allowance for credit losses +1,692 +1,302 +Stock-based compensation +2,532 +2,291 +Inventory reserve +2,868 +3,226 +Lease liability +5,620 +7,125 +Employee retention credit +1,360 +— +Valuation allowance +( 865 ) +( 546 ) +All others +1,850 +1,763 +Gross deferred tax assets +34,270 +33,892 +Deferred tax liabilities: +Depreciation +( 39,253 ) +( 33,486 ) +Right of use asset +( 5,834 ) +( 6,392 ) +Goodwill amortization +( 6,556 ) +( 6,893 ) +All others +( 376 ) +( 453 ) +Gross deferred tax liabilities +( 52,019 ) +( 47,224 ) +Net deferred tax liabilities +$ +( 17,749 ) +$ +( 13,332 ) +The Company's current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +Total income tax refunds, net were $ 20.9 million in 2021, $ 10.1 million in 2020, and $ 11.8 million in 2019. As of December 31, 2021, the Company had net operating losses related to 2020 federal income taxes of $ 82 million which were carried back to 2017 as allowed by the CARES Act. As of December 31, 2021, the Company has net operating loss carryforwards recorded related to state income taxes of $ 89.9 million (gross) that will expire between 2022 and 2040, net of a valuation allowance totaling $ 537 thousand. The valuation allowance is recorded and represents the tax-affected amount of loss carryforwards that the Company does not expect to utilize, against the corresponding deferred tax assets. +The Company’s policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of December 31, 2021 and 2020. +During 2021, the Company recognized an increase in its liability for unrecognized tax benefits related primarily to current year positions. This liability, if released, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2021 +2020 +(in thousands) +Balance at January 1 +$ +— +$ +2,215 +Additions (reductions) based on tax positions related to the current year +1,737 +— +Additions (reductions) for tax positions of prior years +— +( 2,215 ) +Balance at December 31 +$ +1,737 +$ +— +It is reasonably possible that the amount of the unrecognized benefits with respect to the Company’s unrecognized tax positions will increase or decrease in the next 12 months. These changes may be the result of, among other things, expiration of stature of limitations, or conclusions of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time. +The Company and its subsidiaries are subject to U.S. federal and state income tax in multiple jurisdictions. In many cases, the uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. In +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +general, the Company’s 2018 through 2020 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +Note 9: Long-Term Debt +The Company has a revolving Credit Agreement with Bank of America and five other lenders which provides for a line of credit of up to $ 100 million, including a $ 35 million letter of credit subfacility, and a $ 35 million swingline subfacility. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company’s 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. +The Credit Agreement's maturity date is July 26, 2023. On September 25, 2020, the Company entered into Amendment No. 5 to Credit Agreement (the “Amendment”). This Amendment (1) reduced the maximum amount available for borrowing under the credit facility from $ 125 million to $ 100 million, (2) decreased the minimum tangible net worth covenant level from not less than $ 600 million to not less than $ 400 million, and (3) increased the margin spreads and commitment fees payable by RPC by 37.5 and 5 basis points, respectively, at each pricing level of the applicable rate without any changes to the leverage ratios used to calculate such spreads. +The Credit Agreement includes the following covenants: (i) when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million, a maximum consolidated leverage ratio of 2.50 :1.00 and a minimum debt service coverage ratio of 2.00 :1.00, and (ii) when RPC's trailing fourth quarter EBITDA is less than $ 50 million, a minimum tangible net worth of no less than $ 400 million. As of both December 31, 2021 and December 31, 2020, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● the Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a margin ranging from 1.125 % to 2.125 % , based on a quarterly consolidated leverage ratio calculation; or +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Eurodollar Rate plus 1.00 % ; in each case plus a margin that ranges from 0.125 % to 1.125 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.20 % to 0.30 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility. These costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of $ 0.2 million at December 31, 2021 is classified as non-current other assets. The remaining net balance of these costs was $ 0.2 million as of December 31, 2020. +As of December 31, 2021, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 17.3 million; therefore, a total of $ 82.7 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2021 +2020 +2019 +(in thousands) +Interest incurred +$ +257 +$ +276 +$ +256 +Interest paid +$ +166 +$ +160 +$ +162 +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Note 10: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income consists of the following (in thousands): +Foreign +Pension +Currency +Adjustment +Translation +Total +Balance at December 31, 2019 +$ +( 20,908 ) +$ +( 2,315 ) +$ +( 23,223 ) +Change during 2020: +Before-tax amount +1,940 +( 210 ) +1,730 +Tax (expense) benefit +( 475 ) +— +( 475 ) +Pension settlement loss +3,518 +— +3,518 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +744 +— +744 +Total activity in 2020 +5,727 +( 210 ) +5,517 +Balance at December 31, 2020 +$ +( 15,181 ) +$ +( 2,525 ) +$ +( 17,706 ) +Change during 2021: +Before-tax amount +( 3,500 ) +( 112 ) +( 3,612 ) +Tax (expense) benefit +1,220 +— +1,220 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +( 610 ) +— +( 610 ) +Total activity in 2021 +( 2,890 ) +( 112 ) +( 3,002 ) +Balance at December 31, 2021 +$ +( 18,071 ) +$ +( 2,637 ) +$ +( 20,708 ) +(1) Reported as selling, general and administrative expenses. +Note 11: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2021 and 2020: +Fair Value Measurements at December 31, 2021 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +197 +$ +197 +$ +— +$ +— +Investments measured at net asset value +$ +31,738 +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Fair Value Measurements at December 31, 2020 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +132 +$ +132 +$ +— +$ +— +Investments measured at net asset value +$ +32,039 +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 13, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. The expected holding period for these assets measured at net asset value is unknown. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2021 there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2021 and 2020. Outstanding balances based on the quote from the lender (level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable interest rates as described in Note 9. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +The Company’s real estate classified as held for sale has been stated at fair value less costs to sell since the fair value less costs to sell is lower than its carrying amount. The non-recurring fair value measurement was completed in the third quarters of 2021 and 2020 and determined based on observable market data that includes price per square foot involving comparable properties in similar locations and reflected in the tables below: +Fair Value Measurements at December 31, 2021 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Assets held for sale +$ +692 +$ +— +$ +692 +$ +— +Fair Value Measurements at December 31, 2020 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands ) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Assets held for sale +$ +4,032 +$ +— +$ +4,032 +$ +— +Note 12: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. Any probable and reasonable estimate of assessment costs are included in accrued state, local and other taxes. +The Company received a state tax notification of audit results related to sales and use tax on July 12, 2021. The Company and its outside legal counsel continue to evaluate the perceived merits of the tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 13: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon normal retirement at age 65, or reduced early retirement benefits at age 591/2, or 55 or older with 15 or more years of service.to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer. +During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan and as such, the year-end pension obligation has been valued on a termination basis. Specifically, the actuaries utilized an approach based on their experience with other plan terminations that (i) estimated a take rate for lump sums; (ii) for those participants electing a lump-sum, calculated the amount using the November 2021 IRS segment rates and (iii) for those participants with annuities purchased, calculated +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +the amount using estimated insurance settlement rates. The Company currently expects to make a final cash contribution of approximately $ 6.0 million to the benefit plan as part of the termination in early 2023. +The Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by $ 5.7 million as of December 31, 2021. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2021 +2020 +(in thousands) +Accumulated benefit obligation at end of year +$ +41,038 +$ +41,120 +CHANGE IN PROJECTED BENEFIT OBLIGATION: +Benefit obligation at beginning of year +$ +41,120 +$ +48,519 +Service cost +— +— +Interest cost +988 +1,645 +Actuarial loss +1,365 +3,066 +Benefits paid +( 2,435 ) +( 2,581 ) +Settlement +— +( 9,529 ) +Projected benefit obligation at end of year +$ +41,038 +$ +41,120 +CHANGE IN PLAN ASSETS: +Fair value of plan assets at beginning of year +$ +39,068 +$ +40,142 +Actual return on plan assets +( 1,294 ) +6,586 +Employer contribution +— +4,450 +Benefits paid +( 2,435 ) +( 2,581 ) +Settlement +— +( 9,529 ) +Fair value of plan assets at end of year +$ +35,339 +$ +39,068 +Funded status at end of year +$ +( 5,699 ) +$ +( 2,052 ) +December 31, +2021 +2020 +(in thousands) +AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: +Net loss +$ +23,468 +$ +20,108 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +23,468 +$ +20,108 +The accumulated benefit obligation for the Retirement Income Plan at December 31, 2021 and 2020 has been disclosed above. The Company uses a December 31 measurement date for this qualified plan. As part of the plan termination, the Company expects to recognize a non-cash settlement charge of the remaining balance in the accumulated other comprehensive loss at the time. +Amounts recognized in the consolidated balance sheets consist of: +December 31, +2021 +2020 +(in thousands) +Funded status of the Retirement Income Plan +$ +( 5,699 ) +$ +( 2,052 ) +SERP liability +( 29,677 ) +( 31,028 ) +Long-term pension liabilities +$ +( 35,376 ) +$ +( 33,080 ) +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +RPC’s funding policy is to contribute to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. The Company made no cash contributions in 2021 and a cash contribution of $ 4,450,000 in 2020. +The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows: +(in thousands) +2021 +2020 +2019 +Service cost for benefits earned during the period +$ +— +$ +— +$ +— +Interest cost +988 +1,645 +1,960 +Expected return on plan assets +( 1,509 ) +( 1,581 ) +( 2,598 ) +Amortization of net losses +808 +986 +919 +Settlement loss +— +4,660 +— +Net periodic benefit cost +$ +287 +$ +5,710 +$ +281 +The Company recognized pre-tax decreases (increases) to the funded status in accumulated other comprehensive loss of $ 3,361,000 in 2021, ($ 6,863,000 ) in 2020, and $ 3,043,000 in 2019. There were no previously unrecognized prior service costs as of December 31, 2021, 2020 and 2019. In 2020, the Company offered a limited lump-sum payment window for vested terminated participants who had terminated employment before July 1, 2020 and for active employees who reached age 59 ½ by December 1, 2020, with a vested balance. The participants at their election, could receive their vested balance either immediately as a lump-sum or as a monthly annuity payment. Non-cash settlement charges of $ 4.7 million recorded for the year ended December 31, 2020 and shown above represents the accelerated recognition of actuarial losses previously reflected in accumulated other comprehensive loss. +The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019 are summarized as follows: +(in thousands) +2021 +2020 +2019 +Net loss (gain) +$ +4,169 +$ +( 1,217 ) +$ +3,962 +Amortization of net loss +( 808 ) +( 986 ) +( 919 ) +Net transition obligation (asset) +— +— +— +Settlement loss +— +( 4,660 ) +— +Amount recognized in accumulated other comprehensive loss +$ +3,361 +$ +( 6,863 ) +$ +3,043 +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2021 +2020 +2019 +Projected Benefit Obligation : +Discount rate +Note (1) +% +2.50 +% +3.60 +% +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +2.50 +% +3.60 +% +4.65 +% +Expected return on plan assets +4.00 +% +4.00 +% +7.00 +% +Rate of compensation increase +N/A +N/A +N/A +(1) Projected benefit obligation as of December 31, 2021 reflects proposed termination of the Plan and is calculated based on various assumptions in accordance with the Plan agreement. +The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. It includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company has concluded that its 2021 expected long-term return assumption of four percent is reasonable. +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +The plan’s weighted average asset allocation at December 31, 2021 and 2020 by asset category along with the target allocation for 2022 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2022 +2021 +2020 +Asset Category +Cash and cash equivalents +0 % - 5 +% +1.3 +% +2.0 +% +Fixed income securities +15 % - 100 +% +98.7 +% +98.0 +% +Total +100.0 +% +100.0 +% +The Company’s investments consist primarily of fixed-income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets while minimizing the level of risk to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. +The following tables present our plan assets using the fair value hierarchy as of December 31, 2021 and 2020. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 11 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2021: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +444 +$ +444 +$ +— +Fixed Income Securities +(2) +34,895 +— +34,895 +Total Assets in the Fair Value Hierarchy +$ +35,339 +$ +444 +$ +34,895 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +35,339 +Fair Value Hierarchy as of December 31, 2020: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +736 +$ +736 +$ +— +Fixed Income Securities +(2) +38,332 +— +38,332 +Total Assets in the Fair Value Hierarchy +$ +39,068 +$ +736 +$ +38,332 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +39,068 +(1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. +The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2022 +$ +9,026,000 +2023 +35,511,000 +2024 +— +2025 +— +2026 +— +2027‑2031 +$ +— +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $ 60.7 million as of December 31, 2021 and $ 58.0 million as of December 31, 2020. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $ 31,738,000 as of December 31, 2021 and $ 32,039,000 as of December 31, 2020. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading gains (losses) related to the SERP assets totaled $ 2,624,000 in 2021, $ 2,620,000 in 2020, and $( 5,524,000 ) in 2019. The SERP liability includes participant deferrals net of distributions and is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. +As a result of Company-owned life insurance policy claims, the Company recorded tax-free gains of $ 891,000 during 2020; these gains were recorded as an adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Proceeds received totaling $ 1,566,000 were reinvested in mutual funds held as SERP assets. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. Effective January 1, 2020, the Company began making 100 percent matching contributions for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents $(0.50) for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. During 2019, the Company made matching contributions of fifty cents $(0.50) for each dollar $( 1.00 ) of a participant's contribution to the 401(k) Plan that did not exceed six percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 6,910,000 in 2021, $ 5,641,000 in 2020, and $ 10,805,000 in 2019. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2021, 3,194,060 shares were available for grant. As of December 31, 2020, 4,012,780 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense was $ 6,576,000 in 2021 $( 5,064,000 after tax), $ 8,735,000 in 2020 $( 6,595,000 after tax) and $ 8,630,000 in 2019 $( 6,516,000 after tax). +Stock Options +Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years , except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire in five years . +The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003. There were no stock options exercised during 2021, 2020 or 2019 and there are no stock options outstanding as of December 31, 2021 and 2020. +Restricted Stock +The Company has granted certain employees time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse restricted shares issued to date vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2021: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2021 +2,235,179 +$ +6.81 +Granted +1,010,700 +3.87 +Vested +( 434,208 ) +14.96 +Forfeited +( 191,980 ) +7.71 +Non-vested shares at December 31, 2021 +2,619,691 +$ +7.89 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2020: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2020 +2,393,557 +$ +13.23 +Granted +1,085,875 +4.59 +Vested +( 875,202 ) +14.96 +Forfeited +( 369,051 ) +13.60 +Non-vested shares at December 31, 2020 +2,235,179 +$ +6.81 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 3.87 for 2021, $ 4.59 for 2020 and $ 11.39 for 2019. The total fair value of shares vested was $ 1,757,000 during 2021, $ 3,474,000 during 2020 and $ 7,026,000 during 2019. +The consolidated statements of cash flows reflect discrete income tax expense of $ 1,164,000 in 2021 and $ 0 in 2020 related to tax compensation deductions classified within operating activities as part of net income. +Other Information +As of December 31, 2021, total unrecognized compensation cost related to non-vested restricted shares was $ 38,227,000 which is expected to be recognized over a weighted-average period of 3.9 years. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 867,000 in 2021, $ 846,000 in 2020, and $ 865,000 in 2019. The Company’s receivable due from Marine Products for these services was $ 87,000 as of December 31, 2021 and $ 49,000 as of December 31, 2020. The majority of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,275,000 in 2021, $ 1,030,000 in 2020 and $ 1,625,000 in 2019. +RPC receives certain administrative services from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include selected administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2021, $ 104,000 in 2020 and $ 104,000 in 2019. +A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200,000 in 2021, $ 200,000 in 2020 and $ 199,000 in 2019 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.4 million as of December 31, 2021 and $ 1.2 million as of December 31, 2020. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2021, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 521,000 . +Note 15: Business Segment and Entity Wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +Segment Revenues: +RPC’s operating segment revenues by major service lines are shown in the following table: +(in thousands) +2021 +2020 +2019 +Technical Services: +Pressure Pumping +$ +369,028 +$ +221,597 +$ +519,543 +Downhole Tools +247,019 +195,052 +414,352 +Coiled Tubing +88,946 +51,616 +80,758 +Nitrogen +38,773 +30,213 +45,658 +Snubbing +15,408 +8,016 +14,520 +All other +55,872 +49,994 +70,723 +Total Technical Services +$ +815,046 +$ +556,488 +$ +1,145,554 +Support Services: +Rental Tools +$ +32,167 +$ +25,280 +$ +51,792 +All other +17,716 +16,534 +25,063 +Total Support Services +$ +49,883 +$ +41,814 +$ +76,855 +Total revenues +$ +864,929 +$ +598,302 +$ +1,222,409 +The accounting policies of the reportable segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2021, 2020 and 2019 are shown in the following table: +Gain on +Impairment +Technical +Support +disposition of +and other +(in thousands) +Services +Services +Corporate +assets, net +charges +Total +2021 +Revenues +$ +815,046 +$ +49,883 +$ +— +$ +— +$ +— +$ +864,929 +Operating profit (loss) +24,434 +( 5,725 ) +( 13,300 ) +10,882 +— +16,291 +Capital expenditures +59,316 +7,012 +1,317 +— +— +67,645 +Depreciation and amortization +62,667 +9,752 +267 +— +— +72,686 +Identifiable assets +580,406 +69,345 +214,614 +— +— +864,365 +2020 +Revenues +$ +556,488 +$ +41,814 +$ +— +$ +— +$ +— +$ +598,302 +Operating (loss) profit +( 82,525 ) +( 6,714 ) +( 12,426 ) +9,523 +( 217,493 ) +(1) +( 309,635 ) +Capital expenditures +54,327 +10,224 +514 +— +— +65,065 +Depreciation and amortization +80,877 +14,377 +276 +— +— +95,530 +Identifiable assets +499,764 +64,457 +226,284 +— +— +790,505 +2019 +Revenues +$ +1,145,554 +$ +76,855 +$ +— +$ +— +$ +— +$ +1,222,409 +Operating profit (loss) +( 32,993 ) +10,016 +( 12,745 ) +3,707 +( 82,273 ) +(2) +( 114,288 ) +Capital expenditures +237,950 +10,330 +2,349 +— +— +250,629 +Depreciation and amortization +154,776 +15,328 +305 +— +— +170,409 +Identifiable assets +848,264 +72,351 +132,603 +— +— +1,053,218 +(1) Represents $ 212,292 related to technical services, $ 4,660 related to pension settlement loss and the remainder related to corporate expenses. +(2) Represents $ 80,263 related to technical services and $ 2,010 related to corporate expenses. +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2021, 2020 and 2019. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +(in thousands) +2021 +2020 +2019 +United States revenues +$ +833,686 +$ +562,390 +$ +1,157,760 +International revenues +31,243 +35,912 +64,649 +Total revenues +$ +864,929 +$ +598,302 +$ +1,222,409 +Note 16: Leases +The Company has recorded the related Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term, for leases with terms greater than 12 months. Leases that include rental escalation clauses or renewal options are factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, based on the interest rate in the Company’s current credit facility, at lease commencement to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2021, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2021, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +During the year ended December 31, 2021, the Company entered into two Agreements (Agreement 1 and Agreement 2) for certain operating equipment rentals with an industrial manufacturer. Per the terms of Agreement 1, the equipment is being rented for +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +one year and RPC is required to purchase the assets at the end of the lease term for the guaranteed purchase price less the monthly amounts paid during the year. As a result, the Company classified this arrangement as a finance lease and recorded the lease liability using its one-year incremental borrowing rate. Per the terms of Agreement 2, certain operating equipment is being rented for one year with variable lease payments based on usage, which has been recognized as a short-term lease. Amounts totaling $ 2.1 million related to this lease are included in the short-term lease costs disclosed below. +Lease Position: +The table below represents the assets and liabilities related to operating leases recorded on the balance sheet: +December 31, +2021 +2020 +(in thousands) +Assets: +Finance lease right-of-use assets +$ +20,327 +— +Operating lease right-of-use assets +$ +24,572 +$ +27,270 +Liabilities: +Current portion of finance lease +20,194 +— +Current portion of operating leases +$ +6,387 +$ +9,192 +Long-term operating lease liabilities +19,719 +21,090 +Total operating lease liabilities +$ +26,106 +$ +30,282 +Lease costs: +The cos components of the finance lease are included in depreciation and amortization, and interest expense; operating lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations as disclosed below. +Year ended December 31, +2021 +2020 +(in thousands) +Finance lease cost +Amortization of leased assets +$ +1,452 +$ +— +Interest on lease liabilities +116 +— +Total finance lease cost +$ +1,568 +$ +— +Operating lease cost +$ +7,580 +$ +8,373 +Short-term lease cost +3,626 +2,577 +Variable lease cost +772 +624 +Sublease income +( 831 ) +( 295 ) +Total operating lease cost +$ +11,147 +$ +11,279 +Total lease cost +$ +12,715 +$ +11,279 +Other information: +As of December 31, +2021 +2020 +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +10,151 +$ +11,922 +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +5,974 +$ +3,202 +ROU assets obtained in exchange for finance lease liabilities (in thousands) +$ +21,778 +— +Weighted average remaining lease term – finance lease (months) +8 +— +Weighted average remaining lease term – operating leases (years) +5.41 +5.20 +Weighted average discount rate – finance lease +1.7 +% +— +Weighted average discount rate – operating leases +2.29 +% +2.82 +% +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2021, 2020 and 2019 +Lease Commitments: +Maturity of lease liabilities - Operating Leases: +As of December 31, +2021 +2020 +(in thousands) +2021 +$ +— +$ +9,911 +2022 +7,015 +6,889 +2023 +4,483 +4,135 +2024 +3,619 +3,127 +2025 +2,667 +2,181 +2026 +2,421 +— +Thereafter +7,742 +6,404 +Total lease payments +27,947 +32,647 +Less: Amounts representing interest +( 1,841 ) +( 2,365 ) +Present value of lease liabilities +$ +26,106 +$ +30,282 +Maturity of lease liabilities - Finance Lease: +As of December 31, 2021, projected future lease payments on the finance lease total $ 20,400,000 and are scheduled to be paid in 2022, with amounts representing interest of $ 206,000 over the term of the lease. +58 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2021 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 26 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2021 and issued a report thereon which is included on page 27 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not Applicable +59 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and director nominees will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the section titled “Election of Directors.” This information is incorporated herein by reference. Information about executive officers is contained on Page 15 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the section titled “Corporate Governance and Board of Directors, Committees and Meetings – Audit Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the sections titled “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.” This information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership of certain beneficial owners and management, and such all officers and directors as a group, will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the section titled “Stock Ownership of Certain Beneficial Owners and Management.” Such ownership information with respect to individual directors and nominees shall be set forth in the same document in the section titled “Election of Directors.” This information is incorporated herein by reference. Arrangements known to the Company, if any, the operation of which may at a subsequent date result in a change in +60 +control of the Company will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders in the section titled “Certain Relationships and Related Party Transactions.” Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2021.. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A)) +Equity compensation plans approved by securityholders +— +$ +— +3,194,060 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +3,194,060 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 13 to the consolidated financial statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled “Independent Registered Public Accounting Firm” in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to consolidated financial statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to consolidated financial statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1 2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004) . +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +61 +10.9 First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed on February 2, 2021). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +4.2 +Description of Registrant's Securities. (incorporated herein by reference to Exhibit 4.2 to the Form 10-K filed on February 28, 2020). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +62 +Exhibit +Number +Description +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +10.22 +Amendment to No. 5 to Credit Agreement dated as of July 26, 2020 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Current Report on Form 8-K filed on October 1, 2020). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +Inline XBRL Instance Document +101.SCH +Inline XBRL Taxonomy Extension Schema Document +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +The cover page from the Company’s Annual Report for the year ended December 31, 2021, formatted in Inline XBRL +63 +Item 16. Form 10-K Summary +Not Applicable +64 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2022 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Richard A. Hubbell +Richard A. Hubbell +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2022 +/s/ Ben M. Palmer +Ben M. Palmer +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 28, 2022 +The Directors of RPC (listed below) executed a power of attorney, appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf. +Gary W. Rollins, Director +Amy R. Kreisler, Director +Jerry W. Nix, Director +Pamela R. Rollins, Director +Susan R. Bell, Director +Patrick J. Gunning, Director +/s/ +Richard A. Hubbell +Richard A. Hubbell +Director and as Attorney-in-fact +February 28, 2022 +65 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +26 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) on Internal Control Over Financial Reporting +27 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) on Consolidated Financial Statements +28 +Consolidated Balance Sheets as of December 31, 2021 and 2020 +29 +Consolidated Statements of Operations for each of the three years ended December 31, 2021 +30 +Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 2021 +31 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2021 +32 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2021 +33 +Notes to Consolidated Financial Statements +34 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +67 +Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +66 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2021, 2020 and 2019 +Balance at +Charged to +Balance +Beginning +Costs and +Net (Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries +Period +Year ended December 31, 2021 +Credit loss allowance for accounts receivable +$ +4,815 +$ +4,019 +$ +( 2,069 ) +(1) +$ +6,765 +Deferred tax asset valuation allowance +$ +490 +$ +— +$ +375 +(2) +$ +865 +Reserve for obsolete or slow moving inventory +$ +13,829 +$ +5,016 +$ +( 5,609 ) +(3) +$ +13,236 +Year ended December 31, 2020 +Credit loss allowance for accounts receivable +$ +5,181 +$ +342 +$ +( 708 ) +(1) +$ +4,815 +Deferred tax asset valuation allowance +$ +471 +$ +— +$ +19 +(2) +$ +490 +Reserve for obsolete or slow moving inventory +$ +10,467 +$ +5,826 +$ +( 2,464 ) +(3) +$ +13,829 +Year ended December 31, 2019 +Credit loss allowance for accounts receivable +$ +4,813 +$ +1,481 +$ +( 1,113 ) +(1) +$ +5,181 +Deferred tax asset valuation allowance +$ +445 +$ +— +$ +26 +(2) +$ +471 +Reserve for obsolete or slow moving inventory +$ +10,169 +$ +6,467 +$ +( 6,169 ) +(3) +$ +10,467 +(1) Net (deductions) recoveries in the credit loss allowance principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the net operating losses, foreign tax credits and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory. +67 \ No newline at end of file diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/filing_metadata.csv b/raw/filings/0000742278/2021/0001558370-22-002344/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1d0934214e0cca90d534856e7fa4558a6eb0f927 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2022-02-28,2021-12-31,2022-02-28T20:56:45.000Z,0001558370-22-002344,res-20211231x10k.htm,10-K,12401895,1,1,https://www.sec.gov/Archives/edgar/data/742278/000155837022002344/res-20211231x10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000155837022002344/,2021,2021,1 diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/item1.txt b/raw/filings/0000742278/2021/0001558370-22-002344/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..8faa7133fa39aeb1041d17290a9603bbb087d265 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/item1.txt @@ -0,0 +1,88 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2021, RPC had approximately 2,250 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2021, less than five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2021, we also estimate that 65 percent of our revenues were related to drilling and production activities for oil, while 35 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 43 percent of 2021 revenues, 37 percent of 2020 revenues and 42 percent of 2019 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical +3 +additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for 29 percent of revenues in 2021, 34 percent of revenues in 2020 and 34 percent of 2019 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for ten percent of revenues in 2021, nine percent of revenues in 2020 and seven percent of revenues in 2019, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in 2021, one percent of revenues in 2020 and one percent of revenues in 2019, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +4 +Nitrogen . Nitrogen accounted for four percent of revenues in 2021, five percent of revenues in 2020 and four percent of revenues in 2019. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2021, four percent of revenues in 2020 and four percent of revenues in 2019. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region and the Appalachian region. +5 +Patterson Rental Tools offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s. Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and early in the first quarter of 2022, the U.S. domestic rig count rose by approximately 138 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,387 wells were completed, the lowest number of annual well completions recorded during the seven years that these data have been reported. During 2021, reported well completions increased to 9,810, an increase of 2,423 wells or 32.8 percent compared to 2020. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas increased by approximately 93 percent during 2021 as compared with 2020. Early in the first quarter of 2022, the price of natural gas was approximately 19.9 percent higher than the price at the end of 2021. RPC believes that the recent increase in the price of natural gas is sufficient to encourage increasing levels of natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2021 the average price of benchmark natural gas liquids increased by approximately 97 percent compared with 2020. Early in the first quarter of 2022, the price of natural gas liquids increased by approximately 7.0 percent compared to the average price in 2021. +From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. +6 +Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become a source of demand for U.S. natural gas, the price of natural gas generally has fallen in recent years. Unlike oil demand, which is impacted by numerous global factors, the demand for natural gas is determined by U.S. domestic and export demand. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for four percent of RPC’s consolidated revenues in 2021, six percent in 2020 and five percent in 2019. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues decreased 13.0 percent in 2021 compared to the prior year primarily due to lower customer activity levels in Algeria and Saudi Arabia, partially offset by higher activity in Canada. During 2021, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2022. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was +7 +no outstanding balance on this credit facility as of December 31, 2021. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2021, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2021 or 2020 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn that began in 2015, a number of oilfield services companies reduced the scope of their operations or became insolvent. During the most recent downturn that began in 2019, fewer oilfield services companies became insolvent than in the previous downturn, partially because of COVID-19 – related Federal stimulus that supported operations that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. In addition, improving completion services efficiency during this period served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services have caused the oilfield services business to remain competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc. and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. +Human Capital +The table below shows the number of employees at December 31, 2021 and 2020: +At December 31, +2021 +2020 +Employees +2,250 +2,005 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce reflects the diversity of the communities in which it operates. Our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +8 +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). Annual review of the Code is required, and the code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. In addition, a component of our field employee compensation plans is based on safety measures. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated Financial Statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing +9 +laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/item13.txt b/raw/filings/0000742278/2021/0001558370-22-002344/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..cb814644b0568ad4602629c04f74915f599c0428 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2022 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/item9a.txt b/raw/filings/0000742278/2021/0001558370-22-002344/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..0b0e3cfb5e63138eb34fd656f78c71dba4930aa7 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2021 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 26 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2021 and issued a report thereon which is included on page 27 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/rp_note.txt b/raw/filings/0000742278/2021/0001558370-22-002344/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..ac432a492a82c7af4fc0f0f00f5bc0e05a4bbc35 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/rp_note.txt @@ -0,0 +1,9 @@ +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 867,000 in 2021, $ 846,000 in 2020, and $ 865,000 in 2019. The Company’s receivable due from Marine Products for these services was $ 87,000 as of December 31, 2021 and $ 49,000 as of December 31, 2020. The majority of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1,275,000 in 2021, $ 1,030,000 in 2020 and $ 1,625,000 in 2019. +RPC receives certain administrative services from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include selected administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 104,000 in 2021, $ 104,000 in 2020 and $ 104,000 in 2019. +A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of fifty percent of the Company’s voting power. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200,000 in 2021, $ 200,000 in 2020 and $ 199,000 in 2019 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.4 million as of December 31, 2021 and $ 1.2 million as of December 31, 2020. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2021, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 521,000 . \ No newline at end of file diff --git a/raw/filings/0000742278/2021/0001558370-22-002344/rpt_disclosure.txt b/raw/filings/0000742278/2021/0001558370-22-002344/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8a417112f3268dc8464d085d1b9224144b16f380 --- /dev/null +++ b/raw/filings/0000742278/2021/0001558370-22-002344/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The Company provides certain administrative services to Marine Products on a cost reimbursement basis and the arrangement may be terminated upon six months’ notice. The services include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $922,000 in 2022. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2022, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $200,000 for the corporate aircraft. +During 2022, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. Gary W. Rollins, a director at RPC, is an officer, director and controlling stockholder of LOR, Inc. In 2022, payments totaling approximately $1,750,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services from Rollins, Inc., a company of which Mr. Gary W. Rollins is Chairman, and which is controlled by Mr. Rollins and his affiliates. The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $71,000 in 2022. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy R. Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, Board of Directors and Corporate Governance. The group discussed above also controls in excess of fifty percent of Marine Products Corporation’s voting power. +Related party transactions, as defined in Regulation S-K, Item 404(a), must be reviewed and approved in advance, by our Nominating and Corporate Governance Committee or, in the event that our Nominating and Corporate Governance Committee does not consist of all independent directors, by a Subcommittee (the Subcommittee) of the Nominating and Corporate Governance Committee consisting of all of the independent members thereof. As set forth in the charter of our Nominating and Corporate Governance Committee, the Nominating and Corporate Governance Committee has the authority and responsibility to ensure that it approve all related party transactions, including material amendments that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Nominating and Corporate Governance Committee also has the authority to hire legal, accounting, financial or other advisors, as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. These same rights and responsibilities apply equally to the Subcommittee. A copy of the Charter of the Nominating and Corporate Governance Committee is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2022 were reviewed, pre-approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Charter. +46 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/filing.txt b/raw/filings/0000742278/2022/0001558370-23-002171/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..fdaa57852f578808c3d30d4cf74fcd17f07d0f41 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/filing.txt @@ -0,0 +1,3137 @@ +0.03 0.03 GA NYSE 215628716 216609191 P60D http://www.rpc.net/20221231#PensionSettlementImpairmentAndOtherCharges http://www.rpc.net/20221231#PensionSettlementImpairmentAndOtherCharges 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.002 0.50 0000742278 2022 FY false 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2022-01-01 2022-12-31 0000742278 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2022-06-30 0000742278 2023-02-17 0000742278 2022-01-01 2022-12-31 xbrli:shares iso4217:USD xbrli:pure res:Lender res:customer res:agreement iso4217:USD xbrli:shares +down +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +☐ +Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 +For the fiscal year ended December 31 , 2022 +Commission File No. 1-8726 +RPC, INC. +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ◻ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 564,113,681 based on the closing price on the New York Stock Exchange on June 30, 2022 of $6.91 per share. +RPC, Inc. had 217,535,918 shares of Common Stock outstanding as of February 17, 2023. +Documents Incorporated by Reference +Portions of the proxy statement for the 2023 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as “we,” “us,” “RPC” or “the Company.” +Forward-Looking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business and financial strategies, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report also include without limitation statements regarding: our belief that the demand for our oil and gas services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or addressing well control issues; our belief that the common drivers of operational and financial success of Technical Services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment; our belief that the primary drivers of operational success for services and equipment provided off the well site without our personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics; our belief that the primary drivers of operational success for other Support Services relate to meeting customer needs off the well site and competitive marketing of such services; our belief that demand for equipment and services offered tends to be influenced primarily by customer drilling-related activity levels; our belief that our supply sources for flexible steel pipe used in coiled tubing are adequate; our belief that customer activity levels are influenced by their decisions about capital investment toward the development and product of oil and gas reserves; natural gas prices, production levels and drilling activities; our belief that the recent decrease in the price of natural gas may discourage drilling and completion of natural gas-directed wells during the near term; our belief that the future export demand will continue to be strong, and combined with increased natural gas export activity, will encourage natural gas-directed filling in the future; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future; our continued belief in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market; our belief that unconventional wells will continue to comprise the majority of drilling activity because of their high initial production rates; our belief that the advent of unconventional drilling in the U.S. domestic market will be a permanent change and will continue to have a positive impact on the demand for our services; our expectation to continue to focus on the selected development of international business opportunities in current and other international markets and our belief that international revenues will continue to be less than ten percent of total revenues in 2023; our belief that due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations; our primary objective, which is to generate excellent long-term returns on investment through the effective and conservative management of our invested capital to generate strong cash flow; our plans to continue to pursue such primary objective through strategic investments and opportunities designed to enhance the long-term value of our company while improving market share, product offerings and the profitability of existing businesses; our plan to continue to consider the acquisitions of existing businesses while also continuing to maintain a conservative capital structure, which may limit our ability to consummate large transactions; our belief that the principal competitive factors in the market areas that we serve are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency and price; our belief that the temporary suspension of new oil and gas leasing permits on federal oil and gas drilling areas, or any similar future bans, would not impact RPC’s Technical Services Segment’s revenues because this or similar bans would only apply to drilling and completion on Federal lands, which account for less than 10 percent of U.S. oilfield activity; our belief that our operating facilities are suitable and adequate to meet current and reasonably anticipated future needs; our belief that the outcome of various routine lawsuits, legal proceedings and claims, even if determined adversely, will not have a material adverse effect on RPC’s business or financial condition; our belief that oil production in the United States has become an increasingly important determinant of global oil prices; our belief that the long-term outlook for natural gas-directed drilling and completion activities in the United States is favorable due to global political instability and projected increases in U.S. natural gas export capabilities; our belief that current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity; the adequacy of our insurance coverage; our belief that recent price increases in commodities remain above levels sufficient to motivate our customers to increase drilling and completion activities; our belief that higher prices and additional investments in natural gas infrastructure should encourage our customers to increase their natural gas-directed exploration and production activities; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that natural gas-directed drilling has increased and will continue to increase in natural gas-directed basins in the United States due to the current and projected high prices of natural gas and our belief that this trend should be favorable for the demand for our services in such basins; our belief that the competitive market for our services will improve during the near term; our belief that the liquidity provided by our cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our expectation that we will not need our revolving credit facility to meet liquidity requirements in the near term; our expectation that capital expenditures will be between $250 million to $300 million in 2023, and will be directed towards both capitalized maintenance of our existing equipment and selected growth +2 +opportunities; our expectations about final cash contributions to the defined benefit pension plan in 2023; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual obligations for future periods; our expectations to continue to pay cash dividends to common stockholders; our expectations regarding the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of new accounting standards; the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition; our expectation that the adoption of amendments in ASU No. 2022-08 will not have a material impact on our financial statements; and our expectation that during the first quarter of 2023, we will recognize a pre-tax, non-cash settlement charge representing the unamortized net loss in the pension plan which was approximately $22.5 million as of December 31, 2022. +The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2022, RPC had 2,732 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2022, approximately five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2022, we also estimate that 77 percent of our revenues were related to drilling and production activities for oil, while 23 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and +3 +services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 53 percent of 2022 revenues, 43 percent of 2021 revenues and 37 percent of 2020 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions’ (“TTS”) downhole tools division accounted for 23 percent of revenues in 2022, 29 percent of revenues in 2021 and 33 percent of 2020 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in 2022, ten percent of revenues in 2021 and nine percent of revenues in 2020, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows +4 +it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in both 2022 and 2021 and one percent of revenues in 2020, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for two percent of revenues in 2022, four percent of revenues in 2021 and five percent of revenues in 2020. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +5 +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2022, 2021 and 2020. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Rocky Mountain and the Appalachian region. +Patterson Rental Tools offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s (source: Baker Hughes, Inc.). Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and the fourth quarter of 2022, the U.S. domestic rig count rose by approximately 206 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,387 wells were completed, the lowest number of annual well completions recorded during the nine years that these data have been reported. During 2022, reported well completions increased to 11,451, an increase of approximately 22 percent compared to 2021. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Following the cyclical trough in oilfield activity which occurred in the third quarter of 2020, commodity prices and the U.S. domestic rig count began to recover, and by the end of 2021, the U.S. domestic rig count was more than 100 percent higher than the historic low level recorded in 2020. Beginning in the first quarter of 2022, the U.S domestic rig count continued to rise as customer activities increased due to higher oil process and global uncertainty caused by Russia’s invasion of +6 +Ukraine. By the end of 2022, the U.S. domestic rig count had risen to the level recorded immediately prior to the onset of the COVID-19 pandemic in the first quarter of 2020. The Company anticipates that oilfield activity will remain consistent with this level during 2023. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas increased by approximately 64.1 percent during 2022 as compared with 2021. Early in the first quarter of 2023, the price of natural gas was approximately 15.6 percent lower than the price at the end of 2022 (source: U.S. Energy Information Administration). RPC believes that the recent decrease in the price of natural gas may discourage drilling and completion of natural gas-directed wells during the near term. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2022 the average price of benchmark natural gas liquids increased by approximately seven percent compared with 2021 (source: U.S. Energy Information Administration). Early in the first quarter of 2023, the price of natural gas liquids was approximately 14.5 percent higher than the price at the end of 2022. +During the first decade of the twenty-first century, natural gas-directed drilling rigs comprised most of the U.S. drilling rig count. Beginning in 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. Rising U.S. domestic demand for natural gas and the advent of U.S. exports of liquified natural gas have been offset by increasing production, thus preventing the price of natural gas from rising. During 2022, however, the price of natural gas increased significantly following Russia’s invasion of Ukraine, as many European countries boycotted imported Russian natural gas and signaled an increasing reliance on sources such as the U.S. The price of U.S. natural gas has fallen significantly early in the first quarter of 2023, due to a warm winter in Western Europe and insufficient U.S. export capacity. However, the Company believes that future export demand will continue to be strong, and combined with increased natural gas export capacity, will encourage natural gas-directed drilling in the future. In spite of this potential increase in demand and export infrastructure, we anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for two percent of RPC’s consolidated revenues in 2022, four percent in 2021 and six percent in 2020. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues increased 4.3 percent in 2022 compared to the prior year primarily due to higher customer activity levels in Canada. During 2022, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2023. +7 +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2022. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2022, RPC provided oilfield services to several hundred customers. Of these customers, only one customer, a private exploration and production company, accounted for approximately 11 percent of the Company’s revenues in 2022 with no other customers exceeding 10 percent of revenues in 2022. There was no customer in 2021 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn that began in 2015, a number of oilfield services companies reduced the scope of their operations or became insolvent. During the most recent downturn that began in 2019, fewer oilfield services companies became insolvent than in the previous downturn, partially because of COVID-19 – related Federal stimulus that supported operations that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. During 2022, Russia’s invasion of Ukraine destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. +8 +domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. In addition, improving completion services efficiency has served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services have caused the oilfield services business to remain competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. +Human Capital +The table below shows the number of employees at December 31, 2022 and 2021: +At December 31, +2022 +2021 +Employees +2,732 +2,250 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce is diverse and our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). The code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the code; any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +9 +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated financial statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +10 +Item 1A. Risk Factors +Risks Related to our Business. +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 40 percent of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. One of our customers, a private exploration and production company, accounted for approximately 11 percent of the Company’s revenues in 2022 with no other customers exceeding 10 percent of revenues in 2022. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2021 or 2020. In addition, there was no customer as of December 31, 2022 or 2021 that accounted for 10 percent or more of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations which could cause us to experience increased credit losses for accounts receivable. +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s +11 +many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. The Company and our industry is being affected by shortages of skilled labor. If labor shortages continue or a significant increase in wages occur, our capacity and profitability could be diminished, and our growth potential could be impaired. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility, as amended June 22, 2022, provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +12 +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +Our financial results could continue to be negatively impacted by the COVID-19 pandemic. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic. Although global demand began to rebound in 2021, and has remained strong throughout 2022 and in early 2023, a worsening of the pandemic or a new global pandemic could further impact the economic conditions in the United States, as federal, state and local governments react to the public health crisis, creating uncertainties in the United States, as well as the global economy. RPC instituted strict procedures to assess employee health and safety while in its facilities or on operational locations and attempted to hire redundant crews in order to continue to provide services to its customers. These measures increased the Company’s operating expenses, and such higher operating expenses could continue if the COVID-19 pandemic continues during 2023 or a new global pandemic arises. +Increasing expectations from customers, investors and other stakeholders regarding our environmental, social and governance (ESG) practices may affect our business, may create additional costs for us, or expose us to related risks. +Many companies are receiving greater attention from stakeholders regarding their ESG practices, as well as their oversight of relevant ESG issues. The various stakeholders are placing growing importance on our potential environmental and social issue risk exposure and the impact of our choices. This trend appears likely to continue. Increased focus on ESG and related decision-making may negatively impact us as customers, investors and other stakeholders may choose to not work with us or reallocate capital or decline to make an investment as a result of their assessment of our ESG practices. Companies that do not comport with, or do not adapt to, these evolving investor and stakeholder ESG-related expectations and standards, or that are assessed as not having responded appropriately to the growing focus on ESG matters, may have their brand and reputation harmed, and we or our stock price may be adversely affected even though we may be in full compliance with all relevant laws and regulations. +Risk Management Risks. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred, but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation or disposal of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +13 +Compliance with federal and state regulations relating to hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry. In spite of these favorable empirical data, the current administration imposed a temporary suspension of new oil and gas leasing permits on federal oil and gas drilling areas. This suspension has been challenged in court and was blocked in the fourth quarter of 2021. Early in 2023 a final decision was still pending. This legislation has had a minimal impact on RPC’s Technical Services Segment’s revenues. Furthermore, we do not believe that this ban, or any similar future ban, would impact RPC’s Technical Services Segment’s revenues because this or similar bans would only apply to drilling and completion on Federal lands, which account for less than 10 percent of U.S. oilfield activity. +General Risks. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Risks Related to our Capital and Ownership Structure. +Our management and directors have a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the “Controlled Corporation” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of independent directors, and independent compensation and nominating committees. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 61 percent of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +The Controlling Group could take actions that could negatively impact our results of operations, financial condition or stock price. +The Controlling Group may from time to time and at any time, in their sole discretion, acquire or cause to be acquired, additional equity or other instruments of the Company, its subsidiaries or affiliates, or derivative instruments the value of which is linked to Company securities, or dispose or cause to be disposed, such equity or other securities or instruments, in any amount that the Controlling Group may determine in their sole discretion, through open market transactions, privately negotiated transactions or otherwise. In addition, depending upon a variety of factors, the Controlling Group may at any time engage in discussions with the Company and its affiliates, and other persons, including retained outside advisers, concerning the Company’s business, management, strategic alternatives and direction, and in their sole discretion, consider, formulate and implement various plans or proposals intended to enhance the value of their investment in the Company. In the event the Controlling Group were to engage in any of these actions, our common stock price could be negatively impacted, such actions could cause volatility in the market for our common stock or could have a material adverse effect on our results of operations and our financial condition. +14 +Our management and directors have a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC's certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and director nominations, and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Risks Related to Digital Operations, Cybersecurity and Business Disruption. +Our operations rely on digital systems and processes that are subject to cyber-attacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyber-attacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for all employees, simulate phishing attempts and closely manage the accounts and privileges of all employees and contractors. In addition, we have adopted an established cybersecurity framework that provides significant risk management across several areas. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents. We have experienced unsuccessful cyberattack attempts to gain unauthorized access to our network. To date, these attacks have not had a material impact on our operations. +If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Item 1B. Unresolved Staff Comments +None. +15 +Item 2. Properties +RPC owns or leases approximately 60 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See “Related Party Transactions” contained in Item 7. As of December 31, 2021, the lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yard +Elk City, Oklahoma — Operations, sales and equipment storage yard +Houma, Louisiana — Administrative office +Channelview, Texas — Pipe storage yard and inspection services +Odessa, Texas — Pumping services facility +Rock Springs, Wyoming — Operations, sales and equipment storage yard +Vernal, Utah — Operations, sales and equipment storage yards +Newcastle, Oklahoma — Operations, sales and administrative offices +Leased Locations +Midland, Texas — Operations, sales and administrative offices +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Odessa, Texas — Pumping services facility +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K. +Item 4A. Information About Our Executive Officers +The Executive Officers have been elected by the Board of Directors to serve until the April 2023 Board of Directors’ meeting, or until their earlier removal by the Board of Directors or their resignation. The following table lists the executive officers of RPC and their ages, offices, and terms of office with RPC. +Name and Office with Registrant +Age +Date First Elected to Present Office +Ben M. Palmer (1) +62 +5/17/22 +President and Chief Executive Officer +Michael L. Schmit (2) +50 +5/17/22 +Vice President, Chief Financial Officer and Corporate Secretary +Richard A. Hubbell (3) +78 +5/17/22 +Executive Chairman of the Board +(1) Ben M. Palmer became President and Chief Executive Officer of the Company, effective May 17, 2022. Previously, he served as Vice President, Chief Financial Officer and Treasurer of the Company since 1996 and assumed responsibility as Corporate +16 +Secretary in 2018. He is also the President and Chief Executive Officer of Marine Products Corporation and previously served as its Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. Mr. Palmer serves on the Board of Directors for both of these companies. +(2) Michael L. Schmit has been Vice President, Chief Financial Officer and Corporate Secretary of the Company since May 17, 2022. He is also Vice President, Chief Financial Officer and Corporate Secretary of Marine Products Corporation. +(3) Richard A. Hubbell has been Executive Chairman of the Board, since May 17, 2022. Prior to that, he served as the Company’s President since 1987 and Chief Executive Officer since 2003. He is also the Executive Chairman of the Board at Marine Products Corporation. and previously served as its President and Chief Executive Officer since 2001. +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 17, 2023 there were 217,535,918 shares of common stock outstanding and approximately 22,000 beneficial holders of our common stock. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchases in the fourth quarter of 2022 are outlined below. +Total Number +Maximum +of Shares (or +Number (or +Units) +Approximate +Purchased as +Dollar Value) of +Part of +Shares (or Units) +Total Number of +Average Price +Publicly +that May Yet Be +Shares +Paid Per +Announced +Purchased Under +(or Units) +Share +Plans or +the Plans or +Period +Purchased +(or Unit) +Programs (1) +Programs (1) +October 1, 2022 to October 31, 2022 +— +$ +— +— +8,248,184 +November 1, 2022 to November 30, 2022 +— +— +— +8,248,184 +December 1, 2022 to December 31, 2022 +728 +(2) +8.71 +— +8,248,184 +Totals +728 +$ +8.71 +— +8,248,184 +(1) The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 and 2018 that authorizes the repurchase of up to 41,578,125 shares. There were no shares repurchased as part of this program during the fourth quarter of 2022. As of December 31, 2022, there are 8,248,184 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. +(2) Represents shares repurchased by the Company in connection with taxes related to vesting of certain shares. +17 +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil Service Index (“OSX”), and a peer group which includes companies that are considered peers of the Company (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index. +The Company was a component of the Russell 2000 during 2022. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2022 of $2.8 billion, and a median market capitalization of $950 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Halliburton Company, NexTier Oilfield Solutions, Inc., Oil States International, Inc., and Patterson-UTI Energy, Inc. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. The peer group used in the immediately preceding fiscal year (“the Former Peer Group”) included Oil States International, Inc., Patterson-UTI Energy, Inc. and Halliburton Company. NexTier Oilfield Solutions, Inc. is included for this fiscal year because it operates similar service lines in similar domestic markets as the Company and has sufficient trading history to be included for this fiscal year. +Item 6. Reserved +18 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with “Selected Financial Data” and the consolidated financial statements included elsewhere in this document. See also “Forward-Looking Statements” on page 2. Discussions of year-to-year comparisons of 2021 and 2020 items that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2021, which Item is incorporated herein by reference. +RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain capital strength sufficient to allow us to remain a going concern and maintain our operational strength during protracted industry downturns. +- To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. +- To deliver product and services to our customers safely. +- To secure adequate sources of supplies of raw materials used in our operations. +- To maintain and selectively increase market share. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic. Although global demand began to rebound in 2021, and has remained strong throughout 2022, the pandemic could continue to impact the economic conditions in the United States, as federal, state and local governments react to the public health crisis, creating uncertainties in the United States, as well as the global economy. RPC instituted strict +19 +procedures to assess employee health and safety in its facilities and operational locations and attempted to hire redundant crews in order to continue to provide services to its customers. +Current industry conditions are characterized by oil prices which have risen from less than $20 per barrel in the second quarter of 2020 to approximately $80 per barrel early in the first quarter of 2023. While there are many factors influencing the price of oil, we believe that Russia’s invasion of Ukraine in the first quarter of 2022 destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. In response to these conditions, the U.S. domestic rig count has risen from a low of 244 in the third quarter of 2020 to 771 early in the first quarter of 2023. In addition, well completions have increased from 1,110 in the third quarter of 2020 to 2,959 in the fourth quarter of 2022. +RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States has grown to be the world’s largest producer of oil and is more flexible in its ability to increase or decrease drilling and production activities more rapidly than the state-owned oil companies which comprise OPEC membership. During the past several years, improving drilling and completion activity have caused U.S. domestic oil production to rise to record production levels. Oil production fell during 2020 and 2021 during the downturn caused by the COVID-19 pandemic, but by the fourth quarter of 2022 had increased to within five percent of record oil production recorded during the fourth quarter of 2019 (source: U.S. Energy Information Administration). Customer activities directed towards natural gas drilling and production have been weak for many years because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. One result of high natural gas production and steady demand has been a decline in the price of natural gas. The price of natural gas briefly rose to $9.56 per Mcf during the third quarter of 2022 as the market assessed the impact of European sanctions against Russian natural gas imports and the potential of a cold winter. However, the price of natural gas fell during the fourth quarter of 2022 and early 2023. The price of natural gas early in the first quarter of 2023 was $3.46 per Mcf, which was approximately 17.4 percent lower than at the same time in 2022. The Company believes that the recent decline in the price of natural gas discourages our customers from conducting natural gas-directed drilling and completion activities during the near term. However, the Company also believes that the long-term outlook for natural gas-directed drilling and completion activities in the United States is favorable due to global political instability and projected increases in U.S. natural gas export capabilities. +The Company’s strategy of utilizing equipment in unconventional basins continued. During 2022, we made capital expenditures, excluding the equipment acquired under a finance lease, totaling $139.6 million, an increase of $72.0 million compared to the prior year. Capital expenditures during 2022 were primarily directed towards capitalized maintenance and selected growth opportunities. +Revenues during 2022 totaled $1.6 billion, an increase of 85.2 percent compared to 2021. This increase was primarily due to improved pricing, higher customer activity levels and a larger active fleet of revenue-producing equipment. Cost of revenues increased $424.9 million in 2022 compared to the prior year primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. As a percentage of revenues, cost of revenues decreased to 67.9 percent in 2022 compared to 76.7 percent in 2021 due to improved pricing for our services and leverage of employment costs. +Selling, general and administrative expenses as a percentage of revenues decreased to 9.3 percent in 2022 compared to 14.3 percent in 2021, primarily due to leverage of costs that are relatively fixed during the short term over higher revenues. +Income before income taxes was $289.6 million for 2022 compared to $16.4 million in 2021. Net income for 2022 was $218.4 million, or $1.01 earnings per share compared to net income of $7.2 million, or $0.03 earnings per share in 2021. +Cash flows from operating activities increased to $201.3 million in 2022 compared to $47.7 million in 2021 primarily due to a significant increase in net income, partially offset by increased working capital requirements in 2022 compared to 2021. As of December 31, 2022, there were no outstanding borrowings under our credit facility. +20 +Outlook +Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018 (Source: Baker Hughes, Inc.). Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77 percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. Rig count during 2022 increased 51.3 percent compared to 2021. +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil has risen by more than 100 percent in the fourth quarter of 2022 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by over 225 percent during the same time period. Following a low price of $0.23 per gallon in the first quarter of 2020, the price of benchmark natural gas liquids has risen to $0.80 per gallon in the fourth quarter of 2022 (Source: U.S. Energy Information Administration). In addition, oil and gas prices experienced increases beginning in February 2022 due to concerns about potential world-wide supply constraints resulting from the Russian invasion of Ukraine. Although the price increases in these commodities have recently moderated from their highs, RPC believes that they remain above levels sufficient to motivate our customers to increase drilling and completion activities. +The Russian invasion of Ukraine during the first quarter of 2022 prompted Western European countries to curtail or eliminate their purchases of natural gas from Russia. As a result, the demand for liquified natural gas from the United States increased significantly, which increased the price for natural gas in the United States to its highest level since 2008 and has encouraged additional investment in liquified natural gas production facilities in the United States. These higher prices and additional investments in natural gas infrastructure should encourage RPC’s customers to increase their natural gas-directed exploration and production activities. +The majority of the U.S. domestic rig count remains directed towards oil. In the fourth quarter of 2022, approximately 79 percent of the U.S. domestic rig count was directed towards oil, compared to 82 percent in the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. However, we believe that natural gas-directed drilling will increase because of favorable long-term market dynamics. This projected higher demand should drive increased activity in most of the basins in which RPC operates. +We continue to monitor the market for our services and the competitive environment, including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets. The growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market. We believe that most of the feasible efficiency gains have been realized, and a number of our smaller competitors have ceased operations. These factors, combined with the increase in drilling and completion activities and the improvement in commodity prices, leads us to believe that the competitive market for our services has improved during 2022 and we expect demand will continue to improve during the near term. +During 2022, RPC made payments under a finance lease arrangement, with a final payment in the third quarter of 2022, for a new Tier 4 dual-fuel pressure pumping fleet that went to work during the fourth quarter of 2021. In addition, the Company refurbished an existing fleet that was placed into service during 2022 and is currently refurbishing another existing fleet that will be placed in service in early 2023. Additionally, the Company has ordered a pressure pumping fleet that is projected to be delivered in the first half of 2023. We have selectively upgraded our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. RPC’s response to our industry’s current higher activity levels and improved service pricing is primarily to maintain and upgrade our current fleet capacity of revenue-producing equipment. We will remain highly disciplined about adding new revenue-producing equipment capacity and will only expand when we believe the projected financial returns of such capital expenditures meet our financial return criteria. The Company is allocating capital in the coming year to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. +21 +Results of Operations +2022 +2021 +2020 +Consolidated revenues [in thousands] +$ +1,601,762 +$ +864,929 +$ +598,302 +Revenues by business segment [in thousands] : +Technical +$ +1,516,363 +$ +815,046 +$ +556,488 +Support +$ +85,399 +$ +49,883 +$ +41,814 +Consolidated operating income (loss) [in thousands ] +$ +287,940 +$ +16,291 +$ +(309,635) +Operating income (loss) by business segment [in thousands]: +Technical +$ +281,622 +$ +24,434 +$ +(82,525) +Support +18,095 +(5,725) +(6,714) +Corporate +(17,660) +(13,300) +(12,426) +Pension settlement, impairment and other charges (1)(2) +(2,921) +— +(217,493) +Gain on disposition of assets, net +$ +8,804 +$ +10,882 +$ +9,523 +Net income (loss) [in thousands] +$ +218,363 +$ +7,217 +$ +(212,192) +Earnings (loss) per share — diluted +$ +1.01 +$ +0.03 +$ +(1.00) +Percentage cost of revenues to revenues +68 +% +77 +% +80 +% +Percentage selling, general & administrative expenses to revenues +9 +% +14 +% +21 +% +Percentage depreciation and amortization expense to revenues +5 +% +8 +% +16 +% +Effective income tax rate +24.6 +% +56.1 +% +31.4 +% +Average U.S. domestic rig count +723 +478 +436 +Average natural gas price (per thousand cubic feet (mcf)) +$ +6.44 +$ +3.92 +$ +2.03 +Average oil price (per barrel) +$ +94.89 +$ +68.13 +$ +39.50 +(1) Amount in 2022 relates to pension settlement loss. See note 13 of the consolidated financial statements. +(2) Amount in 2020 includes $212,292 related to technical services, $4,660 related to pension settlement loss and the remainder related to corporate expenses. +Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 +Revenues. Revenues in 2022 increased $736.8 million or 85.2 percent compared to 2021 primarily due to higher customer activity levels, pricing improvements and a larger fleet of pressure pumping equipment in service. The Technical Services segment revenues in 2022 increased $701.3 million or 86.0 percent compared to the prior year. The increase is primarily due to higher activity levels and improved pricing as compared to the prior year. The Support Services segment revenues in 2022 increased $35.5 million or 71.2 percent compared to 2021 due to higher activity levels for rental tools. Technical Services reported operating income of $281.6 million during 2022 compared to an operating income of $24.4 million in the prior year, while Support Services reported an operating income of $18.1 million in 2022 compared to an operating loss of $5.7 million in the prior year. The average price of oil increased 39.3 percent and the average price of natural gas increased 64.1 percent during 2022 compared to the prior year. The average domestic rig count during 2022 was 51.3 percent higher than 2021. International revenues, which increased slightly from $31.2 million in 2021 to $32.6 million in 2022, were two percent of consolidated revenues in 2022 compared to four percent in 2021. International revenues decreased in 2022 primarily due to lower activity levels in Canada compared to the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration. +Cost of revenues. Cost of revenues in 2022 increased $424.9 million or 64.1 percent compared to 2021 primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. As a percentage of revenues, cost of revenues decreased to 67.9 percent in 2022 compared to 76.7 percent in 2021 due to the leverage of direct employment costs over higher revenues, improved pricing and a favorable job mix within pressure pumping. +Selling, general and administrative expenses . Selling, general and administrative expenses increased to $148.6 million in 2022 compared to $123.6 million in 2021 primarily due to increases in employment related costs including variable incentive compensation costs consistent with improved operating results. Selling, general and administrative expenses as a percentage of revenues decreased to 9.3 percent of revenues in 2022 compared to 14.3 percent of revenues in 2021 due to leverage of costs that are relatively fixed during the short term over higher revenues. +22 +Depreciation and amortization. Depreciation and amortization were $83.0 million in 2022, an increase of $10.3 million, compared to $72.7 million in 2021. Depreciation and amortization increased due to capital expenditures in the past year. +Gain on disposition of assets, net. Gain on disposition of assets, net was $8.8 million in 2022 compared to $10.9 million in 2021. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income, net. Other income, net was $1.1 million in 2022 compared to other income, net of $2.0 million in 2021. +Interest expense and interest income. Interest expense was $0.6 million in 2022 compared to interest expense of $1.9 million in 2021. Interest expense for 2021 was unusually high, primarily due to interest expense related to the settlement of a legal dispute with a supplier coupled with interest charged in connection with resolution of a state well servicing audit. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan costs. Interest income increased to $1.2 million in 2022 compared to $0.1 million in 2021 due to a higher average cash balance coupled with an increase in investment yields consistent with higher interest rates. +Income tax provision. Income tax provision was $71.3 million in 2022, compared to $9.2 million income tax provision for the same period in 2021. The effective tax rate was 24.6 percent for 2022 compared to 56.1 percent for 2021. The increase in the income tax provision in 2022 is primarily related to an increase in pretax income. The decrease in the effective tax rate resulted from higher pre tax income which diluted the impact of the unfavorable permanent and discrete adjustments. +Net income and diluted earnings per share . Net income was $218.4 million in 2022, or $1.01 diluted earnings per share, compared to net income of $7.2 million in 2021, or $0.03 diluted earnings per share. This improvement in earnings per share was primarily due to higher profitability, as average shares outstanding was essentially unchanged. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $126.4 million as of December 31, 2022, $82.4 million as of December 31, 2021 and $84.5 million as of December 31, 2020. +The following table sets forth the historical cash flows for the years ended December 31: +2022 +2021 +2020 +(In thousands) +Net cash provided by operating activities +$ +201,286 +$ +47,719 +$ +77,958 +Net cash used for investing activities +(123,715) +(47,631) +(42,659) +Net cash used for financing activities +(33,580) +(2,151) +(826) +Cash provided by operating activities for the year ended December 31, 2022 increased by $153.6 million compared to the year ended December 31, 2021. Cash provided by operating activities for the year ended December 31, 2022 includes net income of $218.4 million, less an unfavorable change in accounts receivable of $157.9 million, partially offset by favorable changes in other components of our working capital (accounts payable, accrued payroll and taxes receivable) totaling $69.8 million. The net unfavorable changes in working capital were the result of increased business activity levels. +Cash used for investing activities for 2022 increased by $76.1 million compared to 2021, primarily due to an increase in capital expenditures consistent with higher business activity levels and an improved operating environment. +Cash used for financing activities for 2022 increased by $31.4 million primarily due to cash paid for a finance lease beginning in the third quarter of 2021, coupled with the reinstatement of cash dividends paid to common stockholders in the third quarter of 2022. +Financial Condition and Liquidity +The Company’s financial condition remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, +23 +and the expected amount of cash to be provided by operations. RPC does not expect to utilize our revolving credit facility to meet these liquidity requirements in the near term. +The Company currently has a $100.0 million revolving credit facility that matures in June 2027 as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. In the second quarter of 2022, the Company further amended the revolving credit facility. Among other matters, the amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with Term SOFR as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 25.0 basis points at each pricing level, (3) introduces a 1.00% per annum floor for base rate borrowings, (4) permits the issuance of letters of credit in currencies other than U.S. dollars. As of December 31, 2022, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $17.5 million; therefore, a total of $82.5 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of December 31, 2022. For additional information with respect to RPC’s facility, see Note 9 of the consolidated financial statements. +Cash Requirements +Capital expenditures were $139.6 million in 2022, and we currently expect capital expenditures to be between $250 million to $300 million in 2023, which will be directed towards both capitalized maintenance of our existing equipment and selected growth opportunities. The Company is allocating capital to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. RPC refurbished an existing fleet that was placed into service during 2022 and is currently refurbishing another existing fleet that will be placed in service in early 2023. In addition, the Company ordered a pressure pumping fleet that is expected to be delivered and paid for in the first half of 2023. During 2022, RPC made payments totaling $24.0 million for a pressure pumping fleet under a finance lease which was initiated in 2021. The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. +The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated. See Note 12 of the consolidated financial statements for additional information. +During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan which are expected to be completed in early 2023. The Company currently expects to make a final cash contribution of approximately $6.0 million to $10.0 million as part of the termination. The Company did not make any cash contributions to this plan during 2022 or 2021. +As of December 31, 2022, the Company’s stock buyback program has authorized the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. No shares were purchased on the open market during the twelve months ended December 31, 2022, and 8,248,184 shares remain available to be repurchased under the current authorization. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. +On January 24, 2023, the Board of Directors declared a regular quarterly cash dividend of $0.04 per share payable March 10, 2023 to common stockholders of record at the close of business on February 10, 2023. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors. +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable leases, purchase obligations, amounts related to the usage of corporate aircraft and other long-term liabilities. See note 16 of the consolidated financial statements for details regarding RPC’s lease obligations. +F air Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive +24 +Retirement Plan (“SERP”) investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause supply disruptions and higher costs of certain materials and key equipment components used to provide services to the Company’s customers. During 2021 and continuing through 2022, the price of labor and raw materials have been increasing due to improving oilfield activity and labor shortages caused by the departure of skilled labor from the domestic oilfield industry in prior years. +During 2022, market prices of some raw materials and key equipment components increased significantly and availability has been challenged. We have successfully increased the pricing for our equipment and services to cover much of these cost increases, but due to the competitive nature of the oilfield services business, there is no assurance that we will be able to continue to do this successfully in the future. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +Related Party Transactions +See Note 14 of the consolidated financial statements, which is incorporated herein by reference, for a description of related party transactions. +Critical Accounting Policies and Estimates +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting policies requiring significant judgements and estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +Credit loss allowance for accounts receivable — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our credit loss allowance is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectibility. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Credit loss allowance for accounts receivable are recorded in selling, general and administrative expenses. Accounts are written off against the allowance when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2022, 2021 and 2020. We record specific provisions when we become aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated credit loss allowance is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.4 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general +25 +reserve percentages by 0.50 percentage points as of December 31, 2022 would have resulted in a change of $1.9 million in the recorded provision for current expected credit losses. +Insurance expenses —The Company self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2022, the Company estimates the range of exposure to be from $8.4 million to $12.4 million. The Company has recorded liabilities at December 31, 2022 of $10.4 million which represents management’s best estimate of probable loss. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. +For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. +Recent Accounting Pronouncements +See Note 1 of the consolidated financial statements, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its revolving credit facility. As of December 31, 2022, there were no outstanding interest-bearing advances on our credit facility which bore interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +26 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2022 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2022. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2022, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 28. +/s/ Ben M. Palmer +/s/ Michael L. Schmit +Ben M. Palmer +President and Chief Executive Officer +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 27, 2023 +27 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated February 27, 2023 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 27, 2023 +28 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2023 expressed an unqualified opinion. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 27, 2023 +29 +Item 8. Financial Statements and Supplementary Data +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +December 31, +2022 +2021 +ASSETS +Cash and cash equivalents +$ +126,424 +$ +82,433 +Accounts receivable, net of allowance for credit losses of $ 7,078 in 2022 and $ 6,765 in 2021 +416,568 +258,635 +Inventories +97,107 +78,983 +Income taxes receivable +42,403 +58,504 +Prepaid expenses +17,753 +9,773 +Other current assets +3,086 +3,682 +Total current assets +703,341 +492,010 +Property, plant and equipment, less accumulated depreciation of $ 775,334 in 2022 and $ 763,304 in 2021 +333,093 +254,408 +Operating lease right-of-use assets +28,864 +24,572 +Finance lease right-of-use assets +— +20,327 +Goodwill +32,150 +32,150 +Other assets +31,565 +40,898 +Total assets +$ +1,129,013 +$ +864,365 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +115,213 +$ +74,404 +Accrued payroll and related expenses +33,161 +15,350 +Accrued insurance expenses +3,232 +10,129 +Accrued state, local and other taxes +4,296 +1,905 +Income taxes payable +499 +656 +Pension liabilities +9,610 +— +Current portion of operating lease liabilities +10,728 +6,387 +Current portion of finance lease liabilities +— +20,194 +Other accrued expenses +1,864 +1,824 +Total current liabilities +178,603 +130,849 +Long-term accrued insurance expenses +7,149 +11,770 +Long-term pension and retirement plans liabilities +23,106 +35,376 +Deferred income taxes +37,473 +17,749 +Long-term operating lease liabilities +19,517 +19,719 +Other long-term liabilities +5,430 +7,111 +Total liabilities +271,278 +222,574 +Commitments and contingencies (Note 9) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 216,609,191 and 215,628,716 shares issued and outstanding in 2022 and 2021, respectively +21,661 +21,563 +Capital in excess of par value +— +— +Retained earnings +856,013 +640,936 +Accumulated other comprehensive loss +( 19,939 ) +( 20,708 ) +Total stockholders’ equity +857,735 +641,791 +Total liabilities and stockholders’ equity +$ +1,129,013 +$ +864,365 +The accompanying notes are an integral part of these statements. +30 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2022 +2021 +2020 +Revenues +$ +1,601,762 +$ +864,929 +$ +598,302 +COSTS AND EXPENSES: +Cost of revenues +1,088,115 +663,262 +480,739 +Selling, general and administrative expenses +148,573 +123,572 +123,698 +Pension settlement, impairment and other charges +2,921 +— +217,493 +Depreciation and amortization +83,017 +72,686 +95,530 +Gain on disposition of assets, net +( 8,804 ) +( 10,882 ) +( 9,523 ) +Operating income (loss) +287,940 +16,291 +( 309,635 ) +Interest expense +( 614 ) +( 1,929 ) +( 373 ) +Interest income +1,171 +59 +496 +Other income, net +1,135 +2,027 +81 +Income (loss) before income taxes +289,632 +16,448 +( 309,431 ) +Income tax provision (benefit) +71,269 +9,231 +( 97,239 ) +Net income (loss) +$ +218,363 +$ +7,217 +$ +( 212,192 ) +Earnings (loss) per share +Basic +$ +1.01 +$ +0.03 +$ +( 1.00 ) +Diluted +$ +1.01 +$ +0.03 +$ +( 1.00 ) +Dividends paid per share +$ +0.04 +$ +— +$ +— +The accompanying notes are an integral part of these statements. +31 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2022 +2021 +2020 +Net income (loss) +$ +218,363 +$ +7,217 +$ +( 212,192 ) +Other comprehensive income: +Pension adjustment and reclassification adjustment, net of taxes +764 +( 2,890 ) +5,727 +Foreign currency translation +5 +( 112 ) +( 210 ) +Comprehensive income (loss) +$ +219,132 +$ +4,215 +$ +( 206,675 ) +The accompanying notes are an integral part of these statements. +32 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2019 +214,423 +$ +21,443 +$ +— +$ +832,113 +$ +( 23,223 ) +$ +830,333 +Stock issued for stock incentive plans, net +716 +71 +8,664 +— +— +8,735 +Stock purchased and retired +( 188 ) +( 19 ) +( 8,664 ) +7,857 +— +( 826 ) +Net loss +— +— +— +( 212,192 ) +— +( 212,192 ) +Pension adjustment, net of taxes +— +— +— +— +5,727 +5,727 +Foreign currency translation +— +— +— +— +( 210 ) +( 210 ) +Balance, December 31, 2020 +214,951 +21,495 +— +627,778 +( 17,706 ) +631,567 +Stock issued for stock incentive plans, net +819 +82 +6,494 +— +— +6,576 +Stock purchased and retired +( 141 ) +( 14 ) +( 6,494 ) +5,941 +— +( 567 ) +Net income +— +— +— +7,217 +— +7,217 +Pension adjustment, net of taxes +— +— +— +— +( 2,890 ) +( 2,890 ) +Foreign currency translation +— +— +— +— +( 112 ) +( 112 ) +Balance, December 31, 2021 +215,629 +21,563 +— +640,936 +( 20,708 ) +641,791 +Stock issued for stock incentive plans, net +1,139 +114 +6,261 +— +— +6,375 +Stock purchased and retired +( 159 ) +( 16 ) +( 6,261 ) +5,359 +— +( 918 ) +Net income +— +— +— +218,363 +— +218,363 +Pension adjustment, net of taxes +— +— +— +— +764 +764 +Foreign currency translation +— +— +— +— +5 +5 +Dividends +— +— +— +( 8,645 ) +— +( 8,645 ) +Balance, December 31, 2022 +216,609 +$ +21,661 +$ +— +$ +856,013 +$ +( 19,939 ) +$ +857,735 +The accompanying notes are an integral part of these statements. +33 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, INC. AND SUBSIDIARIES +(in thousands) +Years ended December 31, +2022 +2021 +2020 +OPERATING ACTIVITIES +Net income (loss) +$ +218,363 +$ +7,217 +$ +( 212,192 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation, amortization and other non-cash charges +83,664 +72,506 +95,309 +Stock-based compensation expense +6,375 +6,576 +8,735 +Gain on disposition of assets, net +( 8,804 ) +( 10,882 ) +( 9,523 ) +Gain due to benefit plan financing arrangement +— +— +( 891 ) +Deferred income tax provision (benefit) +19,496 +4,888 +( 25,845 ) +Pension settlement, impairment and other non-cash charges +2,921 +— +211,043 +(Increase) decrease in assets: +Accounts receivable +( 157,894 ) +( 91,082 ) +80,769 +Income taxes receivable +16,101 +24,439 +( 58,798 ) +Inventories +( 18,413 ) +3,951 +18,076 +Prepaid expenses +( 7,980 ) +( 650 ) +1,337 +Other current assets +406 +90 +227 +Other non-current assets +9,306 +( 1,170 ) +( 3,819 ) +Increase (decrease) in liabilities: +Accounts payable +35,759 +32,900 +( 9,130 ) +Income taxes payable +( 157 ) +( 459 ) +( 419 ) +Accrued payroll and related expenses +17,864 +( 3,080 ) +( 1,219 ) +Accrued insurance expenses +( 6,897 ) +4,640 +( 2,051 ) +Accrued state, local and other taxes +2,391 +( 883 ) +361 +Other accrued expenses +( 3,703 ) +( 4,061 ) +( 6,541 ) +Pension and retirement plans liabilities +( 4,589 ) +( 1,065 ) +( 3,249 ) +Long-term accrued insurance expenses +( 4,621 ) +( 52 ) +( 2,218 ) +Other long-term liabilities +1,698 +3,896 +( 2,004 ) +Net cash provided by operating activities +201,286 +47,719 +77,958 +INVESTING ACTIVITIES +Capital expenditures +( 139,552 ) +( 67,645 ) +( 65,065 ) +Proceeds from sale of assets +15,837 +20,014 +22,406 +Proceeds from benefit plan financing arrangement +— +— +1,566 +Re-investment in benefit plan financing arrangement +— +— +( 1,566 ) +Net cash used for investing activities +( 123,715 ) +( 47,631 ) +( 42,659 ) +FINANCING ACTIVITIES +Payment of dividends +( 8,645 ) +— +— +Cash paid for common stock purchased and retired +( 918 ) +( 567 ) +( 826 ) +Cash paid for finance lease +( 24,017 ) +( 1,584 ) +— +Net cash used for financing activities +( 33,580 ) +( 2,151 ) +( 826 ) +Net increase (decrease) in cash and cash equivalents +43,991 +( 2,063 ) +34,473 +Cash and cash equivalents at beginning of period +82,433 +84,496 +50,023 +Cash and cash equivalents at end of period +$ +126,424 +$ +82,433 +$ +84,496 +Supplemental cash flows disclosure: +Income taxes payment (refund), net +$ +35,809 +$ +( 20,903 ) +$ +( 10,051 ) +Interest paid +170 +166 +160 +Supplemental disclosure of noncash investing activities: +Capital expenditures included in accounts payable +$ +9,334 +$ +4,282 +$ +3,859 +The accompanying notes are an integral part of these statements. +34 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany accounts and transactions have been eliminated. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2022, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation. +Dividends +On January 24, 2023, the Board of Directors declared a $ 0.04 per share cash dividend payable March 10, 2023 to stockholders of record at the close of business on February 10, 2023 . +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the credit loss allowance, income taxes, goodwill impairment, accrued insurance expenses, depreciable lives of assets, and pension liabilities. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the last three years. One of our customers, a private exploration and production company, accounted for approximately 11 percent of the Company’s revenues in 2022 with no other customers exceeding 10 percent of revenues in 2022. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2021 or 2020. Additionally, there was no customer that accounted for 10 percent or more of accounts receivable as of December 31, 2022 or 2021. +35 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than “investment grade” by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other than temporary, interest, and dividends with respect to available-for-sale securities are included in interest income. The Company realized no gains or losses on its available-for-sale securities during 2022, 2021 and 2020. Securities that are held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) are classified as trading. See Note 13 for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of a credit loss allowance. +Credit Loss Allowance for Accounts Receivable +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years ; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years ; software, 5 years ; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +36 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reporting unit was as follows: +Years Ended December 31, +2022 +2021 +(in thousands) +Technical Services +$ +30,992 +$ +30,992 +Support Services +1,158 +1,158 +Goodwill +$ +32,150 +$ +32,150 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In 2022, due to improved industry conditions, its reporting units’ performance and public market indications of value, the Company elected to perform a qualitative assessment of its goodwill and concluded that it is more likely than not that fair value of each of its reporting unit is more than its carrying amount, including goodwill. In 2021, the Company performed a quantitative impairment test by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). The discounted cash flow analysis is based on management’s short-term and long-term forecast of operating results for each reporting unit and includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. Based on these assessments the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore no impairment of goodwill occurred during the years ended December 31, 2022 and 2021. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 2.0 million in 2022, $ 1.1 million in 2021, and $ 806 thousand in 2020. +Insurance Expenses +RPC self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +37 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company has a defined benefit pension plan that provides monthly benefits upon normal retirement at age 65, or reduced early retirement benefits at age 59 ½ or at age 55 or older with 15 or more years of service, to substantially all employees with at least one year of service prior to 2002. In 2002, RPC’s Board of Directors approved a resolution to cease all future retirement benefit accruals under the defined benefit pension plan. During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan. See Note 13 for a full description of this plan, the status of the plan termination and the related accounting and funding policies. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, and discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See Note 13 for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(in thousands) +2022 +2021 +2020 +Net income (loss) available for stockholders: +$ +218,363 +$ +7,217 +$ +( 212,192 ) +Less: Adjustments for earnings attributable to participating securities +( 3,197 ) +( 89 ) +— +Net income (loss) used in calculating earnings per share +$ +215,166 +$ +7,128 +$ +( 212,192 ) +Weighted average shares outstanding (including participating securities) +216,518 +215,646 +215,063 +Adjustment for participating securities +( 3,187 ) +( 2,656 ) +( 2,571 ) +Shares used in calculating basic and diluted earnings per share +213,331 +212,990 +212,492 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 11 for additional information. +38 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See Note 13 for additional information. +Leases +The Company determines at contract inception if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles. storage containers and office equipment. The Company’s population of month-to-month real estate leases have been classified as short-term leases. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. +Recent Accounting Pronouncements +The Financial Accounting Standards Board (FASB) issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +● ASU No. 2020-04 — Reference Rate Reform (Topic 848): The amendments in this ASU provide optional guidance for a limited time to ease the impact of the reference rate reform on financial reporting. The amendments, which are elective, provide expedients to contract modifications, affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (LIBOR) or other reference rate that is expected to be discontinued due to reference rate reform. In the second quarter of 2022, the Company adopted these provisions as part of the Amendment No. 6 to its Credit Agreement (see note 9) wherein LIBOR was replaced with the Term Secured Overnight Financing Rate (SOFR). Adoption of these provisions did not have a material impact on the Company’s consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted: +● ASU No. 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: The amendments in this ASU address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination, by adopting guidance requiring an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would recognize and measure the acquired contract assets and contract liabilities in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. The Company plans to adopt these provisions prospectively to business combinations occurring after January 1, 2023 and does not expect adoption to have a material impact on its consolidated financial statements. +Note 2: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 15. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. +Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services. +Payment terms +RPC’s contracts with customers states the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See Note 15 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below: +(in thousands) +2022 +2021 +2020 +Oilfield services transferred at a point in time +$ +— +$ +— +$ +— +Oilfield services transferred over time +1,601,762 +864,929 +598,302 +Total revenues +$ +1,601,762 +$ +864,929 +$ +598,302 +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the consolidated balance sheets are shown below: +December 31, +December 31, +(in thousands) +2022 +2021 +Unbilled trade receivables +$ +103,498 +$ +70,353 +Substantially all of the unbilled trade receivables as of December 31, 2022 and December 31, 2021 were invoiced during the following quarter. +Note 3: Pension Settlement, Impairment and Other Charges +The Company recorded the following pre-tax amounts during 2022 for pension settlement charges and for 2020 as impairment and other charges in the consolidated statements of operations. +(in thousands) +2022 +2021 +2020 +Long lived asset impairments (1) +$ +— +$ +— +$ +204,765 +Abandonment of assets (2) +— +— +5,976 +Pension settlement loss (3) +2,921 +— +4,660 +Severance costs +— +— +1,882 +Assets held for sale write down (4) +— +— +192 +Other +— +— +18 +Total +$ +2,921 +$ +— +$ +217,493 +(1). +Relates solely to the Technical Services segment and primarily includes pressure pumping and coiled tubing assets. +(2). +Represents the final disposition of assets that were ceased to be used during 2019 and recorded at salvage value. Also includes interest costs related to leased assets that were impaired in 2019. +(3). +Represents the non-cash settlement loss. See Note 13 for further details. +(4). +Represents the final settlement on certain real estate properties that were recorded as held for sale. +During 2021, the Company initiated actions to terminate its Retirement Income Plan (Plan), a defined benefit pension plan. Pension settlement loss of $ 2.9 million recognized in 2022 represents the accelerated recognition of actuarial losses related to the lump-sum window offered as part of the Plan termination. During the first quarter of 2023, the Company expects to recognize a pre-tax, non-cash settlement charge representing the unamortized net loss in the Plan which was approximately $ 22.5 million as of December 31, 2022. The final amount is subject to change based on the actual return on Plan assets and the periodic actuarial updates of the net losses in the Plan. See note 13 for additional information regarding the Plan. +During the first half of 2020, the Company experienced drastic declines in oilfield drilling and completion activities, with low levels of revenues not experienced by RPC or the industry for many years. This unprecedented disruption was caused by the substantial decline in global demand for oil caused by the COVID-19 pandemic as well as macroeconomic events such as the geopolitical tensions between the Organization of Petroleum Exporting Countries and Russia, regarding limits on oil production. These factors resulted in a significant drop in oil prices and a substantial deterioration of the Company’s public market capitalization. In response, the Company reduced headcount, furloughed employees and implemented compensation reductions for remaining active employees with the goal of adjusting its cost structure caused by low revenue levels. The Company determined these events constituted a triggering event that required a review of the recoverability of its long-lived assets and performed an interim goodwill impairment assessment as of March 31, 2020. +The Company used both income based and market based approaches to determine the fair value of its long-lived asset groups and its reporting units for goodwill impairment assessment. Under the income approach, the fair value for each of its asset groups and reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows and terminal value calculation, +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on its most recent views of the long-term outlook for each asset group and reporting units. For the market based valuation, the Company used comparable public company multiples. The selection of comparable businesses was based on the markets in which the asset groups and reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. Based on the concluded fair value of the asset groups, the Company measured and recorded an impairment loss that represents the amount by which the asset groups' carrying amounts exceeded their fair value. For purposes of the goodwill impairment assessment, the fair value of each reporting unit exceeded its net book value and therefore, goodwill was deemed to be not impaired. +Note 4: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2022 +2021 +(in thousands) +Trade receivables: +Billed +$ +315,332 +$ +181,500 +Unbilled +103,498 +70,353 +Other receivables +4,816 +13,547 +Total +423,646 +265,400 +Less: allowance for credit losses +( 7,078 ) +( 6,765 ) +Accounts receivable, net +$ +416,568 +$ +258,635 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Note 5: Current Expected Credit Losses +The Company utilizes an expected credit loss model for valuing its accounts receivable, a financial asset measured at amortized cost. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected: +Years Ended December 31, +2022 +2021 +(in thousands) +Beginning balance +$ +6,765 +$ +4,815 +Provision for current expected credit losses +2,029 +4,019 +Write-offs +( 1,752 ) +( 2,098 ) +Recoveries collected (net of expenses) +36 +29 +Ending balance +$ +7,078 +$ +6,765 +Note 6: Inventories +Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using either the first-in, first-out, or the weighted average cost method. +December 31, +2022 +2021 +(in thousands) +Raw materials and supplies +$ +95,384 +$ +77,709 +Finished goods +1,723 +1,274 +Total Inventory +$ +97,107 +$ +78,983 +Note 7: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2022 +2021 +(in thousands) +Land +$ +17,287 +$ +18,180 +Buildings and leasehold improvements +120,506 +120,649 +Operating equipment +683,027 +606,089 +Computer software +22,194 +22,925 +Furniture and fixtures +5,480 +6,222 +Vehicles +259,933 +243,647 +Gross property, plant and equipment +1,108,427 +1,017,712 +Less: accumulated depreciation +( 775,334 ) +( 763,304 ) +Net property, plant and equipment +$ +333,093 +$ +254,408 +Depreciation expense was $ 83.0 million in 2022, $ 72.7 million in 2021, and $ 95.5 million in 2020. The Company had accounts payable for purchases of property and equipment of $ 9.3 million as of December 31, 2022 and $ 4.3 million as of December 31, 2021. The Company transferred inventory to property, plant and equipment totaling $ 9.9 million in 2022 and $ 11.1 million in 2021. +Note 8: Income Taxes +The following table lists the components of the provision (benefit) for income taxes: +Years ended December 31, +2022 +2021 +2020 +(in thousands) +Current provision (benefit): +Federal +$ +47,744 +$ +4,946 +$ +( 74,841 ) +State +3,164 +( 1,387 ) +2,200 +Foreign +865 +784 +1,247 +Deferred provision (benefit): +Federal +14,026 +2,287 +( 16,376 ) +State +5,470 +2,601 +( 9,469 ) +Total income tax provision (benefit) +$ +71,269 +$ +9,231 +$ +( 97,239 ) +The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in 2020, which among other changes, eliminated the taxable income limit for certain net operating losses (“NOL”). This allowed businesses to carryback NOLs arising in 2018, 2019 and 2020 to the five prior years, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. These provisions enabled a carryback of federal tax losses related to 2019 and 2020. The Company recorded net tax benefits totaling $ 29 million in 2020 related to these provisions. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2022 +2021 +2020 +Federal statutory rate +21.0 +% +21.0 +% +21.0 +% +State income taxes, net of federal benefit +1.9 +2.9 +1.5 +Foreign taxes, net of federal benefit +0.3 +5.1 +( 0.4 ) +Tax credits +( 0.1 ) +( 3.5 ) +0.1 +Change in contingencies +— +8.6 +— +Non-deductible expenses +0.7 +( 2.8 ) +( 0.1 ) +Adjustments related to CARES Act +— +3.2 +8.5 +Change in estimated deferred rate +0.4 +10.2 +— +Adjustments related to vesting of restricted stock +0.2 +7.1 +( 0.8 ) +Other +0.2 +4.3 +1.6 +Effective tax rate +24.6 +% +56.1 +% +31.4 +% +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2022 +2021 +(in thousands) +Deferred tax assets: +Self-insurance +$ +3,051 +$ +5,673 +Pension +5,237 +7,982 +State net operating loss carryforwards +1,960 +5,558 +Allowance for credit losses +1,757 +1,692 +Stock-based compensation +2,531 +2,532 +Inventory reserve +3,290 +2,868 +Lease liability +6,701 +5,620 +Valuation allowance +( 990 ) +( 865 ) +All others, net +3,427 +2,834 +Gross deferred tax assets +26,964 +33,894 +Deferred tax liabilities: +Depreciation +( 51,494 ) +( 39,253 ) +Right of use asset +( 6,397 ) +( 5,834 ) +Goodwill amortization +( 6,546 ) +( 6,556 ) +Gross deferred tax liabilities +( 64,437 ) +( 51,643 ) +Net deferred tax liabilities +$ +( 37,473 ) +$ +( 17,749 ) +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +The Company's current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost. +Total net income tax payments (refunds) were $ 35.8 million in 2022, $( 20.9 ) million in 2021, and $( 10.1 ) million in 2020. As of December 31, 2022, the Company has net operating loss carryforwards recorded related to state income taxes of $ 36.9 million (gross) that will expire between 2023 and 2042. +The Company’s policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of December 31, 2022 and 2021. +During 2022, the Company recognized an increase in its liability for unrecognized tax benefits related primarily to current year positions and disclosed as part of other long-term liabilities on the consolidated balance sheet. This liability, if released, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2022 +2021 +(in thousands) +Balance at January 1 +$ +1,737 +$ +— +Additions (reductions) based on tax positions related to the current year +197 +1,737 +Additions (reductions) for tax positions of prior years +( 17 ) +— +Balance at December 31 +$ +1,917 +$ +1,737 +It is reasonably possible that the amount of the unrecognized benefits with respect to the Company’s unrecognized tax positions will increase or decrease in the next 12 months. These changes may be the result of, among other things, expiration of statute of limitation, or conclusions of examinations or reviews. However, quantification of an estimated range cannot be made at this time. +The Company and its subsidiaries are subject to U.S. federal and state income tax in multiple jurisdictions. In many cases, the uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2019 through 2021 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +Note 9: Long-Term Debt +The Company has a revolving Credit Agreement with Bank of America and four other lenders which provides for a line of credit of up to $ 100 million, including a $ 35 million letter of credit subfacility, and a $ 35 million swingline subfacility. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company's 100 percent owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. The Credit Agreement’s maturity date is June 22, 2027. +The Company executed Amendment No. 6 to its Credit Agreement (the “Amendment”). This Amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with the Term Secured Overnight Financing Rate (Term SOFR) as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 25.0 basis points at each pricing level, (3) introduces a 1.00 % per annum floor for Base Rate borrowings, and (4) permits the issuance of letters of credit in currencies other than U.S. dollars. +The Credit Agreement has three financial covenants- when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million: (i) the consolidated leverage ratio cannot exceed 2.50 :1.00 and (ii) the debt service coverage ratio must be equal to or greater than 2.00 :1.00; otherwise, the minimum tangible net worth must be greater than or equal to $ 400 million. As of both December 31, 2022 and December 31, 2021, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● Term SOFR; plus, a margin ranging from 1.25 % to 2.25 % , based on a quarterly consolidated leverage ratio calculation, and an additional SOFR Adjustment ranging from 10 to 30 basis points depending upon maturity length; or +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Term SOFR plus 1.00 % , or (d) 1.00 % ; in each case plus a margin that ranges from 0.25 % to 1.25 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.20 % to 0.30 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility. These costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of $ 0.3 million at December 31, 2022 is classified as non-current other assets. The remaining net balance of these costs was $ 0.2 million as of December 31, 2021. +As of December 31, 2022, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 17.5 million; therefore, a total of $ 82.5 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2022 +2021 +2020 +(in thousands) +Interest incurred +$ +246 +$ +257 +$ +276 +Interest paid +$ +170 +$ +166 +$ +160 +Note 10: Accumulated Other Comprehensive (Loss) Income +Accumulated other comprehensive (loss) income consists of the following (in thousands): +Foreign +Pension +Currency +Adjustment +Translation +Total +Balance at December 31, 2020 +$ +( 15,181 ) +$ +( 2,525 ) +$ +( 17,706 ) +Change during 2021: +Before-tax amount +( 3,500 ) +( 112 ) +( 3,612 ) +Tax benefit +1,220 +— +1,220 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +( 610 ) +— +( 610 ) +Total activity in 2021 +( 2,890 ) +( 112 ) +( 3,002 ) +Balance at December 31, 2021 +$ +( 18,071 ) +$ +( 2,637 ) +$ +( 20,708 ) +Change during 2022: +Before-tax amount +( 2,934 ) +5 +( 2,929 ) +Tax benefit +671 +— +671 +Pension settlement loss +2,249 +— +2,249 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +778 +— +778 +Total activity in 2022 +764 +5 +769 +Balance at December 31, 2022 +$ +( 17,307 ) +$ +( 2,632 ) +$ +( 19,939 ) +(1) Reported as selling, general and administrative expenses. +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Note 11: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2022 and 2021: +Fair Value Measurements at December 31, 2022 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +305 +$ +305 +$ +— +$ +— +Investments measured at net asset value +$ +24,175 +Fair Value Measurements at December 31, 2021 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +197 +$ +197 +$ +— +$ +— +Investments measured at net asset value +$ +31,738 +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 13, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. The expected holding period for these assets measured at net asset value is unknown. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2022 there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2022 and 2021. Borrowings, if any, under our revolving credit facility bear variable interest rates as described in Note 9 and are classified as a level 2, based on quotes from the lender. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Note 12: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. In accordance with ASC 450-20, Loss Contingencies , any probable and reasonable estimate of assessment costs have been included in accrued state, local and other taxes. +The Company has received a state tax notification of audit results related to sales and use tax and with its outside legal counsel has evaluated the perceived merits of this tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 13: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s Plan provides monthly benefits upon normal retirement at age 65, or reduced early retirement benefits at age 59 and a half, or 55 or older with 15 or more years of service.to substantially all employees with at least one year of service prior to 2002. During 2001, the Plan became a multiple employer plan, with Marine Products Corporation as an adopting employer. +During 2021, the Company initiated actions to terminate the defined benefit pension Plan and as such, the year-end pension obligation has been valued on a termination basis. As part of the termination process, the Company offered a lump-sum window in the fourth quarter of 2022 and used the following assumptions to calculate the projected benefit obligation as of 2022; (i) updated census data and removed participants who elected to receive a lump-sum during the lump-sum window; (ii) annuities to be purchased for all remaining participants effective March 1, 2023 and (iii) using appropriate discount rates and mortality tables for participants depending on their pay status. A $ 2.9 million settlement loss representing the accelerated recognition of actuarial losses was recognized in the fourth quarter of 2022 and is reflected as part of Pension settlement charges. During the first quarter of 2023, the Company expects to recognize a pre-tax, non-cash settlement charge representing the unamortized net loss in the Plan which was approximately $ 22.5 million as of December 31, 2022. The final amount is subject to change based on the actual return on Plan assets and the periodic actuarial updates of the net losses in the Plan. For the year ending December 31, 2022, the Company has utilized an +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +expected return on plan assets of zero percent based on the current short-term rates and investment horizon as a result of the expected Plan termination. +Subsequent to December 31, 2022, the Company completed an annuity purchase to transfer risk from the Plan to a commercial annuity provider for all of the remaining Plan participants through the liquidation of its investments in the Plan and a Company contribution of approximately $ 6.0 million to $ 10.0 million. +The Company’s projected benefit obligation exceeds the fair value of the Plan assets under its pension Plan by $ 9.6 million as of December 31, 2022. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2022 +2021 +(in thousands) +Accumulated benefit obligation at end of year +$ +29,651 +$ +41,038 +Change in projected benefit obligation: +Benefit obligation at beginning of year +$ +41,038 +$ +41,120 +Service cost +— +— +Interest cost +972 +988 +Actuarial (gain) loss +( 5,258 ) +1,365 +Benefits paid +( 3,248 ) +( 2,435 ) +Settlement +( 3,853 ) +— +Projected benefit obligation at end of year +$ +29,651 +$ +41,038 +Change in Plan assets: +Fair value of Plan assets at beginning of year +$ +35,339 +$ +39,068 +Actual return on Plan assets +( 8,197 ) +( 1,294 ) +Employer contribution +— +— +Benefits paid +( 3,248 ) +( 2,435 ) +Settlement +( 3,853 ) +— +Fair value of Plan assets at end of year +$ +20,041 +$ +35,339 +Funded status at end of year +$ +( 9,610 ) +$ +( 5,699 ) +December 31, +2022 +2021 +(in thousands) +Amounts (pre-tax) recognized in accumulated other comprehensive income (loss) consist of: +Net loss +$ +22,476 +$ +23,468 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +22,476 +$ +23,468 +The accumulated benefit obligation for the Retirement Income Plan at December 31, 2022 and 2021 has been disclosed above. The Company uses a December 31 measurement date for this qualified Plan. As part of the Plan termination, the Company expects to recognize a non-cash settlement charge of the remaining balance in the accumulated other comprehensive loss at the time. +Funded status of the Plan as of December 31, 2022 was a deficit of $ 9.6 million and is disclosed as part of current liabilities on the consolidated balance sheets. Long-term pension and retirement plan liabilities recognized in the consolidated balance sheets consist of: +December 31, +2022 +2021 +(in thousands) +Funded status of the Retirement Income Plan +$ +— +$ +( 5,699 ) +SERP liability +( 23,106 ) +( 29,677 ) +Long-term pension liabilities +$ +( 23,106 ) +$ +( 35,376 ) +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +RPC’s funding policy is to contribute to the defined benefit pension plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. The Company made no cash contributions in 2022 or 2021. +The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows: +December 31, +2022 +2021 +2020 +(in thousands) +Interest cost +$ +972 +$ +988 +$ +1,645 +Expected return on Plan assets +— +( 1,509 ) +( 1,581 ) +Amortization of net losses +1,010 +808 +986 +Settlement loss +2,921 +— +4,660 +Net periodic benefit cost +$ +4,903 +$ +287 +$ +5,710 +The Company recognized pre-tax (increases) decreases to the funded status in accumulated other comprehensive loss of $( 992 thousand) in 2022, $ 3.4 million in 2021, and $( 6.9 million) in 2020. There were no previously unrecognized prior service costs as of December 31, 2022, 2021 and 2020. Non-cash settlement charges shown above represent the accelerated recognition of actuarial losses previously reflected in accumulated other comprehensive loss related to the lump-sum window offered in each of the years. +In 2020, the Company offered a limited lump-sum payment window for vested terminated participants who had terminated employment before July 1, 2020 and for active employees who reached age 59 ½ by December 1, 2020, with a vested balance. The participants at their election, could receive their vested balance either immediately as a lump-sum or as a monthly annuity payment. Non-cash settlement charges of $ 4.7 million recorded for the year ended December 31, 2020 and shown above represents the accelerated recognition of actuarial losses previously reflected in accumulated other comprehensive loss. +The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2022, 2021 and 2020 are summarized as follows: +December 31, +2022 +2021 +2020 +(in thousands) +Net loss (gain) +$ +2,939 +$ +4,169 +$ +( 1,217 ) +Amortization of net loss +( 1,010 ) +( 808 ) +( 986 ) +Net transition obligation (asset) +— +— +— +Settlement loss +( 2,921 ) +— +( 4,660 ) +Amount recognized in accumulated other comprehensive loss +$ +( 992 ) +$ +3,361 +$ +( 6,863 ) +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2022 +2021 +2020 +Projected Benefit Obligation : +Discount rate +Note (1) +% +Note (1) +% +2.50 +% +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +4.86 +% +2.50 +% +3.60 +% +Expected return on Plan assets +0.0 +% +4.00 +% +4.00 +% +Rate of compensation increase +N/A +N/A +N/A +(1) Projected benefit obligation as of December 31, 2022 and December 31, 2021 reflects proposed termination of the Plan and is calculated based on various assumptions in accordance with the Plan agreement. +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +The Plan’s weighted average asset allocation at December 31, 2022 and 2021 by asset category along with the target allocation for 2023 are as follows: +Target Allocation +Percentage of Plan Assets +December 31, +2023 +2022 +2020 +Asset Category +Cash and cash equivalents +0 % - 5 +% +3.7 +% +1.3 +% +Fixed income securities +15 % - 100 +% +96.3 +% +98.7 +% +Total +100.0 +% +100.0 +% +The Company’s Plan investments consist primarily of fixed-income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. For each of the asset categories in the Plan, the investment strategy is intended to minimize the level of risk as compared to the Plan’s liability and to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. While not limited in approach, the Plan utilizes fixed income funds in which the underlying securities are marketable, to achieve this target allocation. +The following tables present our Plan assets using the fair value hierarchy as of December 31, 2022 and 2021. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 11 for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2022: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +740 +$ +740 +$ +— +Fixed Income Securities +(2) +19,301 +— +19,301 +Total Assets in the Fair Value Hierarchy +$ +20,041 +$ +740 +$ +19,301 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +20,041 +Fair Value Hierarchy as of December 31, 2021: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +444 +$ +444 +$ +— +Fixed Income Securities +(2) +34,895 +— +34,895 +Total Assets in the Fair Value Hierarchy +$ +35,339 +$ +444 +$ +34,895 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +35,339 +(1) Cash and cash equivalents, which are used to pay benefits and Plan administrative expenses, are held in Rule 2a-7 money market funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. Subsequent to December 31, 2022 these securities were liquidated to fund the annuity purchases. +The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows: +(in thousands) +2023 +$ +29,888 +2024 +— +2025 +— +2026 +— +2027 +— +2028‑2032 +$ +— +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $ 45.4 million as of December 31, 2022 and $ 60.7 million as of December 31, 2021. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $ 24.2 million as of December 31, 2022 and $ 31.7 million as of December 31, 2021. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled ($ 4.4 million) in 2022, $ 2.6 million in 2021, and $ 2.6 million in 2020. The SERP liability includes participant deferrals net of distributions and is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. +As a result of Company-owned life insurance policy claims, the Company recorded tax-free gains of $ 891 thousand during 2020; these gains were recorded as an adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Proceeds received totaling $ 1.6 million were reinvested in mutual funds held as SERP assets. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This Plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. Effective January 1, 2019, the Company began making 100 percent matching contributions for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents $(0.50) for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 9.8 million in 2022, $ 6.9 million in 2021, and $ 5.6 million in 2020. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2014. The 1994 plan expired in 2004 and the 2004 plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive plan with a term of 10 years expiring in April 2024. This plan allows for a wide variety of stock-based awards such as stock options and restricted stock. In recent years, we have awarded time-based restricted stock in lieu of granting stock options. We have not issued any stock options since 2003 and have no immediate plans to issue additional stock options. As of December 31, 2022, 2,046,199 shares were available for grant. As of December 31, 2021, 3,194,060 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense included as part of selling, general and administrative expense was $ 6.4 million in 2022 $( 4.9 million after tax), $ 6.6 million in 2021 $( 5.1 million after tax) and $ 8.7 million in 2020 $( 6.6 million after tax). +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Restricted Stock +The Company has granted certain employees and directors time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. The 2023 time-lapse restricted shares will vest ratably over a period of four years ; the shares granted in 2022 vest ratably over a period of five years . Prior to 2022, the time lapse restricted shares vested one-fifth per year beginning on the second anniversary of the grant date. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests) or disability (partially vests based on pre-approved formula), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2022: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2022 +2,619,691 +$ +7.89 +Granted +1,254,276 +6.72 +Vested +( 510,084 ) +11.86 +Forfeited +( 115,155 ) +6.29 +Non-vested shares at December 31, 2022 +3,248,728 +$ +6.87 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2021: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2021 +2,235,179 +$ +6.81 +Granted +1,010,700 +3.87 +Vested +( 434,208 ) +14.96 +Forfeited +( 191,980 ) +7.71 +Non-vested shares at December 31, 2021 +2,619,691 +$ +7.89 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 6.72 for 2022, $ 3.87 for 2021 and $ 4.59 for 2020. The total fair value of shares vested was $ 2.9 million during 2022, $ 1.8 million during 2021 and $ 3.5 million during 2020. +The consolidated statements of cash flows reflect discrete income tax adjustments that resulted in $ 640,000 of detrimental impact in 2022 and $ 1,164,000 of detrimental impact in 2021 realized from tax compensation deductions and classified within operating activities as part of net income. +Other Information +As of December 31, 2022, total unrecognized compensation cost related to non-vested restricted shares was $ 13.8 million which is expected to be recognized over a weighted-average period of 3.3 years. +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 922 thousand in 2022, $ 867 thousand in 2021, and $ 846 thousand in 2020. The Company’s receivable due from Marine Products for these services was $ 26 thousand as of December 31, 2022 and $ 87 thousand as of December 31, 2021. The majority of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1.8 million in 2022, $ 1.3 million in 2021 and $ 1.0 million in 2020. +RPC receives certain administrative services from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include selected administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 71 thousand in 2022, $ 108 thousand in 2021 and $ 104 thousand in 2020. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200 thousand in 2022, $ 200 thousand in 2021 and $ 200 thousand in 2020 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.6 million as of December 31, 2022 and $ 1.4 million as of December 31, 2021. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2022, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 580 thousand. +Note 15: Business Segment and Entity Wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Segment Revenues: +RPC’s operating segment revenues by major service lines are shown in the following table: +(in thousands) +2022 +2021 +2020 +Technical Services: +Pressure Pumping +$ +846,939 +$ +369,028 +$ +221,597 +Downhole Tools +374,081 +247,019 +195,052 +Coiled Tubing +140,889 +88,946 +51,616 +Nitrogen +39,596 +38,773 +30,213 +Snubbing +28,028 +15,408 +8,016 +All other +86,830 +55,872 +49,994 +Total Technical Services +$ +1,516,363 +$ +815,046 +$ +556,488 +Support Services: +Rental Tools +$ +62,780 +$ +32,167 +$ +25,280 +All other +22,619 +17,716 +16,534 +Total Support Services +$ +85,399 +$ +49,883 +$ +41,814 +Total revenues +$ +1,601,762 +$ +864,929 +$ +598,302 +The accounting policies of the reportable segments are the same as those described in Note 1. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2022, 2021 and 2020 are shown in the following table: +Gain on +Pension Settlement, +Technical +Support +disposition of +Impairment and +(in thousands) +Services +Services +Corporate +assets, net +other charges +Total +2022 +Revenues +$ +1,516,363 +$ +85,399 +$ +— +$ +— +$ +— +$ +1,601,762 +Operating profit (loss) +281,622 +18,095 +( 17,660 ) +8,804 +( 2,921 ) +(1) +287,940 +Capital expenditures +126,327 +12,320 +905 +— +— +139,552 +Depreciation and amortization +73,016 +9,840 +161 +— +— +83,017 +Identifiable assets +823,434 +80,104 +225,475 +— +— +1,129,013 +2021 +Revenues +$ +815,046 +$ +49,883 +$ +— +$ +— +$ +— +$ +864,929 +Operating profit (loss) +24,434 +( 5,725 ) +( 13,300 ) +10,882 +— +16,291 +Capital expenditures +59,316 +7,012 +1,317 +— +— +67,645 +Depreciation and amortization +62,667 +9,752 +267 +— +— +72,686 +Identifiable assets +580,406 +69,345 +214,614 +— +— +864,365 +2020 +Revenues +$ +556,488 +$ +41,814 +$ +— +$ +— +$ +— +$ +598,302 +Operating (loss) profit +( 82,525 ) +( 6,714 ) +( 12,426 ) +9,523 +( 217,493 ) +(2) +( 309,635 ) +Capital expenditures +54,327 +10,224 +514 +— +— +65,065 +Depreciation and amortization +80,877 +14,377 +276 +— +— +95,530 +Identifiable assets +499,764 +64,457 +226,284 +— +— +790,505 +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +(1) Represents $ 2,921 related to pension settlement loss. +(2) Represents $ 212,292 related to technical services, $ 4,660 related to pension settlement loss and the remainder related to corporate expenses. +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2022, 2021 and 2020. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented. +(in thousands) +2022 +2021 +2020 +United States revenues +$ +1,569,160 +$ +833,686 +$ +562,390 +International revenues +32,602 +31,243 +35,912 +Total revenues +$ +1,601,762 +$ +864,929 +$ +598,302 +Note 16: Leases +The Company recognizes leases with a duration greater than 12 months on the balance sheet with a Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. Leases that include rental escalation clauses or renewal options are factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement, to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2022, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2022, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +During the year ended December 31, 2022, the Company purchased assets under an arrangement that was recorded as a finance lease, at the end of its lease term. In addition, the Company continued the short-term leasing arrangement for certain operating equipment until it ended in 2022. +Lease Position: +The table below represents the assets and liabilities related to operating leases recorded on the balance sheet: +December 31, +2022 +2021 +(in thousands) +Assets: +Finance lease right-of-use assets +$ +— +$ +20,327 +Operating lease right-of-use assets +$ +28,864 +$ +24,572 +Liabilities: +Current portion of finance lease +— +20,194 +Current portion of operating leases +$ +10,728 +$ +6,387 +Long-term operating lease liabilities +19,517 +19,719 +Total operating lease liabilities +$ +30,245 +$ +26,106 +Lease costs: +The components of finance lease are included in depreciation and amortization and interest expense; operating lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations as disclosed below. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +Year ended December 31, +2022 +2021 +2020 +(in thousands) +Finance lease cost +Amortization of leased assets +$ +3,390 +$ +1,452 +$ +— +Interest on lease liabilities +283 +116 +— +Total finance lease cost +$ +3,673 +$ +1,568 +$ +— +Operating lease cost +$ +9,615 +$ +7,580 +$ +8,373 +Short-term lease cost +9,192 +3,626 +2,577 +Variable lease cost +647 +772 +624 +Sublease income +( 1,021 ) +( 831 ) +( 295 ) +Total operating lease cost +$ +18,433 +$ +11,147 +$ +11,279 +Total lease cost +$ +22,106 +$ +12,715 +$ +11,279 +Other information: +As of December 31, +2022 +2021 +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +8,742 +$ +10,151 +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +12,882 +$ +5,974 +ROU assets obtained in exchange for finance lease liabilities (in thousands) +$ +— +$ +21,778 +Weighted average remaining lease term – finance lease (months) +— +8 +Weighted average remaining lease term – operating leases (years) +5.14 +5.41 +Weighted average discount rate – finance lease +— +% +1.68 +% +Weighted average discount rate – operating leases +3.93 +% +2.29 +% +Lease Commitments: +Maturity of lease liabilities - Operating Leases: +As of December 31, +2022 +2021 +(in thousands) +2022 +$ +— +$ +7,015 +2023 +12,091 +4,483 +2024 +6,164 +3,619 +2025 +4,001 +2,667 +2026 +3,380 +2,421 +2027 +2,615 +— +Thereafter +6,618 +7,742 +Total lease payments +34,869 +27,947 +Less: Amounts representing interest +( 4,623 ) +( 1,841 ) +Present value of lease liabilities +$ +30,246 +$ +26,106 +57 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2022 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 27 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2022 and issued a report thereon which is included on page 28 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not Applicable +58 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors and director nominees will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the section titled “ Information Regarding Director Nominees and Continuing Directors.” This information is incorporated herein by reference. Information about executive officers is contained on Page 16 of this document. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the section titled “Board of Directors and Corporate Governance, Meetings and Committees of the Board of Directors – Audit Committee.” This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the sections titled “Human Capital Management and Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Human Capital Management and Compensation Committee Report” and “Executive Compensation.” This information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership of certain beneficial owners and management, and such all officers and directors as a group, will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the section titled “Stock Ownership of Certain Beneficial Owners and Management.” This information is incorporated herein by reference. Arrangements known to the Company, if any, the operation of which may at a subsequent date result in a change in control of the Company will be +59 +included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders in the section titled “Certain Relationships and Related Party Transactions.” +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2022. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A) +Equity compensation plans approved by securityholders +— +$ +— +2,046,199 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +2,046,199 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See Note 13 to the consolidated financial statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled “Audit Matters, Independent Registered Public Accounting Firm” in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibits and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to consolidated financial statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to consolidated financial statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004) . +10.6 Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004). +10.7 Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed on November 2, 2004). +60 +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed on February 2, 2022). +4 +Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998). +4.2 +Description of Registrant's Securities. (incorporated herein by reference to Exhibit 4.2 to the Form 10-K filed on February 28, 2021). +10.1 +2004 Stock Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s definitive Proxy Statement filed on March 24, 2004). +10.2 +Agreement Regarding Distribution and Plan of Reorganization, dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.2 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.6 +Form of Time Lapse Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 2, 2004). +10.7 +Form of Performance Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on November 2, 2004). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +61 +Exhibit +Number +Description +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.15 +Summary of Compensation Arrangements with Non-Employee Directors (incorporated herein by reference to Exhibit 10.15 to the form 10-K filed on February 28, 2019) +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated January 17, 2014 ). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +10.22 +10.23 +Amendment to No. 5 to Credit Agreement dated as of July 26, 2020 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Form 8-K filed on October 1, 2020). +Amendment to No. 6 to Credit Agreement dated as of June 22, 2022 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Current Report on Form 8-K filed on June 23, 2022). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +95.1 +Mine Safety Disclosure +101.INS +Inline XBRL Instance Document +101.SCH +Inline XBRL Taxonomy Extension Schema Document +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document +62 +Exhibit +Number +Description +101.DEF +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +The cover page from the Company’s Annual Report for the year ended December 31, 2022, formatted in Inline XBRL +Item 16. Form 10-K Summary +Not Applicable +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 27, 2023 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 27, 2023 +/s/ Michael L. Schmit +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 27, 2023 +The Directors of RPC (listed below) executed a power of attorney, appointing Ben M. Palmer their attorney-in-fact, empowering him to sign this report on their behalf. +Richard A. Hubbell, Director +Gary W. Rollins, Director +Jerry W. Nix, Director +Patrick J. Gunning, Director +Susan R. Bell, Director +John F. Wilson, Director +Pamela R. Rollins, Director +Amy R. Kreisler, Director +Timothy C. Rollins, Director +/s/ +Ben M. Palmer +Ben M. Palmer +Director and as Attorney-in-fact +February 27, 2023 +63 +64 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +27 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) on Internal Control Over Financial Reporting +28 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) on Consolidated Financial Statements +29 +Consolidated Balance Sheets as of December 31, 2022 and 2021 +30 +Consolidated Statements of Operations for each of the three years ended December 31, 2022 +31 +Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 2022 +32 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2022 +33 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2022 +34 +Notes to Consolidated Financial Statements +35 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +66 +Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. +65 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2022, 2021 and 2020 +Balance at +Charged to +Balance +Beginning +Costs and +Net (Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries +Period +Year ended December 31, 2022 +Credit loss allowance for accounts receivable +$ +6,765 +$ +2,029 +$ +( 1,716 ) +(1) +$ +7,078 +Deferred tax asset valuation allowance +$ +865 +$ +— +$ +125 +(2) +$ +990 +Reserve for obsolete or slow moving inventory +$ +13,236 +$ +4,080 +$ +( 1,942 ) +(3) +$ +15,374 +Year ended December 31, 2021 +Credit loss allowance for accounts receivable +$ +4,815 +$ +4,019 +$ +( 2,069 ) +(1) +$ +6,765 +Deferred tax asset valuation allowance +$ +490 +$ +— +$ +375 +(2) +$ +865 +Reserve for obsolete or slow moving inventory +$ +13,829 +$ +5,016 +$ +( 5,609 ) +(3) +$ +13,236 +Year ended December 31, 2020 +Credit loss allowance for accounts receivable +$ +5,181 +$ +342 +$ +( 708 ) +(1) +$ +4,815 +Deferred tax asset valuation allowance +$ +471 +$ +— +$ +19 +(2) +$ +490 +Reserve for obsolete or slow moving inventory +$ +10,467 +$ +5,826 +$ +( 2,464 ) +(3) +$ +13,829 +(1) Net (deductions) recoveries in the credit loss allowance principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state and foreign net operating losses and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory. +66 \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/filing_metadata.csv b/raw/filings/0000742278/2022/0001558370-23-002171/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b4fbce918708c26cc8ae93c02d2c3efb833da2f0 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2023-02-27,2022-12-31,2023-02-27T20:29:59.000Z,0001558370-23-002171,res-20221231x10k.htm,10-K,12331731,1,1,https://www.sec.gov/Archives/edgar/data/742278/000155837023002171/res-20221231x10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000155837023002171/,2022,2022,1 diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/item1.txt b/raw/filings/0000742278/2022/0001558370-23-002171/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3448e83a61f0d0c4fd9d89be698693866940630 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/item1.txt @@ -0,0 +1,88 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2022, RPC had 2,732 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2022, approximately five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2022, we also estimate that 77 percent of our revenues were related to drilling and production activities for oil, while 23 percent of revenues were related to drilling and production activities for natural gas. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and +3 +services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 53 percent of 2022 revenues, 43 percent of 2021 revenues and 37 percent of 2020 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. +Downhole Tools . Thru Tubing Solutions’ (“TTS”) downhole tools division accounted for 23 percent of revenues in 2022, 29 percent of revenues in 2021 and 33 percent of 2020 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in 2022, ten percent of revenues in 2021 and nine percent of revenues in 2020, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, costlier workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows +4 +it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in both 2022 and 2021 and one percent of revenues in 2020, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. +Nitrogen . Nitrogen accounted for two percent of revenues in 2022, four percent of revenues in 2021 and five percent of revenues in 2020. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. +For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. +The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a wellbore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. +5 +Support Services +Rental Tools . Rental tools accounted for four percent of revenues in 2022, 2021 and 2020. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Rocky Mountain and the Appalachian region. +Patterson Rental Tools offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to Note 15 in the consolidated financial statements for additional financial information on our business segments. +Industry +United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s (source: Baker Hughes, Inc.). Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and the fourth quarter of 2022, the U.S. domestic rig count rose by approximately 206 percent. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,387 wells were completed, the lowest number of annual well completions recorded during the nine years that these data have been reported. During 2022, reported well completions increased to 11,451, an increase of approximately 22 percent compared to 2021. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Following the cyclical trough in oilfield activity which occurred in the third quarter of 2020, commodity prices and the U.S. domestic rig count began to recover, and by the end of 2021, the U.S. domestic rig count was more than 100 percent higher than the historic low level recorded in 2020. Beginning in the first quarter of 2022, the U.S domestic rig count continued to rise as customer activities increased due to higher oil process and global uncertainty caused by Russia’s invasion of +6 +Ukraine. By the end of 2022, the U.S. domestic rig count had risen to the level recorded immediately prior to the onset of the COVID-19 pandemic in the first quarter of 2020. The Company anticipates that oilfield activity will remain consistent with this level during 2023. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas increased by approximately 64.1 percent during 2022 as compared with 2021. Early in the first quarter of 2023, the price of natural gas was approximately 15.6 percent lower than the price at the end of 2022 (source: U.S. Energy Information Administration). RPC believes that the recent decrease in the price of natural gas may discourage drilling and completion of natural gas-directed wells during the near term. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2022 the average price of benchmark natural gas liquids increased by approximately seven percent compared with 2021 (source: U.S. Energy Information Administration). Early in the first quarter of 2023, the price of natural gas liquids was approximately 14.5 percent higher than the price at the end of 2022. +During the first decade of the twenty-first century, natural gas-directed drilling rigs comprised most of the U.S. drilling rig count. Beginning in 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. Rising U.S. domestic demand for natural gas and the advent of U.S. exports of liquified natural gas have been offset by increasing production, thus preventing the price of natural gas from rising. During 2022, however, the price of natural gas increased significantly following Russia’s invasion of Ukraine, as many European countries boycotted imported Russian natural gas and signaled an increasing reliance on sources such as the U.S. The price of U.S. natural gas has fallen significantly early in the first quarter of 2023, due to a warm winter in Western Europe and insufficient U.S. export capacity. However, the Company believes that future export demand will continue to be strong, and combined with increased natural gas export capacity, will encourage natural gas-directed drilling in the future. In spite of this potential increase in demand and export infrastructure, we anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market. +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for two percent of RPC’s consolidated revenues in 2022, four percent in 2021 and six percent in 2020. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues increased 4.3 percent in 2022 compared to the prior year primarily due to higher customer activity levels in Canada. During 2022, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2023. +7 +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 15 in the consolidated financial statements for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2022. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2022, RPC provided oilfield services to several hundred customers. Of these customers, only one customer, a private exploration and production company, accounted for approximately 11 percent of the Company’s revenues in 2022 with no other customers exceeding 10 percent of revenues in 2022. There was no customer in 2021 that accounted for 10 percent or more of revenues. +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the oilfield downturn that began in 2015, a number of oilfield services companies reduced the scope of their operations or became insolvent. During the most recent downturn that began in 2019, fewer oilfield services companies became insolvent than in the previous downturn, partially because of COVID-19 – related Federal stimulus that supported operations that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. During 2022, Russia’s invasion of Ukraine destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. +8 +domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. In addition, improving completion services efficiency has served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services have caused the oilfield services business to remain competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. +Human Capital +The table below shows the number of employees at December 31, 2022 and 2021: +At December 31, +2022 +2021 +Employees +2,732 +2,250 +The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce is diverse and our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). The code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the code; any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +9 +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the consolidated financial statements. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +10 \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/item13.txt b/raw/filings/0000742278/2022/0001558370-23-002171/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..117bf0b625f110004d52c95a0a643ba46dc41547 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2023 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/item9a.txt b/raw/filings/0000742278/2022/0001558370-23-002171/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2917ae301b323a19e516b0e8ddbfb1152c2f11e --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2022 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 27 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2022 and issued a report thereon which is included on page 28 of this report. +Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/rp_note.txt b/raw/filings/0000742278/2022/0001558370-23-002171/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..0cc4ad59168592d129bc8302a0fea22b54cc5d78 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/rp_note.txt @@ -0,0 +1,12 @@ +Note 14: Related Party Transactions +Marine Products Corporation +Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2022, 2021 and 2020 +In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 922 thousand in 2022, $ 867 thousand in 2021, and $ 846 thousand in 2020. The Company’s receivable due from Marine Products for these services was $ 26 thousand as of December 31, 2022 and $ 87 thousand as of December 31, 2021. The majority of the Company’s directors are also directors of Marine Products and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases in the ordinary course of business equipment or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $ 1.8 million in 2022, $ 1.3 million in 2021 and $ 1.0 million in 2020. +RPC receives certain administrative services from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months ’ notice. The services covered by these agreements include selected administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 71 thousand in 2022, $ 108 thousand in 2021 and $ 104 thousand in 2020. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200 thousand in 2022, $ 200 thousand in 2021 and $ 200 thousand in 2020 for the corporate aircraft. The Company has a payable to 255 RC, LLC of $ 1.6 million as of December 31, 2022 and $ 1.4 million as of December 31, 2021. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2022, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings was approximately $ 580 thousand. \ No newline at end of file diff --git a/raw/filings/0000742278/2022/0001558370-23-002171/rpt_disclosure.txt b/raw/filings/0000742278/2022/0001558370-23-002171/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8a417112f3268dc8464d085d1b9224144b16f380 --- /dev/null +++ b/raw/filings/0000742278/2022/0001558370-23-002171/rpt_disclosure.txt @@ -0,0 +1,9 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The Company provides certain administrative services to Marine Products on a cost reimbursement basis and the arrangement may be terminated upon six months’ notice. The services include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $922,000 in 2022. +RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2022, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $200,000 for the corporate aircraft. +During 2022, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. Gary W. Rollins, a director at RPC, is an officer, director and controlling stockholder of LOR, Inc. In 2022, payments totaling approximately $1,750,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +RPC receives certain administrative services from Rollins, Inc., a company of which Mr. Gary W. Rollins is Chairman, and which is controlled by Mr. Rollins and his affiliates. The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $71,000 in 2022. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy R. Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, Board of Directors and Corporate Governance. The group discussed above also controls in excess of fifty percent of Marine Products Corporation’s voting power. +Related party transactions, as defined in Regulation S-K, Item 404(a), must be reviewed and approved in advance, by our Nominating and Corporate Governance Committee or, in the event that our Nominating and Corporate Governance Committee does not consist of all independent directors, by a Subcommittee (the Subcommittee) of the Nominating and Corporate Governance Committee consisting of all of the independent members thereof. As set forth in the charter of our Nominating and Corporate Governance Committee, the Nominating and Corporate Governance Committee has the authority and responsibility to ensure that it approve all related party transactions, including material amendments that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Nominating and Corporate Governance Committee also has the authority to hire legal, accounting, financial or other advisors, as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. These same rights and responsibilities apply equally to the Subcommittee. A copy of the Charter of the Nominating and Corporate Governance Committee is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2022 were reviewed, pre-approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Charter. +46 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/filing.txt b/raw/filings/0000742278/2023/0001558370-24-001993/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..6432de37cc45d71617952092dfd2e69671328746 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/filing.txt @@ -0,0 +1,3206 @@ +GA NYSE 216609191 215026458 P60D 1300000 1300000 1300000 0.0000 0.0000 0.0000 0.0000 0.03 0.2 0.50 P0M 0000742278 2023 FY false 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2022-01-01 2022-12-31 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2021-01-01 2021-12-31 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2023-01-01 2023-12-31 0000742278 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Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ◻ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 216,408,974 based on the closing price on the New York Stock Exchange on June 30, 2023, of $7.15 per share. +RPC, Inc. had 215,445,398 shares of Common Stock outstanding as of February 16, 2024. +Documents Incorporated by Reference +Portions of the proxy statement for the 2024 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as we, us, RPC or the Company. +Forward-Looking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. The words “may,” “should,” “will,” “expect,” “believe,” “anticipate,” “intend,” “seek,” “project,” “estimate,” “focus,” “plan,” “continue,” “likely,” “design,” “strategies,” “outlook,” “trend,” the negative of such terms and different forms thereof (e.g., different tenses or number or principle parts, as well as gerunds and other parts of speech such as adjectives, adverbs and nouns derived therefrom), and similar expressions generally identify forward-looking statements. +Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, including without limitation the discussion under the heading, “Business – Growth Strategies,” and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include, without limitation, statements regarding: our expectations that the acquisition of Spinnaker will expand RPC’s cementing business from its presence in South Texas to basins in which we currently provide other services; our ability to continue to monitor factors that impact current and expected customer activity levels, such as the prices of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel; the effect of geopolitical factors such as political instability in the petroleum-producing regions of the world, the actions of the OPEC oil cartel, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities on our financial results; our strategy of utilizing equipment in unconventional basins; our expectation that capital expenditures will be $200 million to $250 million during 2024; and our expectation that such expenditures will be directed primarily towards capitalized maintenance of our existing equipment to improve efficiency and selected growth opportunities; our intention to replace a Tier 2 diesel fleet with a recently ordered Tier 4 dual-fuel fleet; our plans to continue to pursue international growth opportunities; our belief that international revenues will continue to be less than ten percent of our consolidated revenues in the foreseeable future; our belief that current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity; our belief that oil prices will stay above levels sufficient to motivate our customers to maintain drilling and completion activities: our belief that the favorable long-term outlook for natural gas provided by the U.S. oil and gas industry is sufficient to encourage our customers to maintain their natural gas-directed exploration and production activities; our belief in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market; our belief that unconventional wells will continue to comprise the majority of drilling activity because of their high initial production rates, that the advent of unconventional drilling in the U.S. domestic market will be a permanent change and continue to have a positive impact on the demand for our services; our emphasis on domestic rather than international expansion because of higher domestic activity levels and expected financial returns; our belief that our international customers’ drilling decisions have the potential to be more stable than domestic operations due to the significant investment requirement and complexity of such projects and, in our assessment, the enhanced operating stability of the major oil companies and national oil companies that dominate the international market, although this market is prone to uncertainties including civil unrest and conflicts; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that natural gas-directed drilling will increase in the future because of favorable long-term market dynamics and our belief that this projected higher demand for oil and natural gas products should drive increased activity in most of the basins in which we operate; our plans to continue to monitor the market for our services and the competitive environment including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets; our belief that the growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market; our belief that most of the feasible efficiency gains have been realized; our belief that demand for our services will remain consistent with 2023 levels during the near term; our plan to continue to maintain and upgrade our revenue-producing equipment; our plans to remain highly disciplined about adding new incremental revenue-producing equipment capacity and to expand only if we believe the projected financial returns of such capital expenditures meet our financial return criteria; our plans to allocate capital to maintain the capacity of our pressure pumping fleet to offset anticipated fleet retirements; the strength of our financial condition; our plans with respect to our stock buyback program; our belief that the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our belief that we will not need our revolving credit facility to meet our liquidity requirements; our expectations to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC earnings, financial condition and other relevant factors; estimates made with respect to our critical accounting policies; the effect of new accounting standards; the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition; our belief that our sources of supply, including of nitrogen in liquid form, are adequate; our belief that our facilities, including our rental tool facilities, are strategically located to serve the major staging points for oil and gas activities, and are suitable and adequate for our current and reasonably anticipated future needs; our anticipation that 2024 oilfield activity will remain consistent with 2023 levels; our objective to generate attractive long-term returns on investment through effective and conservative management of invested capital to generate strong cash flow; our plans to improve +2 +market share, product offerings and profitability of existing businesses; our plans to focus on selected customers and markets where we believe there are opportunities for higher growth, customers and market penetration, or enhanced returns achieved through acquisitions or through providing proprietary value added equipment and services; our goal to expand our service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances; our belief that a number of acquisition opportunities exist; our plan to continue to consider acquisitions while also maintaining a conservative capital structure; our assessments regarding the principal competitive factors in the market areas we serve; our human resources objectives described under “Business—Human Capital,” including but not limited to, our goals to attract and retain employees by providing competitive compensation and benefit packages and to reduce safety hazard exposure for employees; our intention to seek patent protection when possible; our key business and financial strategies outlined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” including but not limited to our goals related to focusing on investments that we believe will earn high returns on capital, increasing market share, maintaining flexible and low-cost capital structure, maintaining flexible cost structure, and maximizing stockholder return; statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook,” including but not limited to our belief that oil prices will remain above levels sufficient to motivate our customers to maintain drilling and completion activities; our statements that we may repurchase outstanding common shares periodically based on market conditions and other factors; estimates, assumptions and projections related to our application of critical accounting policies, including those related to credit losses and allowance related to same, self-insurance, goodwill, and acquisitions, described in more detail below under “Critical Accounting Policies and Estimates,” and the impact of lawsuits, legal proceedings and claims on our financial position and results of operation. +Such forward-looking statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RPC to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Risk factors that could cause such future events not to occur as expected include the following: the volatility of oil and natural gas prices; volatility in demand for our services due to, among other things, fluctuations in price levels of oil and natural gas, activity levels in the oil and gas industry in general, driven in part by customer decisions about capital investment toward the development and production of oil and gas reserves; fluctuations in drilling rig count and well completions; our concentration of customers in the energy industry and periodic downturns; our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations; dependence on our key personnel; our ability to identify or complete acquisitions; our ability to attract and retain skilled workers; some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers; whether outside financing is available or favorable to us; increasing expectations from customers, investors and other stakeholders regarding our environmental, social and governance practices; our compliance with regulations and environmental laws; the combined impact of the OPEC disputes and the COVID-19 pandemic on our operating results; possible declines in the price of oil and natural gas, which tend to result in a decrease in drilling activity and therefore a decline in the demand for our services; the ultimate impact of current and potential political unrest and armed conflict in the oil producing regions of the world, including the current conflict involving Israel and the Gaza Strip, which could impact drilling activity, adverse weather conditions in oil or gas producing regions, including the Gulf of Mexico; competition in the oil and gas industry; the Company’s ability to implement price increases; the potential impact of possible future regulations on hydraulic fracturing on our business; risks of international operations; reliance on large customers; our operations rely on digital systems and processes that are subject to cyber attacks or other threats; our cash and cash equivalents are held primarily at a single financial institution; certain ongoing sales and use tax audits in various jurisdictions that involve issues that could result in unfavorable outcomes that cannot be currently estimated; and inflation in the general economy, upward wage pressures in the labor markets, supply disruptions, and higher costs of certain materials and key equipment components, and decreased supply of skilled labor; and changes in assumptions underlying our critical accounting judgments and estimates. See “Risk Factors” contained in Item 1A. for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services, which are its operating segments. As of December 31, 2023, RPC had 2,691 employees. +3 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services), or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. In 2023, we estimate that 74% of our revenues were related to drilling and production activities for oil, while 26% of revenues were related to drilling and production activities for natural gas. During 2023, approximately five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. Technical Services are provided in all of RPC’s principal geographical markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The primary drivers of operational success for Support Services are offering safe, high quality and in-demand equipment, as well as meeting customer needs and competitive marketing of such services. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. Support Services are provided in all of RPC’s principal geographical markets. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 48% of 2023 revenues, 53% of 2022 revenues and 43% of 2021 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +4 +Downhole Tools . Thru Tubing Solutions’ (TTS) downhole tools division accounted for 25% of revenues in 2023, 23% of revenues in 2022 and 29% of revenues in 2021. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are often proprietary solutions developed by the Company, for which the Company maintains an active intellectual property and patent program. Management believes Downhole Tools represents a differentiated service line. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in both 2023 and 2022 and ten percent of revenues in 2021, involve the injection of coiled tubing into wells to perform various applications and functions for use principally to facilitate completion of unconventional wells, and to a lesser extent, in well-servicing operations of existing wells. Coiled tubing is a flexible steel pipe thousands of feet in length which is wound or coiled around a large reel and conveyed into a wellbore to conduct a variety of downhole tasks. Coiled tubing is attractive because its flexibility allows it to be steered through wellbores that are other than vertical, while also being strong enough to convey tools or motors at the end of the coiled tubing string. Since it is hollow, it can convey fluid which powers a motor or may be needed to clean out a wellbore. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and larger-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Cementing. Cementing services, which accounted for four percent of revenues in 2023 and one percent of revenues in both 2022 and 2021 are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The Company’s cementing revenues increased during 2023 primarily due to the acquisition of Spinnaker. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in 2023, 2022 and 2021, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than pipe conveyed by a snubbing unit. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. +Nitrogen . Nitrogen accounted for three percent of revenues in 2023, two percent of revenues in 2022 and four percent of revenues in 2021. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower +5 +an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Support Services +Rental Tools . Rental tools accounted for five percent of revenues in 2023 and four percent of revenues in both 2022 and 2021. The Company rents specialized equipment for use with onshore and offshore oil and gas well completion, drilling and workover activities. The Company offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling requirements. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to note in the consolidated financial statements titled Business Segment and Entity Wide Disclosures for additional financial information on our business segments. +6 +Industry +United States. RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s (source: Baker Hughes, Inc.). While oil and gas industry demand is influenced by many factors, the rig count is often used as a proxy for current and future industry activity. Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history, following the onset of the COVID pandemic. Between August 2020 and the fourth quarter of 2023, the U.S. domestic rig count rose by approximately 149%. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, reported well completions increased to 12,250 in 2023, an increase of approximately 8.0% compared to 2022. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. During 2020, oil prices suffered a historic decrease due to the global economic disruption and uncertainty following the COVID-19 outbreak, with our customers facing a potential collapse in global oil demand. Following the cyclical trough in oilfield activity in the third quarter of 2020, commodity prices and the U.S. domestic rig count began to recover, and by the end of 2022, the U.S. domestic rig count had more than doubled compared to the historic low level recorded in 2020. During early 2022 the industry also experienced volatility, with higher oil process and global uncertainty caused by Russia’s invasion of Ukraine. During 2023, the U.S. domestic average rig count decreased to 688 compared to 723 in the prior year, in part due to continued productivity and efficiency improvements of oilfield assets. The Company anticipates oilfield activity to remain consistent with 2023 levels during 2024. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas decreased by approximately 61% during 2023 as compared with 2022 (source: U.S. Energy Information Administration). RPC believes that the recent decrease in the price of natural gas may discourage drilling and completion of natural gas-directed wells during the near term. +During the first decade of the twenty-first century, natural gas-directed drilling rigs comprised most of the U.S. drilling rig count. Beginning in 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50% of total U.S. drilling. Rising U.S. domestic demand for natural gas and the advent of U.S. exports of liquified natural gas have been offset by increasing production, thus preventing the price of natural gas from rising. The Russian invasion of Ukraine during the first quarter of 2022 prompted Western European countries to curtail or eliminate their purchases of natural gas from Russia. As a result, the demand for liquified natural gas from the United States increased significantly, which increased the price for natural gas in the United States to its highest level since 2008 and encouraged additional investment in liquified natural gas production facilities in the United States. These factors have been offset by warm weather and the idling of a major liquified natural gas facility in the U.S., which contributed to the decline in the price of natural gas during 2023. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons and the high production of oil in the domestic U.S. market. +7 +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80% of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for approximately two percent of RPC’s consolidated revenues in both 2023 and 2022 and four percent in 2021. RPC’s allocation of growth capital over the last several years has emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to note in the consolidated financial statements titled Business Segment and Entity wide Disclosures for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate attractive long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through acquisitions or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential new customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. In the third quarter of 2023 we successfully completed the acquisition of Spinnaker Oilwell Services, thereby expanding our cementing service line. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements, as needed. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2023. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. There was no customer in 2023 that accounted for 10% or more of revenues. RPC provided oilfield services to several hundred customers during each of the past three years. Of these customers, only one customer, a private exploration and production company, accounted for approximately 11% of the Company’s revenues in 2022 with no other customers exceeding 10% of revenues during 2022 or 2021. +8 +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We offer our services and equipment in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the most recent downturn that began in 2019, fewer oilfield service companies became insolvent than in previous downturns. This was due in part to COVID-19 – related Federal stimulus that supported businesses that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. During 2022, Russia’s invasion of Ukraine destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. Instability in the Middle East region has continued including the conflict in Israel and the Gaza Strip, and the Red Sea shipping disruptions. +Improving completion services efficiency has served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services has caused the oilfield services business to remain highly competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Energy, Inc, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. Increased demands for larger-scale and newer technology solutions, as well as business combinations among large oil and gas companies, are driving consolidation of our competitors in certain service lines. +Human Capital +The table below shows the number of employees at December 31, 2023 and 2022: +At December 31, +2023 +2022 +Employees +2,691 +2,732 +The Company operates in a cyclical business where financial performance and headcount are influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce is diverse and our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships, and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender, and other protected classes. The Committee provides an update of such incidents to the Board, as needed, at least on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a Code of Conduct to provide guidance for everyone associated with the Company, including its employees, officers, and directors (the Code). The code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the code each year and any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting, and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee +9 +discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see note to the consolidated financial statements titled Leases. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +10 +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection, when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Risks Related to our Business. +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 40% of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. There was no customer that accounted for 10% of revenues in 2023. One of our customers, a private exploration and production company, accounted for approximately 11% of the Company’s revenues in 2022, with no other customers in 2022 and no customers in 2021 exceeding 10% of revenues. In addition, there was one customer that accounted for approximately 10% of accounts receivable as of December 31, 2023. There were no other customers as of December 31, 2023, and no customers as of December 31, 2022, that accounted for 10% or more of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations, which could cause us to experience increased credit losses for accounts receivable. +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing +11 +investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the oilfield services industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions, and the completion of significant acquisitions involves integration and other risks. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to successfully integrate the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth of acquired businesses could have a material adverse effect on our results of operations and financial condition. We completed the acquisition of Spinnaker Oilwell Services in 2023 and may have difficulty and incur anticipated expenses related to integrating information systems, financial reporting activities, employee retention and integrating and retaining management and personnel. Additionally, we may not be able to achieve the anticipated expansion of our cementing business from its presence in South Texas to basins in which we provide other services. +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. The Company and our industry are being affected by shortages of skilled labor. If labor shortages continue or a significant increase in wages occurs, our capacity and profitability could be diminished, and our growth potential could be impaired. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping +12 +services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital to maintain our equipment and increase our fleet of equipment to expand our operations, and we currently have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate, or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +13 +Increasing expectations from governments, customers, investors and other stakeholders regarding our environmental, social and governance (ESG) practices may affect our business, may create additional costs for us, or expose us to related risks. +Many companies are receiving greater attention from stakeholders regarding their ESG practices, as well as their oversight of relevant ESG issues. The various stakeholders are placing growing importance on our potential environmental and social issue risk exposure and the impact of our choices. Increased focus on ESG and related decision-making may negatively impact us as customers, investors and other stakeholders may choose to not work with us or reallocate capital or decline to make an investment as a result of their assessment of our ESG practices. Companies that do not comport with, or do not adapt to, these evolving investor and stakeholder ESG-related expectations and standards, or that are assessed as not having responded appropriately to the growing focus on ESG matters, may have their brand and reputation harmed, and the Company or our stock price may be adversely affected even though we may be in full compliance with all relevant laws and regulations. +We are planning to create and publish voluntary disclosures regarding ESG matters from time to time. To the extent that we report Green House Gas (GHG) emissions data, the methodologies that we use to calculate our emissions may change over time based upon changing industry standards. We note that standards and expectations regarding the processes for measuring and counting GHG emissions and GHG emission reductions are evolving, and it is possible that our approach to measuring our emissions maybe considered inconsistent with common or best practices with respect to measuring and accounting for such matters. If our approaches to such matters fall out of step with common or best practice, we may be subject to additional scrutiny, criticism, regulatory and investor engagement or litigation, any of which may adversely impact our business, financial condition or results of operation. +Furthermore, the SEC has announced proposed rules that, among other matters, will establish a framework for reporting climate-related risks. To the extent that any proposed rules impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient. Furthermore, in November 2022, the U.S. Department of Labor adopted final rules that allow plan fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights, such as proxy voting. Should plan investors decide to not invest in us based on ESG factors, our business and access to capital may be negatively impacted. In 2023, the State of California enacted legislation that will require large U.S. companies doing business in California to make broad-based climate-related disclosures starting as early as 2026, and other jurisdictions, domestically and internationally, are also considering various climate change disclosure requirements. +In addition, ESG and climate change issues may cause consumer preference to shift toward other alternative sources of energy, lowering demand for oil and natural gas and consequently lowering demand for our services. In some areas these concerns have caused governments to adopt or consider adopting regulations to transition to a lower-carbon economy. These measures may include adoption of cap-and-trade programs, carbon taxes, increased efficiency standards, prohibitions on the manufacture of certain types of equipment (such as new automobiles with internal combustion engines), and requirements for the use of alternate energy sources such as wind or solar. These types of programs may reduce the demand for oil and natural gas and consequently the demand for our services. +Approaches to climate change and a transition to a lower-carbon economy, including government regulation, company policies, and consumer behavior, are continuously evolving. At this time, we cannot predict how such approaches may develop or otherwise reasonably or reliably estimate their impact on our financial condition, results of operations and ability to compete. However, any long-term material adverse effect on the oil and gas industry may adversely affect our financial condition, results of operations and cash flows. +Risk Management Risks. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of heavy equipment and exposure to inherent risks, including blowouts, explosions, and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees, and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +14 +Regulatory Risks. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental, or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation or disposal of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +Compliance with federal and state regulations relating to pressure pumping services, including hydraulic fracturing, could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. Compliance with federal and state regulations relating to pressure pumping services could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry; however, more stringent regulations could be imposed in the future, which could have a material adverse impact on our costs and our business. +Risks Related to our Capital and Ownership Structure. +Our management and directors have a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the Controlled Corporation exemption under Section 303A of the New York Stock Exchange (NYSE) Listed Company Manual. The Company is a Controlled Corporation because a group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control (the Controlling Group), controls in excess of 50% of the Company’s voting power. As a Controlled Corporation, the Company need not comply with certain NYSE rules including those requiring a majority of independent directors, and independent compensation and nominating committees. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 60% of RPC’s outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +The Controlling Group could take actions that could negatively impact our results of operations, financial condition or stock price. +The Controlling Group may from time to time and at any time, in their sole discretion, acquire or cause to be acquired, additional equity or other instruments of the Company, its subsidiaries or affiliates, or derivative instruments the value of which is linked to Company securities, or dispose or cause to be disposed, such equity or other securities or instruments, in any amount that the +15 +Controlling Group may determine in their sole discretion, through open market transactions, privately negotiated transactions or otherwise. In addition, depending upon a variety of factors, the Controlling Group may at any time engage in discussions with the Company and its affiliates, and other persons, including retained outside advisers, concerning the Company’s business, management, strategic alternatives and direction, and in their sole discretion, consider, formulate and implement various plans or proposals intended to enhance the value of their investment in the Company. In the event the Controlling Group were to engage in any of these actions, our common stock price could be negatively impacted, such actions could cause volatility in the market for our common stock or could have a material adverse effect on our results of operations and our financial condition. +Our management and directors have a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC's certificate of incorporation and bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and director nominations, and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Risks Related to Digital Operations, Cybersecurity and Business Disruption. +Our operations rely on digital systems and processes that are subject to cyber attacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber attacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyber attacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for appropriate employees, simulate phishing attempts and closely manage the accounts and privileges of all employees and contractors. In addition, we have adopted an established cybersecurity framework that provides significant risk management across several areas. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents. We have experienced unsuccessful cyberattack attempts to gain unauthorized access to our network. To date, these attacks have not had a material impact on our operations. +If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +General Risks. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Item 1B. Unresolved Staff Comments +None. +16 +Item 1C. Cybersecurity +Risk Management and Strategy +RPC approaches cybersecurity as an enterprise-wide risk and has created an accountability framework that includes oversight of cybersecurity risks. We have implemented policies and processes designed to detect, prevent, and respond to cybersecurity incidents. To help guide its overall program, RPC uses the Center for Internet Security (CIS) Controls framework to provide best practices for securing IT systems and data. We have implemented a majority of version 8.0 of the CIS Controls which supports a Zero Trust architecture. RPC has created a cross-departmental team to continuously monitor and screen Company vendors (also known as partners and managed service providers) for vulnerabilities on their own systems and compliance with RPC’s policies and procedures, to mitigate risks potentially caused by third party breaches. We have completed an initial risk assessment for each vendor and identified an external cybersecurity firm to further assist with this initiative that is being guided by CIS Control Standards. +As part of its Standard Operating Procedures, RPC has adopted Incident Response Policy (IRP), Data Loss Prevention Policy, and other policies regarding key areas of information security. These policies are reviewed periodically and updated as needed to address emerging risks or gaps in compliance. The IRP also includes guidance on internal and external escalation in the event of an incident or breach. RPC has not experienced a material cybersecurity incident to date. If a material cybersecurity breach occurs, the incident will be reviewed by the cybersecurity team to determine whether further escalation is appropriate. Any incident assessed as potentially being or becoming material will immediately be escalated for further assessment and reported to designated members of our executive leadership team and if deemed necessary, the Board of Directors, We plan to consult with outside counsel as appropriate, including on materiality analysis and disclosure matters, and make the final materiality determination regarding disclosure and other compliance decisions. We also plan to keep our independent public accounting firm informed of such incidents as appropriate. +The Company maintains a cyber liability insurance policy that is designed to cover certain expenses, business losses, business interruption, and fines and penalties associated with a data breach or other similar incident. Cyber liability insurance also provides coverage in the event of a ransomware attack. Our cyber risk coverage includes assistance in the timely remediation of material cyberattacks and incidents. +Our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats, including as a result of previously identified cybersecurity incidents, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. For more information on our cybersecurity related risks, see Item 1A Risk Factors of this Annual Report on Form 10-K. +Governance +Role of the Board +The Board is responsible for overseeing overall risk management for the Company, including review and approval of the enterprise risk management approach and processes implemented by management to identify, assess, manage, and mitigate risk, at least annually. The Board has delegated its responsibility for oversight of the Company’s cybersecurity and information security framework and risk management to the Audit Committee. The Audit Committee receives information and updates at least quarterly and actively engages with senior leaders with respect to the effectiveness of the Company’s cybersecurity and information security framework, data privacy, and risk management. In addition, the Audit Committee receives reports summarizing threat detection and mitigation plans, audits of internal controls, training and certification, and other cyber priorities and initiatives, as well as timely updates from senior leaders on material incidents relating to information systems security, including cybersecurity incidents. The Audit Committee includes members with experience in risk management including cybersecurity. +17 +Role of Management +RPC’s cybersecurity program is overseen by the Chief Information Officer (CIO) as well as several key members of RPCs Enterprise Technology team including the Principal Security Architect. These key leaders collectively have over 50 years of experience in network security, cybersecurity and enterprise risk management. The Chief Executive Officer and CIO receive regular updates on cybersecurity matters, results of mitigation efforts related to existing risks and cybersecurity incident response and remediation. These leaders communicate closely with members of RPCs Information Security Committee (ISC) which oversees the adopted CIS Control Framework, governs the Company’s information security programs and ensures the effectiveness of the Company’s cybersecurity and technology risk management practices. In addition, ISC provides oversight to ensure that security strategies are aligned with business objectives. T he Company also maintains business continuity and disaster recovery plans. RPC performs scheduled tabletop exercises periodically to evaluate the resilience of its cyber crisis processes, tools, and proficiency in responding to cyber attacks from both a strategic and technical response perspective. +Item 2. Properties +RPC owns or leases approximately 60 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. See the note titled Related Party Transactions. The lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yard +Elk City, Oklahoma — Operations, sales and equipment storage yard +Houma, Louisiana — Administrative office +Channelview, Texas — Pipe storage yard and inspection services +Odessa, Texas — Pumping services facility +Vernal, Utah — Operations, sales and equipment storage yards +Newcastle, Oklahoma — Operations, sales and administrative offices +Leased Locations +Midland, Texas — Operations, sales and administrative offices +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Odessa, Texas — Pumping services facility +Atlanta, Georgia — Headquarters +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. RPC is also subject to sales and use tax audits in various jurisdictions. While the outcome of these lawsuits, legal proceedings and audit claims cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +Not applicable. +18 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Market Information +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 20, 2024, there were 215,445,398 shares of common stock outstanding and approximately 23,000 beneficial holders of our common stock. +Dividends +On January 23, 2024, the Board of Directors declared a $0.04 per share cash dividend payable March 11, 2024, to stockholders of record at the close of business on February 9, 2024. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchasers in the fourth quarter of 2023 are outlined below. +Period +Total Number of Shares (or Units) Purchased +Average Price Paid Per Share (or Unit) +Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) +Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) +October 1, 2023, to October 31, 2023 +314 +(1) +$ +8.95 +— +14,979,128 +November 1, 2023, to November 30, 2023 +— +— +— +14,979,128 +December 1, 2023, December 31, 2023 +1,200 +(2) +7.20 +1,200,000 +13,779,128 +Total +1,514 +$ +7.20 +1,200,000 +13,779,128 +(1) Represents shares repurchased by the Company in connection with taxes related to vesting of certain restricted shares. +(2) The Company has a stock buyback program initially adopted in 1998 (and subsequently amended in 2013, 2021 and 2023) that authorized the repurchase of up to 49,578,125 shares in the aggregate. There were 1,200,000 shares purchased on the open market during the fourth quarter of 2023 and 13,779,128 shares remained available to be repurchased under the current authorization as of December 31, 2023. Currently the program does not have a predetermined expiration date. +19 +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (Russell 2000), the Philadelphia Stock Exchange’s Oil Service Index (OSX), and a peer group which includes companies that are considered peers of the Company (the Peer Group). The Company has voluntarily chosen to provide both an industry and a peer group index. +The Company was a component of the Russell 2000 during 2023. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2023 of $3.3 billion, and a median market capitalization of $965 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Halliburton Company, Oil States International, Inc., Patterson-UTI Energy, Inc and Liberty Energy, Inc. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. The peer group used in the immediately preceding fiscal year (the Former Peer Group) included Halliburton Company, NexTier Oilfield Solutions, Inc., Oil States International, Inc., and Patterson-UTI Energy, Inc. Liberty Energy, Inc. is included for this fiscal year because it operates similar service lines in similar domestic markets as the Company and has sufficient trading history to be included for this fiscal year. +December 31, +Company/Index +2018 +2019 +2020 +2021 +2022 +2023 +Base Period +RPC, Inc. Common Stock +100 +54 +32 +47 +90 +78 +Russell 2000 Index +100 +123 +146 +166 +131 +150 +OSX +100 +99 +54 +65 +104 +104 +Peer Group +100 +30 +40 +49 +87 +77 +Item 6. Reserved +20 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +The following discussion should be read in conjunction with Selected Financial Data and the consolidated financial statements included elsewhere in this document. See also Forward-Looking Statements on page 2. Discussions of year-to-year comparisons of 2022 and 2021 items that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2022, which Item is incorporated herein by reference. +RPC, Inc. (RPC) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Our key business and financial strategies are: +- To focus our management resources on and invest our capital in equipment and geographic markets that we believe will earn high returns on capital. +- To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. +- To maintain capital strength sufficient to allow us to remain a going concern and maintain our operational strength during protracted industry downturns. +- To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. +- To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. +- To deliver products and services to our customers safely. +- To secure adequate sources of supplies of raw materials used in our operations. +- To maintain and selectively increase market share. +- To explore potential acquisitions that could increase our scale, bolster selected service lines, broaden our customer base and deliver attractive financial returns. +- To maximize stockholder return by optimizing the balance between cash invested in the Company's productive assets, the payment of dividends to stockholders, and the repurchase of our common stock on the open market. +- To align the interests of our management and stockholders. +In assessing the outcomes of these strategies and RPC’s financial condition and operating performance, management generally reviews periodic forecast data, monthly actual results, and other similar information. We also consider trends related to certain key financial data, including revenues, utilization of our equipment and personnel, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities. +Current industry conditions are characterized by oil prices which have risen from less than $20 per barrel in the second quarter of 2020 to approximately $73 per barrel early in the first quarter of 2024. While there are many factors influencing the price of oil, we +21 +believe that Russia’s invasion of Ukraine in the first quarter of 2022 destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. In response to these conditions, the U.S. domestic rig count has risen from a low of 244 in the third quarter of 2020 to 620 early in the first quarter of 2024. In addition, well completions have increased from 1,308 in the third quarter of 2020 to 2,850 in the fourth quarter of 2023. +RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States has grown to be the world’s largest producer of oil and is more flexible in its ability to increase or decrease drilling and production activities more rapidly than the state-owned oil companies which comprise OPEC membership. During the past several years, improved drilling and completion techniques have increased productivity and caused U.S. domestic oil production to rise to record production levels, reaching 13.2 million barrels per day in December of 2023. (source: U.S. Energy Information Administration). +Customer activities directed towards natural gas drilling and production have been weak for many years because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. One result of high natural gas production and steady demand has been a decline in the price of natural gas. The price of natural gas briefly rose to $9.56 per Mcf during the third quarter of 2022 as the market assessed the impact of European sanctions against Russian natural gas imports. However, the price of natural gas fell during the fourth quarter of 2022 and remained low throughout 2023 due to warm weather and the idling of a major liquified natural gas facility in the U.S. The price of natural gas early in the first quarter of 2024 was $2.92 per Mcf, which was approximately 35.1% lower than at the same time in 2023. The Company believes that despite the decline in price, the favorable long-term outlook for natural gas provided by the U.S. oil and gas industry is sufficient to encourage our customers to maintain their natural gas-directed exploration and production activities. +The Company’s strategy of utilizing equipment in unconventional basins has continued. During 2023, capital expenditures totaled $181.0 million which included the purchase of a new Tier 4 dual-fuel equipment, coupled with capitalized maintenance and upgrades of our existing equipment. +Effective July 1, 2023, the Company acquired Spinnaker Oilwell Services, LLC (Spinnaker), a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The acquisition of Spinnaker expanded RPC’s cementing business from its presence in South Texas to basins in which we currently provide other services. See note titled Business Acquisition for additional information. +Revenues during 2023 totaled $1.6 billion, a slight increase of 1.0% compared to 2022. This increase was primarily due to an increase in cementing revenues due to the Spinnaker acquisition, partially offset by a decrease in pressure pumping activity. Cost of revenues increased 0.1% compared to the prior year, consistent with the slight increase in revenues. +Selling, general and administrative expenses during 2023 totaled $165.9 million, an increase of 11.7% compared to 2022. The increase was primarily due to costs related to the settlement of a vendor dispute during 2023 coupled with the incremental SG&A expenses from the recently acquired Spinnaker. +Income before income taxes was $256.2 million for 2023 compared to $289.6 million in 2022. Net income for 2023 was $195.1 million, or $0.90 earnings per share compared to net income of $218.4 million, or $1.01 earnings per share in 2022. 2023 net income included $18.3 million of non-cash pension settlement charges. +Cash flows from operating activities increased to $394.8 million in 2023 compared to $201.3 million in 2022. Change in working capital generated $57.8 million of cash in 2023, compared to a $122.5 million use of cash in the prior year primarily due to lower business activity levels in the fourth quarter of 2023 compared to the same period in the prior year. This increase in cash flow was partially offset by a decrease in net income, which included the non-cash pension settlement charges referenced above. As of December 31, 2023, there were no outstanding borrowings under our credit facility. +22 +Outlook +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity and can be impacted by economic developments as well as geopolitical disruptions, such as the continuing conflicts in the Middle East as well as Russia and Ukraine. RPC believes that oil prices remain above levels sufficient to motivate our customers to maintain drilling and completion activities. +The majority of the U.S. domestic rig count remains directed towards oil. During 2023, approximately 80% of the U.S. domestic rig count was directed towards oil, consistent with the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. However, we believe that natural gas-directed drilling will increase in the future because of favorable long-term market dynamics. This projected higher demand for oil and natural gas should drive increased activity in most of the basins in which RPC operates. +We continue to monitor the market for our services and the competitive environment, including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets. The growing efficiency in recent years with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market. We believe that most of the feasible efficiency gains have been realized, and a number of our smaller competitors have ceased operations. We expect demand for our services will remain consistent with 2023 levels during the near term. +We have selectively upgraded our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. RPC continues to maintain and upgrade our current fleet capacity of revenue-producing equipment. We will remain highly disciplined about adding new incremental revenue-producing equipment capacity and will only expand if we believe the projected financial returns of such capital expenditures meet our financial return criteria. The Company is allocating capital to maintain the capacity of our pressure pumping fleet to offset anticipated future fleet retirements. During 2023 the Company placed into service a new pressure pumping fleet, replacing existing older equipment sent out for refurbishment. During 2024, the Company will be replacing a Tier 2 diesel fleet with a recently ordered Tier 4 dual-fuel fleet. +Effective July 1, 2023, the Company acquired Spinnaker Oilwell Services, LLC (Spinnaker), a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The acquisition of Spinnaker expanded RPC’s legacy cementing business in South Texas to basins in which we currently provide other services. See the note titled Business Acquisition for additional information. +Results of Operations +2023 +2022 +2021 +Consolidated revenues [in thousands] +$ +1,617,474 +$ +1,601,762 +$ +864,929 +Revenues by business segment [in thousands] : +Technical +$ +1,516,137 +$ +1,516,363 +$ +815,046 +Support +$ +101,337 +$ +85,399 +$ +49,883 +Consolidated operating income [in thousands ] +$ +244,950 +$ +287,940 +$ +16,291 +Operating income (loss) by business segment [in thousands]: +Technical +$ +245,904 +$ +281,622 +$ +24,434 +Support +26,461 +18,095 +(5,725) +Corporate +(18,473) +(17,660) +(13,300) +Pension settlement charges +(18,286) +(2,921) +— +Gain on disposition of assets, net +$ +9,344 +$ +8,804 +$ +10,882 +Average U.S. domestic rig count +688 +723 +478 +Average natural gas price (per thousand cubic feet (mcf)) +$ +2.54 +$ +6.44 +$ +3.92 +Average oil price (per barrel) +$ +77.55 +$ +94.89 +$ +68.13 +Year Ended December 31, 2023, Compared to Year Ended December 31, 2022 +Revenues. Revenues of $1.6 billion for 2023 increased 1.0% compared to 2022. Domestic revenues in 2023 increased 1.2% compared to the prior year. This increase was primarily due to an increase in cementing revenues due to the Spinnaker acquisition, partially offset by a decrease in pressure pumping activity. In addition to the growth in cementing, other service lines that contributed to revenue growth included coiled tubing, nitrogen, downhole tools and rental tools. International revenues in 2023 of $28.7 million +23 +decreased 12.0% compared to the prior year primarily due to a continued emphasis on domestic rather than international expansion because of higher domestic activity levels and expected financial returns. During 2023, the average price of oil was 18.3% lower, and the average price of natural gas was 60.6% lower, both as compared to the prior year. The average domestic rig count for 2023 was 4.8% lower than the prior year. +Technical Services segment revenues were $1.5 billion for both 2023 and 2022. Technical Services reported operating income of $245.9 million during 2023 compared to operating income of $281.6 million in the prior year. Support Services segment revenues for 2023 increased by 18.7% compared to the prior year, primarily due to higher activity levels within rental tools. Support Services reported operating income of $26.5 million for 2023 compared to operating income of $18.1 million for the prior year. +Cost of revenues. Cost of revenues was $1.1 billion for 2023, unchanged compared to the prior year. In accordance with SAB Topic 11.B, cost of revenues presented on the Consolidated Statement of Operations excludes depreciation and amortization totaling $97.7 million for 2023, compared to $74.3 million in the prior year. +Selling, general and administrative expenses. Selling, general and administrative expenses increased to $165.9 million in 2023 compared to $148.6 million in the prior year. The increase was primarily due to costs related to the settlement of a vendor dispute coupled with the incremental SG&A expenses from the recently acquired Spinnaker business. +Pension settlement charges. Pension settlement charges (non-cash) were $18.3 million during 2023. There was no pension settlement charge in the prior year. See note titled Employee Benefit Plans of the notes to the consolidated financial statements for more information. +Depreciation and amortization. Depreciation and amortization increased 30.2% to $108.1 million in 2023, compared to $83.0 million in 2022. Depreciation and amortization increased due to capital expenditures in the past year coupled with amortization of acquired intangible assets expenses related to the acquired Spinnaker business. +Gain on disposition of assets, net. Gain on disposition of assets, net was $9.3 million in 2023 compared to a gain on disposition of assets, net of $8.8 million in 2022. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income, net. Other income, net was $3.0 million in 2023 compared to other income, net of $1.1 million in the prior year. +Interest expense and interest income. Interest expense was $341 thousand in 2023 compared to $614 thousand in the prior year. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan costs. Interest income increased to $8.6 million compared to $1.2 million in the prior year due to a higher average cash balance coupled with higher investment yields. +Income tax provision. Income tax provision was $61.1 million during the twelve months ended December 31, 2023, compared to $71.3 million tax provision for the same period in 2022. The effective tax rate was 23.9% for the twelve months ended December 31, 2023, compared to a 24.6% effective tax rate for the twelve months ended December 31, 2022. The decrease in the 2023 effective tax rate is primarily due to a beneficial discrete adjustment compared to a detrimental discrete adjustment in 2022. +Net income and diluted earnings per share. Net income was $195.1 million in 2023, or $0.90 diluted earnings per share, compared to net income of $218.4 million in 2022, or $1.01 diluted earnings per share. +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $223.3 million as of December 31, 2023, $126.4 million as of December 31, 2022, and $82.4 million as of December 31, 2021. +(In thousands) +2023 +2022 +2021 +Net cash provided by operating activities +$ +394,763 +$ +201,286 +$ +47,719 +Net cash used for investing activities +(241,712) +(123,715) +(47,631) +Net cash used for financing activities +(56,165) +(33,580) +(2,151) +Cash provided by operating activities for the year ended December 31, 2023, increased by $193.5 million compared to the year ended December 31, 2022. Cash provided by operating activities for the year ended December 31, 2023, includes net income of $195.1 million, coupled with a favorable change in accounts receivable of $104.6 million, partially offset by unfavorable changes in +24 +other components of our working capital (accounts payable, inventories and taxes receivable) totaling $56.7 million. The net favorable changes in working capital were the result of decreased business activity levels during the fourth quarter of 2023 compared to the same period in the prior year. +Cash used for investing activities for 2023 increased by $118.0 million compared to 2022, primarily due to cash paid for the acquisition of Spinnaker during the second quarter of 2023, coupled with an increase in capital expenditures primarily due to the timing of new equipment deliveries. +Cash used for financing activities for 2023 increased by $22.6 million primarily due to an increase in cash dividends paid to common stockholders, coupled with repurchases during 2023 of the Company’s common shares on the open market and repurchases for taxes related to the vesting of employees’ restricted shares. These uses were partially offset by a decrease in cash paid for finance lease and finance obligations. The Company resumed dividend payments to common stockholders during the third quarter of 2022. +Financial Condition and Liquidity +The Company’s financial condition remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not expect to utilize our revolving credit facility to meet these liquidity requirements in the near term. +The Company currently has a $100.0 million revolving credit facility that matures in June 2027 as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. In the second quarter of 2023, the Company further amended the revolving credit facility. Among other matters, the amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with Term SOFR as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 25.0 basis points at each pricing level, (3) introduces a 1.00% per annum floor for base rate borrowings, (4) permits the issuance of letters of credit in currencies other than U.S. dollars. As of December 31, 2023, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $16.6 million; therefore, a total of $83.4 million of the facility was available. The Company is currently in compliance with the credit facility financial covenants. For additional information with respect to RPC’s facility, see note in the consolidated financial statements titled Long-Term Debt. +Cash Requirements +Capital expenditures were $181.0 million in 2023, and we currently expect capital expenditures to be between $200 million and $250 million in 2024, which will be directed towards both capitalized maintenance of our existing equipment to improve efficiency and selected growth opportunities. The Company is allocating capital to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. During 2024 the Company will be replacing a Tier 2 diesel fleet with a recently ordered Tier 4 dual-fuel fleet. The actual amount of capital expenditures in 2024 will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules. During 2022, RPC made payments totaling $24.0 million for a pressure pumping fleet under a finance lease which was initiated in 2021. +The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or are probable and can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated. +During 2023, the Company’s Retirement Income Plan was fully terminated through a liquidation of the assets held in a trust and an additional cash contribution of $5.4 million. +25 +The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market, including an additional 8,000,000 shares authorized for repurchase by the Board of Directors in the second quarter of 2023. There were 2,469,056 shares repurchased on the open market during 2023 and 13,779,128 shares remained available to be repurchased under the current authorization as of December 31, 2023. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date. For additional information with respect to RPC’s stock buyback program, see note of the consolidated financial statements titled Cash Paid for Common Stock Purchased and Retired. +On January 23, 2024, the Board of Directors declared a regular quarterly cash dividend of $0.04 per share payable March 11, 2024, to common stockholders of record at the close of business on February 9, 2024. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors. +Contractual Obligations +The Company’s obligations and commitments that require future payments include our credit facility, certain non-cancelable leases, purchase obligations, amounts related to the usage of corporate aircraft and other long-term liabilities. See note to the consolidated financial statements titled Leases for details regarding RPC’s lease obligations. +F air Value Measurements +The Company’s assets and liabilities measured at fair value are classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation. Assets and liabilities that are traded on an exchange with a quoted price are classified as Level 1. Assets and liabilities that are valued using significant observable inputs in addition to quoted market prices are classified as Level 2. The Company currently has no assets or liabilities measured on a recurring basis that are valued using unobservable inputs and therefore no assets or liabilities measured on a recurring basis are classified as Level 3. For defined benefit plan and Supplemental Executive Retirement Plan (SERP) investments measured at net asset value, the values are computed using inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data or on net asset values calculated by the fund when not publicly available. +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices and employ skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause supply disruptions and higher costs of certain materials and key equipment components used to provide services to the Company’s customers. In recent years, the price of labor and raw materials increased due to higher oilfield activity and labor shortages caused by the departure of skilled labor from the domestic oilfield industry in prior years. These cost increases moderated during 2023 but remain high by historical standards. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +Related Party Transactions +See note of the consolidated financial statements titled Related Party Transactions for a description of related party transactions. +Critical Accounting Policies and Estimates +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting policies requiring significant judgments and estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting policies involve estimates that require a higher degree of judgment and complexity: +26 +Credit loss allowance for accounts receivable — Substantially all of the Company’s receivables are due from oil and gas exploration and production companies in the United States, selected international locations and foreign, nationally owned oil companies. Our credit loss allowance is determined using a combination of factors to estimate the risk of uncollectibility so that our receivables are appropriately stated. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Credit loss allowance for accounts receivable is recorded in selling, general and administrative expenses. Accounts are written off against the allowance when the Company determines that amounts are uncollectible and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2023, 2022 and 2021. We record specific provisions when we become aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer change, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated credit loss allowance is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.4% to 0.8% over the last three years. Increasing or decreasing the estimated general reserve percentage by 0.50 percentage points as of December 31, 2023, would have resulted in a change of $1.4 million in the recorded provision for current expected credit losses. +Insurance expenses —The Company self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability. The cost of claims under these self-insurance programs is estimated and accrued using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the ultimate cost of many of these claims may not be known for several years. These claims are monitored, and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third-party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2023, the Company estimates the range of exposure to be from $12.6 million to $17.1 million. The Company has recorded liabilities as of December 31, 2023, of $15.5 million which represents management’s best estimate of probable loss. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. The Company completes a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. For goodwill, there are no current events that indicate that these indefinite lived intangibles might be impaired but with the economic uncertainty, it is possible that circumstances could change that would result in the need for impairment testing. +In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. +27 +Acquisition of business — I n accounting for our acquisitions, we evaluate whether a transaction pertains to an acquisition of assets, or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires assets acquired and the liabilities assumed to be recognized at the acquisition date fair values, separately from goodwill. The excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is recorded as goodwill. The Company uses its best estimates and assumptions to accurately value assets acquired, and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable. However, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, the Company may have to record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of a business acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. +Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, pre-acquisition contingencies and any contingent consideration, where applicable. Although management believes that the assumptions and estimates the Company has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. +Recent Accounting Pronouncements +See note of the consolidated financial statements titled Significant Accounting Policies, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its revolving credit facility. As of December 31, 2023, there were no outstanding interest-bearing advances on our credit facility which bore interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +28 +Item 8. Financial Statements and Supplementary Data +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. +Management has excluded Spinnaker Oilwell Services LLC (Spinnaker) , which the Company acquired in July 2023, from its assessment of internal control over financial reporting as of December 31, 2023. Spinnaker a wholly owned subsidiary of the Company, whose total assets and revenues excluded from management’s assessment represented 6% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2023. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2023, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 30. +/s/ Ben M. Palmer +/s/ Michael L. Schmit +Ben M. Palmer +President and Chief Executive Officer +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2024 +29 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Spinnaker Oilwell Services, LLC, a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 6 and 3 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023. As indicated in Management’s Report, Spinnaker Oilwell Services, LLC was acquired during 2023. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Spinnaker Oilwell Services, LLC. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2024 +30 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2024 expressed an unqualified opinion. +Basis for opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Valuation of trade names and trademarks and customer relationship intangible assets related to the acquisition of Spinnaker Oilwell Services, LLC +As described further in Note 2 to the consolidated financial statements, the Company acquired Spinnaker Oilwell Services, LLC effective July 1, 2023, for total purchase consideration of $79.3 million. As part of the acquisition, the Company acquired $13.2 million of identifiable intangible assets, including trade names and trademarks and customer relationships. We identified the assumptions used in the valuation of trade names and trademarks (specifically revenue growth rates, royalty rates and discount rates) and customer relationships (specifically revenue growth rates, customer attrition rates, forecasted earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and discount rates) acquired in the acquisition of Spinnaker Oilwell Services, LLC as a critical audit matter. +The principal consideration for our determination that the valuation of trade names and trademarks and customer relationships is a critical audit matter is the high degree of auditor judgment necessary in evaluating certain inputs and assumptions made by management in the valuation models used to determine fair value. Those key assumptions include revenue growth rates, forecasted EBITDA, customer attrition rates, discount rates, and royalty rates. +Our audit procedures related to the Company’s valuation of trade names and trademarks and customer relationships related to the acquisition of Spinnaker Oilwell Services, LLC included the following, among others: +31 +● We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s relevant controls to value acquired intangible assets, including the Company’s controls over the selection and review of the appropriateness of revenue growth rates, royalty rates, customer attrition rates, forecasted EBITDA and discount rates used in determining fair value. +● We evaluated the appropriateness of the Company's forecasted revenue growth rates used to value trade names and trademarks and customer relationship intangible assets by (1) comparing forecasted revenue growth rates to forecasted industry growth rates and available market data and (2) comparing forecasted revenue growth rates to historical growth rates of the acquired entity. +● We evaluated the appropriateness of the Company’s forecasted EBITDA used to value customer relationship intangible assets by (1) comparing forecasted EBITDA margin to historical EBITDA margin and (2) comparing forecasted EBITDA margin to available industry and market data. +● We utilized a specialist to evaluate key inputs and assumptions used to determine fair value. Our specialist compared the estimated customer attrition rates used to value the customer relationship intangible assets to historical customer retention data of the acquired company, compared the discount rates used to value the trade names and trademarks and customer relationship intangible assets to independently developed discount rates derived from publicly available data for comparable companies, and compared the royalty rates used to value the trade names and trademarks to royalty rates derived from publicly available data for comparable companies. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2024 +32 +CONSOLIDATED BALANCE SHEETS +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +2023 +2022 +ASSETS +Cash and cash equivalents +$ +223,310 +$ +126,424 +Accounts receivable, net of allowance for credit losses of $ 7,109 in 2023 and $ 7,078 in 2022 +324,915 +416,568 +Inventories +110,904 +97,107 +Income taxes receivable +52,269 +42,403 +Prepaid expenses +12,907 +17,753 +Other current assets +2,768 +3,086 +Total current assets +727,073 +703,341 +Property, plant and equipment, less accumulated depreciation of $ 810,933 in 2023 and $ 775,334 in 2022 +435,139 +333,093 +Operating lease right-of-use assets +24,537 +28,864 +Finance lease right-of-use assets +1,036 +— +Goodwill +50,824 +32,150 +Other intangibles, net +12,825 +1,084 +Other assets +35,411 +30,481 +Total assets +$ +1,286,845 +$ +1,129,013 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +85,036 +$ +115,213 +Accrued payroll and related expenses +30,956 +33,161 +Accrued insurance expenses +5,340 +3,232 +Accrued state, local and other taxes +4,461 +4,296 +Income taxes payable +275 +499 +Unearned revenue +15,743 +— +Pension liabilities +— +9,610 +Current portion of operating lease liabilities +7,367 +10,728 +Current portion of finance lease liabilities and finance obligations +375 +— +Accrued expenses and other liabilities +2,304 +1,864 +Total current liabilities +151,857 +178,603 +Long-term accrued insurance expenses +10,202 +7,149 +Long-term retirement plan liabilities +23,724 +23,106 +Deferred income taxes +51,290 +37,473 +Long-term operating lease liabilities +18,600 +19,517 +Long-term finance lease liabilities +819 +— +Other long-term liabilities +7,840 +5,430 +Total liabilities +264,332 +271,278 +Commitments and contingencies (Note 16) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 215,026,458 and 216,609,191 shares issued and outstanding in 2023 and 2022, respectively +21,502 +21,661 +Capital in excess of par value +— +— +Retained earnings +1,003,380 +856,013 +Accumulated other comprehensive loss +( 2,369 ) +( 19,939 ) +Total stockholders’ equity +1,022,513 +857,735 +Total liabilities and stockholders’ equity +$ +1,286,845 +$ +1,129,013 +The accompanying notes are an integral part of these statements. +33 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2023 +2022 +2021 +Revenues +$ +1,617,474 +$ +1,601,762 +$ +864,929 +COSTS AND EXPENSES: +Cost of revenues (exclusive of depreciation and amortization shown separately below) +1,089,519 +1,088,115 +663,262 +Selling, general and administrative expenses +165,940 +148,573 +123,572 +Pension settlement charges +18,286 +2,921 +— +Depreciation and amortization +108,123 +83,017 +72,686 +Gain on disposition of assets, net +( 9,344 ) +( 8,804 ) +( 10,882 ) +Operating income +244,950 +287,940 +16,291 +Interest expense +( 341 ) +( 614 ) +( 1,929 ) +Interest income +8,599 +1,171 +59 +Other income, net +3,035 +1,135 +2,027 +Income before income taxes +256,243 +289,632 +16,448 +Income tax provision +61,130 +71,269 +9,231 +Net income +$ +195,113 +$ +218,363 +$ +7,217 +Earnings per share +Basic +$ +0.90 +$ +1.01 +$ +0.03 +Diluted +$ +0.90 +$ +1.01 +$ +0.03 +Dividends paid per share +$ +0.16 +$ +0.04 +$ +— +The accompanying notes are an integral part of these statements. +34 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +RPC, INC. AND SUBSIDIARIES +(in thousands) +Years ended December 31, +2023 +2022 +2021 +Net income +$ +195,113 +$ +218,363 +$ +7,217 +Other comprehensive income: +Pension settlement and adjustment, net of tax +17,307 +764 +( 2,890 ) +Foreign currency translation +263 +5 +( 112 ) +Comprehensive income +$ +212,683 +$ +219,132 +$ +4,215 +The accompanying notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Income (Loss) +Total +Balance, December 31, 2020 +214,951 +$ +21,495 +$ +— +$ +627,778 +$ +( 17,706 ) +$ +631,567 +Stock issued for stock incentive plans, net +819 +82 +6,494 +— +— +6,576 +Stock purchased and retired +( 141 ) +( 14 ) +( 6,494 ) +5,941 +— +( 567 ) +Net income +— +— +— +7,217 +— +7,217 +Pension adjustment, net of taxes +— +— +— +— +( 2,890 ) +( 2,890 ) +Foreign currency translation +— +— +— +— +( 112 ) +( 112 ) +Balance, December 31, 2021 +215,629 +21,563 +— +640,936 +( 20,708 ) +641,791 +Stock issued for stock incentive plans, net +1,139 +114 +6,261 +— +— +6,375 +Stock purchased and retired +( 159 ) +( 16 ) +( 6,261 ) +5,359 +— +( 918 ) +Net income +— +— +— +218,363 +— +218,363 +Pension settlement and adjustment, net of tax +— +— +— +— +764 +764 +Foreign currency translation +— +— +— +— +5 +5 +Dividends +— +— +— +( 8,645 ) +— +( 8,645 ) +Balance, December 31, 2022 +216,609 +21,661 +— +856,013 +( 19,939 ) +857,735 +Stock issued for stock incentive plans, net +1,143 +114 +7,767 +— +— +7,881 +Stock purchased and retired +( 2,726 ) +( 273 ) +( 7,767 ) +( 13,184 ) +— +( 21,224 ) +Net income +— +— +— +195,113 +— +195,113 +Pension settlement and adjustment, net of tax +— +— +— +— +17,307 +17,307 +Foreign currency translation +— +— +— +— +263 +263 +Dividends +— +— +— +( 34,562 ) +— +( 34,562 ) +Balance, December 31, 2023 +215,026 +$ +21,502 +$ +— +$ +1,003,380 +$ +( 2,369 ) +$ +1,022,513 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, INC. AND SUBSIDIARIES +(in thousands) +Years ended December 31, +2023 +2022 +2021 +OPERATING ACTIVITIES +Net income +$ +195,113 +$ +218,363 +$ +7,217 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation and amortization +108,123 +83,017 +72,686 +Stock-based compensation expense +7,881 +6,375 +6,576 +Gain on disposition of assets, net +( 9,344 ) +( 8,804 ) +( 10,882 ) +Deferred income tax provision +8,647 +19,496 +4,888 +Pension settlement charges +18,286 +2,921 +— +Other non-cash adjustments +126 +647 +( 180 ) +(Increase) decrease in assets: +Accounts receivable +104,574 +( 157,894 ) +( 91,082 ) +Income taxes receivable +( 9,866 ) +16,101 +24,439 +Inventories +( 12,341 ) +( 18,413 ) +3,951 +Prepaid expenses +5,233 +( 7,980 ) +( 650 ) +Other current assets +311 +406 +90 +Other non-current assets +( 1,285 ) +9,306 +( 1,170 ) +Increase (decrease) in liabilities: +Accounts payable +( 34,519 ) +35,759 +32,900 +Income taxes payable +( 224 ) +( 157 ) +( 459 ) +Unearned revenue +15,743 +— +— +Accrued payroll and related expenses +( 2,223 ) +17,864 +( 3,080 ) +Pension liabilities +( 5,419 ) +— +— +Accrued insurance expenses +2,108 +( 6,897 ) +4,640 +Accrued state, local and other taxes +165 +2,391 +( 883 ) +Other accrued expenses +( 5,732 ) +( 3,703 ) +( 4,061 ) +Pension and retirement plan liabilities +618 +( 4,589 ) +( 1,065 ) +Long-term accrued insurance expenses +3,053 +( 4,621 ) +( 52 ) +Other long-term liabilities +5,735 +1,698 +3,896 +Net cash provided by operating activities +394,763 +201,286 +47,719 +INVESTING ACTIVITIES +Capital expenditures +( 181,005 ) +( 139,552 ) +( 67,645 ) +Proceeds from sale of assets +18,091 +15,837 +20,014 +Purchase of business +( 78,798 ) +— +— +Net cash used for investing activities +( 241,712 ) +( 123,715 ) +( 47,631 ) +FINANCING ACTIVITIES +Payment of dividends +( 34,562 ) +( 8,645 ) +— +Cash paid for common stock purchased and retired +( 21,088 ) +( 918 ) +( 567 ) +Cash paid for finance lease and finance obligations +( 515 ) +( 24,017 ) +( 1,584 ) +Net cash used for financing activities +( 56,165 ) +( 33,580 ) +( 2,151 ) +Net increase (decrease) in cash and cash equivalents +96,886 +43,991 +( 2,063 ) +Cash and cash equivalents at beginning of period +126,424 +82,433 +84,496 +Cash and cash equivalents at end of period +$ +223,310 +$ +126,424 +$ +82,433 +Supplemental cash flows disclosure: +Income tax payments, net +$ +62,226 +$ +35,809 +$ +( 20,903 ) +Interest paid +166 +170 +166 +Supplemental disclosure of noncash investing activities: +Capital expenditures included in accounts payable +$ +9,036 +$ +9,334 +$ +4,282 +The accompanying notes are an integral part of these statements. +37 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (RPC or the Company). All significant intercompany accounts and transactions have been eliminated. +Certain prior year amounts have been reclassified to conform to the presentation in the current year. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2023, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the credit loss allowance, income taxes, goodwill and other impairment assessments, accrued insurance expenses and acquisition of business. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See note of the consolidated financial statements titled Revenues for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. There were no customers in 2023 that accounted for 10 % or more of revenues. RPC provided oilfield services to several hundred customers during each of the past three years. One of our customers, a private exploration and production company, accounted for approximately 11 % of the Company’s revenues in 2022. There were no other customers in 2022 and no customers in 2021 exceeding 10 % of revenues. In addition, there was one customer that accounted for approximately 10 % of accounts receivable as of December 31, 2023. There were no other customers as of December 31, 2023, and no customers as of December 31, 2022, that accounted for 10 % or more of accounts receivable. +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash +38 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than investment grade by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with all gains and losses included in other income. The Company recorded gains on its available-for-sale securities of $ 18 thousand in 2023, $ 107 thousand in 2022, and $ 65 thousand in 2021. The Securities that are held in the non-qualified Supplemental Executive Retirement Plan (SERP) are classified as trading. See note titled Employee Benefit Plans for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the consolidated statements of operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas exploration and production companies. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of a credit loss allowance. +Credit Loss Allowance for Accounts Receivable +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years ; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years ; software, 5 years ; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. There was no impairment recorded during 2023, 2022 or 2021. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The following is a summary of the changes in Goodwill by reporting unit: +(in thousands) +Technical Services +Support Services +Total +Beginning balance at December 31, 2022 +$ +30,992 +$ +1,158 +$ +32,150 +Business acquisition (see note titled Business Acquisition) +18,674 +— +18,674 +Ending balance at December 31, 2023 +$ +49,666 +$ +1,158 +$ +50,824 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In both 2022 and 2023 , due to improved industry conditions, its reporting units’ performance and public market indications of value, the Company elected to perform a qualitative assessment of its goodwill and concluded that it is more likely than not that fair value of each of its reporting units is more than the carrying amounts, including goodwill. Based on these assessments the Company concluded that the fair value of its reporting units exceeded their carrying amounts and therefore no impairment of goodwill occurred during the years ended December 31, 2023, and 2022. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 2.4 million in 2023, $ 2.0 million in 2022, and $ 1.1 million in 2021. +Insurance Expenses +RPC self-insures, up to certain policy-specified limits, certain risks related to general liability, workers’ compensation, vehicle and equipment liability, and employee health insurance plan costs. The estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The portion of these estimated outstanding claims expected to be paid more than one year in the future is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Defined Benefit Pension Plan +The Company’s multiemployer Retirement Income Plan (Plan), a trusteed defined benefit pension plan provided monthly benefits to its participants based on the various provisions contained therein. The Company initiated actions to terminate the Plan in 2021 and it was fully terminated in 2023. See note titled Employee Benefit Plans for details on the termination and related settlement losses. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period and discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See note titled Employee Benefit Plans for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +(in thousands) +2023 +2022 +2021 +Net income available for stockholders +$ +195,113 +$ +218,363 +$ +7,217 +Less: Adjustments for earnings attributable to participating securities +( 3,099 ) +( 3,197 ) +( 89 ) +Net income used in calculating earnings per share +$ +192,014 +$ +215,166 +$ +7,128 +Weighted average shares outstanding (including participating securities) +216,472 +216,518 +215,646 +Adjustment for participating securities +( 3,545 ) +( 3,187 ) +( 2,656 ) +Shares used in calculating basic and diluted earnings per share +212,927 +213,331 +212,990 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified SERP which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See note titled Fair Value Disclosures for additional information. +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See note titled Employee Benefit Plans for additional information. +Leases +The Company determines at contract inception if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, storage containers and office equipment. The Company’s population of month-to-month real estate leases have been classified as short-term leases. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. +Recent Accounting Pronouncements +The Financial Accounting Standards Board issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +● ACCOUNTING STANDARDS UPDATE (ASU) No. 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: The amendments in this ASU address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination, by adopting guidance +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +requiring an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would recognize and measure the acquired contract assets and contract liabilities in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. The Company adopted these provisions in the second quarter of 2023 prospectively for future acquisitions. For the acquisition completed effective in the third quarter of 2023, the Company has recognized the contract assets and contract liabilities in the same manner as the acquiree. See note titled Business Acquisition for additional information. The adoption did not have a material impact on the Company’s consolidated financial statements . +Recently Issued Accounting Standards Not Yet Adopted: +● ASU No. 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures: The amendments in this ASU require an entity to disclose the title and position of the Chief Operating Decision Maker (CODM) and the significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss. These amendments are effective for annual disclosures beginning in 2024 and interim disclosures beginning in the first quarter of 2025, with early adoption permitted. These amendments are effective retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements. +● ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures: The amendments in this ASU require an entity to include consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid, disaggregated by jurisdiction. These amendments are effective for annual disclosures beginning in 2025, with early adoption permitted for annual financial statements that have not yet been issued. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements . +Note 2: Business Acquisition +Effective July 1, 2023 (Effective Date), the Company completed its acquisition of all of the outstanding equity interests in Spinnaker Oilwell Services, LLC (Spinnaker), pursuant to a Merger Agreement (Merger Agreement) with Catapult Energy Services Group, LLC, as the representative of the Sellers. +Spinnaker, headquartered in Oklahoma City, Oklahoma, is a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. Spinnaker operates two facilities located in El Reno, Oklahoma and Hobbs, New Mexico and maintains 18 full-service cementing spreads. This acquisition significantly expanded RPC's cementing business from its presence in South Texas to basins in which it currently provides other services. Spinnaker is included in our Technical Services Segment. +The purchase price was $ 79.3 million for 100 % of Spinnaker’s equity, and consisted of approximately $ 76.8 million in cash, a $ 2.0 million pay-off of finance obligations together with an assumption of $ 518 thousand of finance obligations. The Merger Agreement included a post-closing adjustment window for an agreed-upon level of Spinnaker’s working capital, as well as other usual and customary items, which is reflected in the purchase price allocation below and was finalized during the fourth quarter of 2023. Acquisition-related transaction costs of $ 767 thousand were recorded during the year ended December 31, 2023, and included in Selling, general and administrative expenses in the Consolidated Statements of Operations. The acquisition was funded with cash on hand. +The acquisition was accounted for as a business combination with the assets acquired and liabilities assumed measured at their fair values as of the acquisition date, primarily using Level 3 inputs. +The acquisition consideration allocation below is the final fair value. The excess of the acquisition consideration over the estimated fair values of the acquired assets and assumed liabilities has been assigned to goodwill which is primarily attributable to expected revenue synergies. During the fourth quarter, we finalized the valuation of the acquired assets and closed the measurement period. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Fair Value +(in thousands) +as of July 1, 2023 +Accounts receivable +$ +12,836 +Inventories +1,373 +Prepaid and other current assets +384 +Accounts payable +( 4,499 ) +Property, plant and equipment +37,374 +Operating lease right-of-use assets +46 +Current portion of operating lease liabilities +( 31 ) +Long-term operating lease liabilities +( 15 ) +Finance lease right-of-use assets +1,165 +Current portion of finance lease liabilities +( 247 ) +Long-term finance lease liabilities +( 944 ) +Goodwill +18,674 +Other intangibles +13,200 +Total consideration +79,316 +Less: Assumption of finance obligations +( 518 ) +Total cash consideration +$ +78,798 +The fair value of receivables acquired approximates the gross contractual value. The contractual amount not expected to be collected is immaterial. The fair value of acquired inventory was based on the lower of cost and net realizable value, with cost determined using the weighted-average cost method. +Property, plant and equipment is comprised of buildings and leasehold improvements, machinery and equipment, vehicles, land, and information technology. The estimated fair value was determined using the cost and market approaches. +The Company assumed the following leases and obligations as of the Effective Date - a finance lease for certain land and facilities with a remaining lease term of approximately 4.5 years; three spreads under failed sale and lease back arrangements with varying expiration dates; and an operating lease for an office space with a remaining lease term of approximately 1.5 years. There were no favorable or unfavorable market terms for the leases. Details regarding the lease costs and remaining lease obligations on the existing leases related to Spinnaker have been included in the footnote titled Leases. The obligations related to failed sale and leaseback arrangements are being reported as part of current portion of finance lease liabilities and finance obligations. +Acquired intangible assets include customer relationships, trade names and trademarks. Intangible assets were valued using the multi-period excess earnings and relief-from-royalty methods, both forms of the income approach which considers a forecast of future cash flows generated from the use of each asset. The following table shows the fair values assigned to identifiable intangible assets: +Weighted-Average +(in thousands) +Fair Value +Amortization Period (Years) +Customer Relationships +$ +10,000 +10 +Trade Names and Trademarks +3,200 +10 +Total Amortizable Intangible Assets +$ +13,200 +Revenues and net income of Spinnaker included in the Company's Consolidated Statement of Operations from the acquisition date are as follows: +(in thousands) +Six months ended +December 31, 2023 +Revenues +$ +44,830 +Net income +4,727 +Spinnaker’s duration of contracts is typically a day or less and their contract assets and liabilities are measured similar to RPC’s other businesses. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Spinnaker and RPC. This proforma financial information does not necessarily represent what the combined company’s revenues or results of operations would have been had the acquisition been completed on January 1, 2022, nor do they intend to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Spinnaker and RPC. +The following table provides unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2022. +(in thousands) +2023 +2022 +Revenues +$ +1,669,231 +$ +1,689,559 +Net income +204,222 +234,284 +Note 3: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see note titled Business Segment and Entity wide Disclosures. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools services, coiled tubing, cementing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. +Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Payment terms +RPC’s contracts with customers state the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See note titled Business Segment and Entity Wide Disclosures for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below: +(in thousands) +2023 +2022 +2021 +Oilfield services transferred at a point in time +$ +— +$ +— +$ +— +Oilfield services transferred over time +1,617,474 +1,601,762 +864,929 +Total revenues +$ +1,617,474 +$ +1,601,762 +$ +864,929 +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the consolidated balance sheets are shown below: +December 31, +December 31, +(in thousands) +2023 +2022 +Unbilled trade receivables +$ +59,831 +$ +103,498 +Substantially all of the unbilled trade receivables as of December 31, 2023, and December 31, 2022, were invoiced during the following quarter. +Unearned revenue +Contract liabilities represent the payments received in advance of satisfying the Company’s performance obligation and are recognized over time as the service is performed. For the year ended December 31, 2023, such amounts were $ 15.7 million and are recorded as Unearned revenue on the Consolidated Balance Sheets. There was no unearned revenue recorded for the year ended December 31, 2022. +Note 4: Depreciation and Amortization +Depreciation and amortization disclosed in the Consolidated Statements of Operations related to the following components: +(in thousands) +2023 +2022 +2021 +Cost of revenues +$ +97,685 +$ +74,294 +$ +63,068 +Selling, general and administrative expenses +10,438 +8,723 +9,618 +Total +$ +108,123 +$ +83,017 +$ +72,686 +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Note 5: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2023 +2022 +(in thousands) +Trade receivables: +Billed +$ +271,515 +$ +315,332 +Unbilled +59,831 +103,498 +Other receivables +678 +4,816 +Total +332,024 +423,646 +Less: allowance for credit losses +( 7,109 ) +( 7,078 ) +Accounts receivable, net +$ +324,915 +$ +416,568 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Note 6: Current Expected Credit Losses +The Company utilizes an expected credit loss model for valuing its accounts receivable, a financial asset measured at amortized cost. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected: +Years Ended December 31, +2023 +2022 +(in thousands) +Beginning balance +$ +7,078 +$ +6,765 +Provision for current expected credit losses +2,656 +2,029 +Write-offs +( 2,737 ) +( 1,752 ) +Recoveries collected (net of expenses) +112 +36 +Ending balance +$ +7,109 +$ +7,078 +Note 7: Inventories +Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using either the first-in, first-out, or the weighted average cost method. +December 31, +2023 +2022 +(in thousands) +Raw materials and supplies +$ +109,872 +$ +95,384 +Finished goods +1,032 +1,723 +Total inventory +$ +110,904 +$ +97,107 +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Note 8: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2023 +2022 +(in thousands) +Land +$ +18,165 +$ +17,287 +Buildings and leasehold improvements +129,513 +120,506 +Operating equipment +784,826 +683,027 +Computer software +19,535 +22,194 +Furniture and fixtures +5,298 +5,480 +Vehicles +288,735 +259,933 +Gross property, plant and equipment +1,246,072 +1,108,427 +Less: accumulated depreciation +( 810,933 ) +( 775,334 ) +Net property, plant and equipment +$ +435,139 +$ +333,093 +Depreciation expense was $ 108.1 million in 2023, $ 83.0 million in 2022, and $ 72.7 million in 2021. The Company had accounts payable for purchases of property and equipment of $ 9.0 million as of December 31, 2023, and $ 9.3 million as of December 31, 2022. The Company transferred inventory to property, plant and equipment totaling $ 10.9 million in 2023 and $ 9.9 million in 2022. +Note 9: Other Intangibles, net +Intangible assets are amortized over their legal or estimated useful life. The following table provides a summary of the gross carrying value and accumulated amortization by each major intangible class: +2023 +2022 +(in thousands) +Gross +Carrying +Amount +Accumulated Amortization +Gross +Carrying +Amount +Accumulated Amortization +Finite-lived Intangibles: +Customer relationships +$ +10,000 +$ +( 500 ) +$ +— +$ +— +Trade names and trademarks +3,519 +( 479 ) +319 +( 294 ) +Software licenses +2,202 +( 1,917 ) +2,202 +( 1,143 ) +Patents and technology +300 +( 300 ) +300 +( 300 ) +$ +16,021 +$ +( 3,196 ) +$ +2,821 +$ +( 1,737 ) +During 2023, the Company acquired intangible assets; see note titled Business Acquisition for additional details related to the intangible assets acquired. Amortization expense for each of the periods presented was as follows: +Years ended December 31, +2023 +2022 +2021 +(in thousands) +Amortization of finite-lived intangible assets +$ +1,459 +$ +796 +$ +27 +Estimated future amortization expense based on balances as of December 31, 2023, is as follows: $ 1.7 million for 2024 ; $ 1.3 million for the years 2024 to 2028 . +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Note 10: Income Taxes +The following table lists the components of the provision for income taxes: +Years ended December 31, +2023 +2022 +2021 +(in thousands) +Current provision (benefit): +Federal +$ +45,146 +$ +47,744 +$ +4,946 +State +6,502 +3,164 +( 1,387 ) +Foreign +835 +865 +784 +Deferred provision: +Federal +7,116 +14,026 +2,287 +State +1,531 +5,470 +2,601 +Total income tax provision +$ +61,130 +$ +71,269 +$ +9,231 +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2023 +2022 +2021 +Federal statutory rate +21.0 +% +21.0 +% +21.0 +% +State income taxes, net of federal benefit +2.1 +1.9 +2.9 +Foreign taxes, net of federal benefit +0.3 +0.3 +5.1 +Tax credits +( 0.3 ) +( 0.1 ) +( 3.5 ) +Change in contingencies +0.1 +— +8.6 +Non-deductible expenses +0.8 +0.7 +( 2.8 ) +Adjustments related to CARES Act +— +— +3.2 +Change in estimated deferred rate +— +0.4 +10.2 +Adjustments related to vesting of restricted stock +( 0.1 ) +0.2 +7.1 +Other +— +0.2 +4.3 +Effective tax rate +23.9 +% +24.6 +% +56.1 +% +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2023 +2022 +(in thousands) +Deferred tax assets: +Self-insurance +$ +4,303 +$ +3,051 +Long-term retirement plan +5,101 +5,237 +State net operating loss carryforwards +1,520 +1,960 +Allowance for credit losses +1,634 +1,757 +Stock-based compensation +1,414 +2,531 +Inventory reserve +3,330 +3,290 +Lease liability +5,777 +6,701 +Capitalized research and development +3,066 +1,041 +Valuation allowance +( 1,591 ) +( 990 ) +All others, net +3,126 +2,386 +Gross deferred tax assets +27,680 +26,964 +Deferred tax liabilities: +Depreciation +( 66,784 ) +( 51,494 ) +Right of use asset +( 5,461 ) +( 6,397 ) +Goodwill amortization +( 6,725 ) +( 6,546 ) +Gross deferred tax liabilities +( 78,970 ) +( 64,437 ) +Net deferred tax liabilities +$ +( 51,290 ) +$ +( 37,473 ) +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +The Company's current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits or would otherwise create no additional U.S. tax cost. +Total net income tax payments (refunds) were $ 62.2 million in 2023, $ 35.8 million in 2022, and $( 20.9 ) million in 2021. As of December 31, 2023, the Company has net operating loss carryforwards recorded related to state income taxes of $ 31.0 million (gross) that will expire between 2024 and 2042. +The Company’s policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of December 31, 2023, and 2022. +During 2023, the Company recognized an increase in its liability for unrecognized tax benefits related primarily to current year positions and disclosed as part of other long-term liabilities on the consolidated balance sheet. This liability, if released, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +(in thousands) +2023 +2022 +Balance at January 1 +$ +1,917 +$ +1,737 +Additions (reductions) based on tax positions related to the current year +337 +197 +Additions (reductions) for tax positions of prior years +( 86 ) +( 17 ) +Balance at December 31 +$ +2,168 +$ +1,917 +It is reasonably possible that the amount of the unrecognized benefits with respect to the Company’s unrecognized tax positions will increase or decrease in the next 12 months. These changes may be the result of, among other things, expiration of the statute of limitation, or conclusions of examinations or reviews. However, quantification of an estimated range cannot be made at this time. +The Company and its subsidiaries are subject to U.S. federal and state income tax in multiple jurisdictions. In many cases, the uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing authorities. In general, the Company’s 2020 through 2022 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +Note 11: Long-Term Debt +The Company has a revolving Credit Agreement with Bank of America and four other lenders which provides for a line of credit of up to $ 100 million, including a $ 35 million letter of credit sub-facility, and a $ 35 million swingline sub-facility. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company's 100% owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. The Credit Agreement’s maturity date is June 22, 2027. +The Company executed Amendment No. 6 to its Credit Agreement (the Amendment). This Amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with the Term Secured Overnight Financing Rate (Term SOFR) as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 25.0 basis points at each pricing level, (3) introduces a 1.00 % per annum floor for Base Rate borrowings, and (4) permits the issuance of letters of credit in currencies other than U.S. dollars. +Under the Credit Agreement, when RPC’s trailing four quarter adjusted EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million: (i) the consolidated leverage ratio cannot exceed 2.50 :1.00 and (ii) the debt service coverage ratio must be equal to or greater than 2.00 :1.00; otherwise, the minimum tangible net worth must be greater than or equal to $ 400 million. As of both December 31, 2023, and December 31, 2022, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● Term SOFR; plus, a margin ranging from 1.25 % to 2.25 % , based on a quarterly consolidated leverage ratio calculation, and an additional SOFR Adjustment ranging from 10 to 30 basis points depending upon maturity length; or +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Term SOFR plus 1.00 % , or (d) 1.00 % ; in each case plus a margin that ranges from 0.25 % to 1.25 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.20 % to 0.30 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility. These costs are being amortized to interest expense over the remaining term of the loan, and the remaining net balance of approximately $ 330 thousand as of December 31, 2023, is classified in non-current other assets. The remaining net balance of these costs was $ 257 thousand as of December 31, 2022. +As of December 31, 2023, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 16.6 million; therefore, a total of $ 83.4 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2023 +2022 +2021 +(in thousands) +Interest incurred +$ +242 +$ +246 +$ +257 +Interest paid +$ +166 +$ +170 +$ +166 +Note 12: Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss consists of the following (in thousands): +Foreign +Pension +Currency +Adjustment +Translation +Total +Balance at December 31, 2021 +$ +( 18,071 ) +$ +( 2,637 ) +$ +( 20,708 ) +Change during 2022: +Before-tax amount +( 2,934 ) +5 +( 2,929 ) +Tax benefit +671 +— +671 +Pension settlement loss, net of taxes +2,249 +— +2,249 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +778 +— +778 +Total activity in 2022 +764 +5 +769 +Balance at December 31, 2022 +( 17,307 ) +( 2,632 ) +( 19,939 ) +Change during 2023: +Before-tax amount +3,964 +263 +4,227 +Tax benefit +( 911 ) +— +( 911 ) +Pension settlement loss, net of taxes +14,080 +— +14,080 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +174 +— +174 +Total activity in 2023 +17,307 +263 +17,570 +Balance at December 31, 2023 +$ +— +$ +( 2,369 ) +$ +( 2,369 ) +(1) Reported as selling, general and administrative expenses. +Note 13: Cash Paid for Common Stock Purchased and Retired +The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market, including an additional 8,000,000 shares authorized for repurchase by the Board of Directors in the second quarter of 2023. As of December 31, 2023, 13,779,128 shares remained available to be repurchased. The program does not have a preset expiration date. Repurchases of shares of the Company’s common stock may be made from time to time in the open market, by block purchases, in privately negotiated transactions or in such other manner as determined by the Company. The timing of the repurchases and the actual amount +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +repurchased will depend on a variety of factors, including the market price of the Company's shares, general market and economic conditions, and other factors. The stock repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or discontinued at any time. +Shares purchased for withholding taxes represent taxes due upon vesting of time-lapse restricted shares granted to employees. Total share repurchases for 2023 and 2022 year to date are detailed below: +Year ended +Year ended +December 31, 2023 +December 31, 2022 +No. of shares +Avg. price +Total cost +No. of shares +Avg. price +Total cost +Shares purchased for withholding taxes +256,623 +$ +9.24 +$ +2,369,988 +158,649 +$ +5.78 +$ +917,645 +Open market purchases +2,469,056 +7.58 +18,717,662 +— +— +— +Total +2,725,679 +$ +7.74 +$ +21,087,650 +158,649 +$ +5.78 +$ +917,645 +Note 14: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2023, and 2022: +Fair Value Measurements at December 31, 2023 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +4 +$ +4 +$ +— +$ +— +Investments measured at net asset value +$ +26,772 +Fair Value Measurements at December 31, 2022 with: +Quoted prices in +Significant +active markets +other +Significant +for identical +observable +unobservable +(in thousands) +Total +assets +inputs +inputs +(Level 1) +(Level 2) +(Level 3) +Assets: +Equity securities +$ +305 +$ +305 +$ +— +$ +— +Investments measured at net asset value +$ +24,175 +The Company determines the fair value of marketable securities classified as available-for-sale through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities classified as trading are comprised of the SERP assets, as described in the note titled Employee Benefit Plans, and are recorded primarily at their +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. The expected holding period for these assets measured at net asset value is unknown. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2023, there were no significant transfers in or out of levels 1, 2 or 3. +Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2023 or 2022. Borrowings, if any, under our revolving credit facility bear variable interest rates as described in the note titled Long Term Debt and are classified as a level 2, based on quotes from the lender. The Company is subject to interest rate risk on the variable component of the interest rate. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 15: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. In accordance with ASC 450-20, Loss Contingencies , any probable and reasonable estimate of assessment costs have been included in accrued state, local and other taxes. +The Company has received a state tax notification of audit results related to sales and use tax and, with its outside legal counsel, has evaluated the perceived merits of this tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management, after consultation with legal counsel, believes that it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition. +Note 16: Employee Benefit Plans +Defined Benefit Pension Plan +The Company initiated actions to terminate the Plan in 2021 and it was fully terminated in 2023. As part of termination, the Company settled its participant liabilities in one of the following ways – (i) through a lump-sum settlement at the election of the participants; or (ii) transfer to a commercial annuity provider or a government agency. The Company funded this transfer through the liquidation of investments in the Plan assets and an additional cash contribution of $ 5.4 million. The Company recognized a pre-tax, non-cash settlement charge of $ 18.3 million during 2023, which represents the accelerated recognition of net actuarial loss that was previously recorded in accumulated other comprehensive loss (net of tax) and deferred taxes (tax effect). In addition, the Company utilized funds related to Marine Product’s plan assets to settle its participant liabilities, since it was a multiemployer Plan. See footnote titled Related Party Transactions for additional information. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +The following table sets forth the funded status of the Plan and the amounts recognized in RPC’s consolidated balance sheets: +December 31, +2023 +2022 +(in thousands) +Accumulated benefit obligation at end of year +$ +— +$ +29,651 +Change in projected benefit obligation: +Benefit obligation at beginning of year +$ +29,651 +$ +41,038 +Service cost +— +— +Interest cost +22 +972 +Actuarial (gain) loss +( 3,715 ) +( 5,258 ) +Benefits paid +( 836 ) +( 3,248 ) +Settlement +( 25,122 ) +( 3,853 ) +Projected benefit obligation at end of year +$ +— +$ +29,651 +Change in Plan assets: +Fair value of Plan assets at beginning of year +$ +20,041 +$ +35,339 +Actual return on Plan assets +249 +( 8,197 ) +Employer contribution +5,454 +— +Benefits paid +( 836 ) +( 3,248 ) +Transfer of assets +524 +— +Refund related to Plan trust dissolution +( 310 ) +— +Settlement +( 25,122 ) +( 3,853 ) +Fair value of Plan assets at end of year +$ +— +$ +20,041 +Funded status at end of year +$ +— +$ +( 9,610 ) +The Company used a December 31 measurement date for this qualified Plan. As of December 31, 2022, the underfunded status of the Plan was disclosed in the current liabilities section on the Consolidated Balance Sheets. +December 31, +2023 +2022 +(in thousands) +Amounts (pre-tax) recognized in accumulated other comprehensive income (loss) consist of: +Net loss +$ +— +$ +22,476 +Prior service cost (credit) +— +— +Net transition obligation (asset) +— +— +$ +— +$ +22,476 +The components of net periodic cost of the Retirement Income Plan are summarized as follows: +December 31, +2023 +2022 +2021 +(in thousands) +Interest cost +$ +22 +$ +972 +$ +988 +Expected return on Plan assets +— +— +( 1,509 ) +Amortization of net losses +226 +1,010 +808 +Settlement loss +18,286 +2,921 +— +Net periodic benefit cost +$ +18,534 +$ +4,903 +$ +287 +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +The pre-tax amounts recognized in accumulated other comprehensive (loss) income for the years ended December 31, 2023, 2022 and 2021 are summarized as follows: +December 31, +2023 +2022 +2021 +(in thousands) +Net (loss) gain +$ +( 3,964 ) +$ +2,939 +$ +4,169 +Amortization of net loss +( 226 ) +( 1,010 ) +( 808 ) +Settlement loss +( 18,286 ) +( 2,921 ) +— +Amount recognized in accumulated other comprehensive (loss) income +$ +( 22,476 ) +$ +( 992 ) +$ +3,361 +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2023 +2022 +2021 +Projected Benefit Obligation : +Discount rate +(1) +(1) +(1) +Rate of compensation increase +N/A +N/A +N/A +Net Benefit Cost: +Discount rate +N/A +4.86 +% +2.50 +% +Expected return on Plan assets +N/A +0.0 +% +4.00 +% +Rate of compensation increase +N/A +N/A +N/A +(1) As of December 31, 2023, there was no liability in the plan and therefore, a discount rate does not apply. Projected benefit obligation as of December 31, 2022, and 2021 reflects proposed termination of the Plan and is calculated based on various assumptions in accordance with the Plan agreement. +There were no assets in the Plan as of December 31, 2023. The Plan’s weighted average asset allocation as of December 31, 2022, by asset category was as follows: +Percentage of Plan Assets +December 31, +2022 +Asset Category +Cash and cash equivalents +3.7 +% +Fixed income securities +96.3 +% +Total +100.0 +% +The following tables present our Plan assets using the fair value hierarchy as of December 31, 2022. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See note titled Fair Value Disclosures for a brief description of the three levels under the fair value hierarchy. +Fair Value Hierarchy as of December 31, 2022: +Investments (in thousands) +Total +Level 1 +Level 2 +Cash and Cash Equivalents +(1) +$ +740 +$ +740 +$ +— +Fixed Income Securities +(2) +19,301 +— +19,301 +Total Assets in the Fair Value Hierarchy +$ +20,041 +$ +740 +$ +19,301 +Investments measured at Net Asset Value +— +Investments at Fair Value +$ +20,041 +(1) Cash and cash equivalents, which are used to pay benefits and Plan administrative expenses, are held in money market funds. +(2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades. Subsequent to December 31, 2022 these securities were liquidated to fund the annuity purchases. +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Supplemental Executive Retirement Plan (SERP) +The Company permits selected highly compensated employees to defer a portion of their compensation to the SERP. The liabilities related to these deferrals are recognized as Long-term retirement plan liabilities in the Consolidated Balance Sheets. +The SERP assets are invested primarily in company-owned life insurance (COLI) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them for another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $ 49.3 million as of December 31, 2023, and $ 45.4 million as of December 31, 2022. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +The Company classifies the SERP assets as trading securities as described in note 1. The fair value of these assets totaled $ 26.8 million as of December 31, 2023, and $ 24.2 million as of December 31, 2022. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading gains (losses) related to the SERP assets totaled $ 2.6 million in 2023, $( 4.4 million) in 2022, and $ 2.6 million in 2021. The SERP liability includes participant deferrals net of distributions and is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Trading gains (losses) related to the SERP liability totaled $ 2.8 million in 2023, $( 4.1 million) in 2022, and $ 3.1 million in 2021. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This Plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. Effective January 1, 2019, the Company began making 100 percent matching contributions for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents $(0.50) for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 11.3 million in 2023, $ 9.8 million in 2022, and $ 6.9 million in 2021. +Stock Incentive Plans +The Company has issued stock options and restricted stock to employees under stock incentive plans that were approved by stockholders. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive plan with a term of 10 years expiring in April 2024. This plan allows for a wide variety of stock-based awards such as stock options and restricted stock. In recent years, we have awarded time-based restricted stock in lieu of granting stock options. We have not issued any stock options since 2003 and have no immediate plans to issue additional stock options. As of December 31, 2023, 911,997 shares were available for grant under the 2014 plan. As of December 31, 2022, 2,046,199 shares were available for grant. +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense included as part of selling, general and administrative expense was $ 7.9 million in 2023 $( 6.1 million after tax), $ 6.4 million in 2022 $( 4.9 million after tax) and $ 6.6 million in 2021 $( 5.1 million after tax). +Restricted Stock +The Company has granted certain employees and directors time lapse restricted stock which vests after a stipulated number of years from the grant date in the case of employees and vests immediately for non-employee directors, depending on the terms of the issue. The time-lapse restricted shares granted to employees in 2024 will vest ratably over a period of three years ; the shares granted to employees in 2023 vest ratably over a period of four years ; the shares granted to employees in 2022 vest ratably over a period of five +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +years . Prior to 2022, the time-lapse restricted shares vested one -fifth per year beginning on the second anniversary of the grant date. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests) or disability (partially vests based on pre-approved formula), shares with restrictions are forfeited in accordance with the plan. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2023: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2023 +3,248,728 +$ +6.87 +Granted +1,235,728 +9.50 +Vested +( 859,485 ) +8.63 +Forfeited +( 92,786 ) +7.74 +Non-vested shares at December 31, 2023 +3,532,185 +$ +7.35 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2022: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2022 +2,619,691 +$ +7.89 +Granted +1,254,276 +6.72 +Vested +( 510,084 ) +11.86 +Forfeited +( 115,155 ) +6.29 +Non-vested shares at December 31, 2022 +3,248,728 +$ +6.87 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 9.50 for 2023, $ 6.72 for 2022 and $ 3.87 for 2021. The total fair value of shares vested was $ 7.8 million during 2023, $ 2.9 million during 2022 and $ 1.8 million during 2021. +The consolidated statements of cash flows reflect discrete income tax adjustments that resulted in $ 222,000 of beneficial impact in 2023 and $ 640,000 of detrimental impact in 2022 realized from tax compensation deductions and classified within operating activities as part of net income. +Other Information +As of December 31, 2023, total unrecognized compensation cost related to non-vested restricted shares was $ 13.8 million which is expected to be recognized over a weighted-average period of 2.8 years. +Note 17: Related Party Transactions +Marine Products Corporation +In conjunction with RPC’s spin-off of its powerboat manufacturing business, RPC and Marine Products Corporation (Marine Products) entered into various agreements that define the companies’ relationship. Per the terms of their Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 1.0 million in 2023, $ 922 thousand in 2022, and $ 867 thousand in 2021. The Company’s receivable due from Marine Products for these services was $ 120 thousand as of December 31, 2023, and $ 26 thousand as of December 31, 2022. In addition, the Company owed $ 524 thousand to Marine Products, for using Marine Product’s assets in the Plan to settle its participant liabilities. Of the total Plan-related amounts owed, the Company reimbursed Marine Products $ 482 thousand during 2023. All of the Company’s directors are also directors of Marine Products, and the executive officers are employees of both the Company and Marine Products. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Other +The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of or affiliated with certain directors of RPC. The total amounts paid to these affiliated parties were $ 1.8 million in 2023, $ 1.8 million in 2022 and $ 1.3 million in 2021. All of the related party transactions have been approved by the Nominating and Corporate Governance Committee. +RPC received certain administrative services from Rollins, Inc. (a company that has a significant shareholder group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company). That significant shareholder group had a controlling interest in Rollins, Inc. prior to June 2023. The service agreements between Rollins, Inc. and the Company provided for the provision of services on a cost reimbursement basis; the agreement was terminated in November 2023. The services covered by these agreements included administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 3 thousand in 2023, $ 71 thousand in 2022 and $ 108 thousand in 2021. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of 50 % of the Company’s voting power. RPC and Marine Products own 50 % each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200 thousand in 2023, $ 200 thousand in 2022 and $ 200 thousand in 2021 for the corporate aircraft. The Company had a payable to 255 RC, LLC of $ 1.8 million as of December 31, 2023, and $ 1.6 million as of December 31, 2022. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2023, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings were approximately $ 639 thousand. +Note 18: Business Segment and Entity Wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, cementing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (CODM) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Segment Revenues: +RPC’s operating segment revenues by major service lines are shown in the following table: +(in thousands) +2023 +2022 +2021 +Technical Services: +Pressure Pumping +$ +771,542 +$ +846,939 +$ +369,028 +Downhole Tools +397,341 +374,081 +247,019 +Coiled Tubing +152,484 +140,889 +88,946 +Cementing +64,481 +21,178 +10,111 +Nitrogen +47,306 +39,596 +38,773 +Snubbing +26,345 +28,028 +15,408 +All other +56,638 +65,652 +45,761 +Total Technical Services +$ +1,516,137 +$ +1,516,363 +$ +815,046 +Support Services: +Rental Tools +$ +73,301 +$ +62,780 +$ +32,167 +All other +28,036 +22,619 +17,716 +Total Support Services +$ +101,337 +$ +85,399 +$ +49,883 +Total revenues +$ +1,617,474 +$ +1,601,762 +$ +864,929 +The accounting policies of the reportable segments are the same as those described in the note titled Significant Accounting Policies. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2023, 2022 and 2021 are shown in the following table: +Gain on +Pension +Technical +Support +disposition of +Settlement +(in thousands) +Services +Services +Corporate +assets, net +charges +Total +2023 +Revenues +$ +1,516,137 +$ +101,337 +$ +— +$ +— +$ +— +$ +1,617,474 +Operating income (loss) +245,904 +26,461 +( 18,473 ) +9,344 +( 18,286 ) +244,950 +Capital expenditures +160,799 +15,634 +4,572 +— +— +181,005 +Depreciation and amortization +97,773 +10,293 +57 +— +— +108,123 +Identifiable assets +867,550 +81,754 +337,541 +— +— +1,286,845 +2022 +Revenues +$ +1,516,363 +$ +85,399 +$ +— +$ +— +$ +— +$ +1,601,762 +Operating income (loss) +281,622 +18,095 +( 17,660 ) +8,804 +( 2,921 ) +287,940 +Capital expenditures +126,327 +12,320 +905 +— +— +139,552 +Depreciation and amortization +73,016 +9,840 +161 +— +— +83,017 +Identifiable assets +823,434 +80,104 +225,475 +— +— +1,129,013 +2021 +Revenues +$ +815,046 +$ +49,883 +$ +— +$ +— +$ +— +$ +864,929 +Operating income (loss) +24,434 +( 5,725 ) +( 13,300 ) +10,882 +— +16,291 +Capital expenditures +59,316 +7,012 +1,317 +— +— +67,645 +Depreciation and amortization +62,667 +9,752 +267 +— +— +72,686 +Identifiable assets +580,406 +69,345 +214,614 +— +— +864,365 +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2023, 2022 and 2021. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10% of RPC’s consolidated assets, and therefore are not presented. +(in thousands) +2023 +2022 +2021 +United States revenues +$ +1,588,774 +$ +1,569,160 +$ +833,686 +International revenues +28,700 +32,602 +31,243 +Total revenues +$ +1,617,474 +$ +1,601,762 +$ +864,929 +Note 19: Leases +The Company recognizes operating and finance leases with a duration greater than 12 months on the balance sheet with a Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. Leases that include rental escalation clauses or renewal options are factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement, to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2023, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2023, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +During the year ended December 31, 2023, the Company assumed certain leases as part of its acquisition of Spinnaker. The disclosures below include the information related to the leases after the acquisition. See note tilted Business Acquisition for further information related to those leases. +Lease Position: +The table below represents the assets and liabilities related to operating leases recorded on the balance sheet: +December 31, +2023 +2022 +(in thousands) +Assets: +Operating lease right-of-use assets +$ +24,537 +$ +28,864 +Finance lease right-of-use assets +1,036 +— +Total lease assets +$ +25,573 +$ +28,864 +Liabilities: +Current portion of operating leases +$ +7,367 +$ +10,728 +Current portion of finance lease liabilities and finance obligations +375 +— +Long-term finance lease liabilities +819 +— +Long-term operating lease liabilities +18,600 +19,517 +Total lease liabilities +$ +27,161 +$ +19,517 +Lease costs: +The components of finance lease are included in depreciation and amortization and interest expense; operating lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations as disclosed below. +Year ended December 31, +2023 +2022 +2021 +(in thousands) +Finance lease cost +Amortization of leased assets +$ +129 +$ +3,390 +$ +1,452 +Interest on lease liabilities +13 +283 +116 +Total finance lease cost +$ +142 +$ +3,673 +$ +1,568 +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Interest on finance obligation +$ +35 +$ +— +$ +— +Operating lease cost +$ +15,096 +$ +9,615 +$ +7,580 +Short-term lease cost +1,862 +9,192 +3,626 +Variable lease cost +774 +647 +772 +Sublease income +( 1,400 ) +( 1,021 ) +( 831 ) +Total operating lease cost +$ +16,332 +$ +18,433 +$ +11,147 +Total lease cost +$ +16,509 +$ +22,106 +$ +12,715 +Other Information: +As of December 31, +2023 +2022 +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +12,475 +$ +8,742 +Cash paid for amounts included in the measurement of lease liabilities – finance lease and finance obligations (in thousands) +$ +515 +$ +— +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +8,151 +$ +12,882 +Weighted average remaining lease term – finance lease (years) +4.00 +— +Weighted average remaining lease term – operating leases (years) +5.06 +5.14 +Weighted average remaining term – finance obligations (months) +8.00 +— +Weighted average discount rate – finance lease +2.3 +% +— +% +Weighted average discount rate – operating leases +4.42 +% +3.93 +% +Weighted average discount rate – finance obligations +8.40 +% +— +% +Lease Commitments: +Maturity of lease liabilities and finance obligations: +As of December 31, +2023 +(in thousands) +2024 +$ +9,197 +2025 +5,856 +2026 +4,957 +2027 +3,863 +2028 +2,291 +Thereafter +4,487 +Total lease payments +30,651 +Less: Amounts representing interest +( 3,490 ) +Present value of lease liabilities +$ +27,161 +Note 20. Subsequent Event +On January 23, 2024, the Board of Directors declared a $ 0.04 per share cash dividend payable March 11, 2024 , to stockholders of record at the close of business on February 9, 2024 . +60 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2023 (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 29 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2023, and issued a report thereon which is included on page 30 of this report. +Changes in internal control over financial reporting — There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2023 which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +During the quarter ended December 31, 2023, no director or officer, as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended, of the Company adopted or terminated a “ Rule 10b5-1 trading arrangement” or “ non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation SK. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not Applicable +61 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors, director nominees and executive officers will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the sections titled Information Regarding Director Nominees, Continuing Directors and Executive Officers. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the section titled Board of Directors and Corporate Governance, Meetings and Committees of the Board of Directors – Audit Committee. This information is incorporated herein by reference. +Code of Ethics +RPC, Inc. has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, N.E., Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its code that relates to any elements of the code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under Section 16(a) Beneficial Ownership Reporting Compliance in the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is incorporated herein by reference. +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the sections titled Human Capital Management and Compensation Committee Interlocks and Insider Participation, Director Compensation, Compensation Discussion and Analysis, Human Capital Management and Compensation Committee Report and Executive Compensation. This information is incorporated herein by reference. +62 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership of certain beneficial owners and management, and such all officers and directors as a group, will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the section titled Stock Ownership of Certain Beneficial Owners and Management. This information is incorporated herein by reference. +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2023. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A) +Equity compensation plans approved by securityholders +— +$ +— +911,997 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +911,997 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See note titled Employee Benefit Plans to the consolidated financial statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the sections titled, Certain Relationships and Related Party Transactions. Information regarding director independence will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders in the section titled Director Independence and NYSE Requirements. This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled Audit Matters, Independent Registered Public Accounting Firm in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibit and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to consolidated financial statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to consolidated financial statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +63 +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K filed on March 24, 2000). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. (incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed on February 2, 2021). +4 +Form of Stock Certificate (incorporated herein by reference to Exhibit 4 to the Annual Report on Form 10-K filed on March 25, 1999). +4.2 +Description of Registrant's Securities. (incorporated herein by reference to Exhibit 4.2 to the Form 10-K filed on February 26, 2022). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001 by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.5 +Tax Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.5 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.9 +First Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 2, 2007). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers (incorporated herein by reference to Exhibit 10.17 to the Form 10-K filed on March 3, 2010). +10.12 +Credit Agreement dated August 31, 2010 between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011 between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on January 24, 2014). +64 +Exhibit +Number +Description +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +10.22 +Amendment to No. 5 to Credit Agreement dated as of September 25, 2020 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Registrants Form 8-K filed on October 1, 2021). +10.23 +Amendment to No. 6 to Credit Agreement dated as of June 22, 2022 among RPC, Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Current Report on Form 8-K filed on June 23, 2023). +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +97.1 +Policy relating to recovery of erroneously awarded compensation +101.INS +Inline XBRL Instance Document +101.SCH +Inline XBRL Taxonomy Extension Schema Document +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +The cover page from the Company’s Annual Report for the year ended December 31, 2023, formatted in Inline XBRL +Item 16. Form 10-K Summary +Not Applicable +65 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2024 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2024 +/s/ Michael L. Schmit +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 28, 2024 +The Directors of RPC (listed below) executed a power of attorney, appointing Ben M. Palmer their attorney-in-fact, empowering him to sign this report on their behalf. +Richard A. Hubbell, Director +Gary W. Rollins, Director +Jerry W. Nix, Director +Patrick J. Gunning, Director +Susan R. Bell, Director +John F. Wilson, Director +Pamela R. Rollins, Director +Amy R. Kreisler, Director +Timothy C. Rollins, Director +/s/ +Ben M. Palmer +Ben M. Palmer +Director and as Attorney-in-fact +February 28, 2024 +66 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +29 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) on Internal Control Over Financial Reporting +30 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) on Consolidated Financial Statements +31 +Consolidated Balance Sheets as of December 31, 2023, and 2022 +33 +Consolidated Statements of Operations for each of the three years ended December 31, 2023 +34 +Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 2023 +35 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2023 +36 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2023 +37 +Notes to Consolidated Financial Statements +38 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +68 +Schedules not listed above have been omitted because they are not applicable, or the required information is included in the consolidated financial statements or notes thereto. +67 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2023, 2022 and 2021 +Balance at +Charged to +Balance +Beginning +Costs and +Net (Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries +Period +Year ended December 31, 2023 +Credit loss allowance for accounts receivable +$ +7,078 +$ +2,656 +$ +( 2,625 ) +(1) +$ +7,109 +Deferred tax asset valuation allowance +$ +990 +$ +601 +$ +— +(2) +$ +1,591 +Reserve for obsolete or slow-moving inventory +$ +15,374 +$ +3,063 +$ +( 2,512 ) +(3) +$ +15,925 +Year ended December 31, 2022 +Credit loss allowance for accounts receivable +$ +6,765 +$ +2,029 +$ +( 1,716 ) +(1) +$ +7,078 +Deferred tax asset valuation allowance +$ +865 +$ +— +$ +125 +(2) +$ +990 +Reserve for obsolete or slow-moving inventory +$ +13,236 +$ +4,080 +$ +( 1,942 ) +(3) +$ +15,374 +Year ended December 31, 2021 +Credit loss allowance for accounts receivable +$ +4,815 +$ +4,019 +$ +( 2,069 ) +(1) +$ +6,765 +Deferred tax asset valuation allowance +$ +490 +$ +— +$ +375 +(2) +$ +865 +Reserve for obsolete or slow-moving inventory +$ +13,829 +$ +5,016 +$ +( 5,609 ) +(3) +$ +13,236 +(1) Net (deductions) recoveries in the credit loss allowance principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state and foreign net operating losses and capital losses that management believes will not be utilized before they expire. +(3) Net (deductions) recoveries in the reserve for obsolete or slow-moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory . +68 \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/filing_metadata.csv b/raw/filings/0000742278/2023/0001558370-24-001993/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..6de5895d711ce8508916a23e2a474590c05e4985 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2024-02-28,2023-12-31,2024-02-28T21:05:32.000Z,0001558370-24-001993,res-20231231x10k.htm,10-K,13722123,1,1,https://www.sec.gov/Archives/edgar/data/742278/000155837024001993/res-20231231x10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000155837024001993/,2023,2023,1 diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/item1.txt b/raw/filings/0000742278/2023/0001558370-24-001993/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..478ddab4fe5c5e8eda690980c12ebe233374afb3 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/item1.txt @@ -0,0 +1,82 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services, which are its operating segments. As of December 31, 2023, RPC had 2,691 employees. +3 +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services), or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. In 2023, we estimate that 74% of our revenues were related to drilling and production activities for oil, while 26% of revenues were related to drilling and production activities for natural gas. During 2023, approximately five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. Technical Services are provided in all of RPC’s principal geographical markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The primary drivers of operational success for Support Services are offering safe, high quality and in-demand equipment, as well as meeting customer needs and competitive marketing of such services. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. Support Services are provided in all of RPC’s principal geographical markets. +A brief description of the primary services conducted within each of the operating segments follows: +Technical Services +Pressure Pumping . Pressure pumping services, which accounted for 48% of 2023 revenues, 53% of 2022 revenues and 43% of 2021 revenues are provided to customers throughout Texas, and the mid-continent regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in pressure pumping operations include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: +Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluids and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. +Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. Acid is also frequently used in the beginning of a fracturing operation. +4 +Downhole Tools . Thru Tubing Solutions’ (TTS) downhole tools division accounted for 25% of revenues in 2023, 23% of revenues in 2022 and 29% of revenues in 2021. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation and bridge plug drilling at the completion stage of an oil or gas well. The services that TTS provides are often proprietary solutions developed by the Company, for which the Company maintains an active intellectual property and patent program. Management believes Downhole Tools represents a differentiated service line. +Coiled Tubing . Coiled tubing services, which accounted for nine percent of revenues in both 2023 and 2022 and ten percent of revenues in 2021, involve the injection of coiled tubing into wells to perform various applications and functions for use principally to facilitate completion of unconventional wells, and to a lesser extent, in well-servicing operations of existing wells. Coiled tubing is a flexible steel pipe thousands of feet in length which is wound or coiled around a large reel and conveyed into a wellbore to conduct a variety of downhole tasks. Coiled tubing is attractive because its flexibility allows it to be steered through wellbores that are other than vertical, while also being strong enough to convey tools or motors at the end of the coiled tubing string. Since it is hollow, it can convey fluid which powers a motor or may be needed to clean out a wellbore. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and larger-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate. +Cementing. Cementing services, which accounted for four percent of revenues in 2023 and one percent of revenues in both 2022 and 2021 are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle. Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The Company’s cementing revenues increased during 2023 primarily due to the acquisition of Spinnaker. +Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for two percent of revenues in 2023, 2022 and 2021, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than pipe conveyed by a snubbing unit. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing unit can perform many applications at a lower cost than other alternatives. +Nitrogen . Nitrogen accounted for three percent of revenues in 2023, two percent of revenues in 2022 and four percent of revenues in 2021. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer's well. For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. +Well Control . Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations. The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. +Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower +5 +an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Support Services +Rental Tools . Rental tools accounted for five percent of revenues in 2023 and four percent of revenues in both 2022 and 2021. The Company rents specialized equipment for use with onshore and offshore oil and gas well completion, drilling and workover activities. The Company offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling requirements. +Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. +Refer to note in the consolidated financial statements titled Business Segment and Entity Wide Disclosures for additional financial information on our business segments. +6 +Industry +United States. RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. +Due to improved drilling technology, the drilling rig count in the U.S. has declined dramatically since the early 1980’s (source: Baker Hughes, Inc.). While oil and gas industry demand is influenced by many factors, the rig count is often used as a proxy for current and future industry activity. Due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and the domestic production of both oil and natural gas in these wells rose to record levels in 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history, following the onset of the COVID pandemic. Between August 2020 and the fourth quarter of 2023, the U.S. domestic rig count rose by approximately 149%. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, reported well completions increased to 12,250 in 2023, an increase of approximately 8.0% compared to 2022. +Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. During 2020, oil prices suffered a historic decrease due to the global economic disruption and uncertainty following the COVID-19 outbreak, with our customers facing a potential collapse in global oil demand. Following the cyclical trough in oilfield activity in the third quarter of 2020, commodity prices and the U.S. domestic rig count began to recover, and by the end of 2022, the U.S. domestic rig count had more than doubled compared to the historic low level recorded in 2020. During early 2022 the industry also experienced volatility, with higher oil process and global uncertainty caused by Russia’s invasion of Ukraine. During 2023, the U.S. domestic average rig count decreased to 688 compared to 723 in the prior year, in part due to continued productivity and efficiency improvements of oilfield assets. The Company anticipates oilfield activity to remain consistent with 2023 levels during 2024. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results. +The average price of natural gas decreased by approximately 61% during 2023 as compared with 2022 (source: U.S. Energy Information Administration). RPC believes that the recent decrease in the price of natural gas may discourage drilling and completion of natural gas-directed wells during the near term. +During the first decade of the twenty-first century, natural gas-directed drilling rigs comprised most of the U.S. drilling rig count. Beginning in 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50% of total U.S. drilling. Rising U.S. domestic demand for natural gas and the advent of U.S. exports of liquified natural gas have been offset by increasing production, thus preventing the price of natural gas from rising. The Russian invasion of Ukraine during the first quarter of 2022 prompted Western European countries to curtail or eliminate their purchases of natural gas from Russia. As a result, the demand for liquified natural gas from the United States increased significantly, which increased the price for natural gas in the United States to its highest level since 2008 and encouraged additional investment in liquified natural gas production facilities in the United States. These factors have been offset by warm weather and the idling of a major liquified natural gas facility in the U.S., which contributed to the decline in the price of natural gas during 2023. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons and the high production of oil in the domestic U.S. market. +7 +Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80% of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services. +International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for approximately two percent of RPC’s consolidated revenues in both 2023 and 2022 and four percent in 2021. RPC’s allocation of growth capital over the last several years has emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. +RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to note in the consolidated financial statements titled Business Segment and Entity wide Disclosures for further information on our international operations. +Growth Strategies +RPC’s primary objective is to generate attractive long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through acquisitions or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential new customers who have a long-term need for our services in markets in which we operate. +RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. In the third quarter of 2023 we successfully completed the acquisition of Spinnaker Oilwell Services, thereby expanding our cementing service line. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions. +RPC has a revolving credit facility which can be used to fund working capital and other capital requirements, as needed. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2023. Our capital structure is more conservative than that of many of our peers. +Customers +Demand for RPC’s services and equipment depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. There was no customer in 2023 that accounted for 10% or more of revenues. RPC provided oilfield services to several hundred customers during each of the past three years. Of these customers, only one customer, a private exploration and production company, accounted for approximately 11% of the Company’s revenues in 2022 with no other customers exceeding 10% of revenues during 2022 or 2021. +8 +Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +Competition +RPC operates in highly competitive areas of the oilfield services industry. We offer our services and equipment in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. During the most recent downturn that began in 2019, fewer oilfield service companies became insolvent than in previous downturns. This was due in part to COVID-19 – related Federal stimulus that supported businesses that would otherwise have become insolvent. Oilfield activity levels began to improve during the fourth quarter of 2020, and pricing for our services began to improve during the fourth quarter of 2021, both of which supported the operations of oilfield services companies that remained in operation. During 2022, Russia’s invasion of Ukraine destabilized global oil markets, causing prices to rise, while also increasing the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. Instability in the Middle East region has continued including the conflict in Israel and the Gaza Strip, and the Red Sea shipping disruptions. +Improving completion services efficiency has served to increase effective capacity and impose another catalyst for declining pricing and utilization. The combination of a large number of oilfield services companies and the increased efficiency with which these companies provide services has caused the oilfield services business to remain highly competitive. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Energy, Inc, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac and ProPetro Holding Corporation, as well as numerous smaller, locally owned competitors. Increased demands for larger-scale and newer technology solutions, as well as business combinations among large oil and gas companies, are driving consolidation of our competitors in certain service lines. +Human Capital +The table below shows the number of employees at December 31, 2023 and 2022: +At December 31, +2023 +2022 +Employees +2,691 +2,732 +The Company operates in a cyclical business where financial performance and headcount are influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Diversity and Equality - The Company’s workforce is diverse and our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships, and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel. The Board of Directors has a Human Capital Management and Compensation Committee that monitors compliance with applicable non-discrimination laws related to race, gender, and other protected classes. The Committee provides an update of such incidents to the Board, as needed, at least on an annual basis. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a Code of Conduct to provide guidance for everyone associated with the Company, including its employees, officers, and directors (the Code). The code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the code each year and any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting, and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee +9 +discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees. +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see note to the consolidated financial statements titled Leases. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +10 +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection, when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/item13.txt b/raw/filings/0000742278/2023/0001558370-24-001993/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9dc20437f22483d4bbbd9169246f052b29bab53b --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders, in the sections titled, Certain Relationships and Related Party Transactions. Information regarding director independence will be included in the RPC Proxy Statement for its 2024 Annual Meeting of Stockholders in the section titled Director Independence and NYSE Requirements. This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/item9a.txt b/raw/filings/0000742278/2023/0001558370-24-001993/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9b318af05bf072a753bfac83ad157610c032e349 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2023 (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 29 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2023, and issued a report thereon which is included on page 30 of this report. +Changes in internal control over financial reporting — There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2023 which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/rp_note.txt b/raw/filings/0000742278/2023/0001558370-24-001993/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..73d2ad4d5667a26562d6d53a4cbd668694f40d82 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/rp_note.txt @@ -0,0 +1,11 @@ +Note 17: Related Party Transactions +Marine Products Corporation +In conjunction with RPC’s spin-off of its powerboat manufacturing business, RPC and Marine Products Corporation (Marine Products) entered into various agreements that define the companies’ relationship. Per the terms of their Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 1.0 million in 2023, $ 922 thousand in 2022, and $ 867 thousand in 2021. The Company’s receivable due from Marine Products for these services was $ 120 thousand as of December 31, 2023, and $ 26 thousand as of December 31, 2022. In addition, the Company owed $ 524 thousand to Marine Products, for using Marine Product’s assets in the Plan to settle its participant liabilities. Of the total Plan-related amounts owed, the Company reimbursed Marine Products $ 482 thousand during 2023. All of the Company’s directors are also directors of Marine Products, and the executive officers are employees of both the Company and Marine Products. +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2023, 2022 and 2021 +Other +The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of or affiliated with certain directors of RPC. The total amounts paid to these affiliated parties were $ 1.8 million in 2023, $ 1.8 million in 2022 and $ 1.3 million in 2021. All of the related party transactions have been approved by the Nominating and Corporate Governance Committee. +RPC received certain administrative services from Rollins, Inc. (a company that has a significant shareholder group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company). That significant shareholder group had a controlling interest in Rollins, Inc. prior to June 2023. The service agreements between Rollins, Inc. and the Company provided for the provision of services on a cost reimbursement basis; the agreement was terminated in November 2023. The services covered by these agreements included administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 3 thousand in 2023, $ 71 thousand in 2022 and $ 108 thousand in 2021. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of 50 % of the Company’s voting power. RPC and Marine Products own 50 % each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $ 200 thousand in 2023, $ 200 thousand in 2022 and $ 200 thousand in 2021 for the corporate aircraft. The Company had a payable to 255 RC, LLC of $ 1.8 million as of December 31, 2023, and $ 1.6 million as of December 31, 2022. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2023, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings were approximately $ 639 thousand. \ No newline at end of file diff --git a/raw/filings/0000742278/2023/0001558370-24-001993/rpt_disclosure.txt b/raw/filings/0000742278/2023/0001558370-24-001993/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8c7bf08e31587a15bca4ede7212ee42c00f1d086 --- /dev/null +++ b/raw/filings/0000742278/2023/0001558370-24-001993/rpt_disclosure.txt @@ -0,0 +1,7 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The Company provides certain administrative services to Marine Products on a cost reimbursement basis and the arrangement may be terminated upon six months’ notice. The services include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $1 million in 2023. The Company’s receivable due from Marine Products for these services was $120 thousand as of December 31, 2023. In addition, the Company owed $524 thousand to Marine Products, for using Marine Product’s assets in the Retirement Income Plan to settle its participant liabilities. Of the total Plan-related amounts owed, the Company reimbursed Marine Products $482 thousand during 2023. +RPC and Marine Products own 50% each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2023, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $200 thousand for the corporate aircraft. +During 2023, a subsidiary of RPC conducted business with companies owned by LOR, Inc., a member of the control group. Mr. Gary W. Rollins, a director at RPC, is an officer, director and controlling stockholder of LOR, Inc., and Timothy C. Rollins, Vice President of LOR, Inc., Pamela R. Rollins, Director of LOR, Inc., and Amy R. Kreisler, Vice President of LOR Inc., are part of the controlling stockholders of LOR, Inc. Payments totaling approximately $1.7 million were made in 2023 and approximately $150 thousand were made in 2024 to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred are at least as favorable as the charges that would have been incurred for similar purchases from unaffiliated third parties. +Related party transactions, as defined in Regulation S-K, Item 404(a), must be reviewed and approved in advance by our Nominating and Corporate Governance Committee or, in the event that our Nominating and Corporate Governance Committee does not consist of all independent directors, by a Subcommittee (the Subcommittee) of the Nominating and Corporate Governance Committee consisting of all of the independent members thereof. As set forth in the Charter of our Nominating and Corporate Governance Committee, the Nominating and Corporate Governance Committee has the authority and responsibility to ensure that it approve all related party transactions, including material amendments that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Nominating and Corporate Governance Committee also has the authority to hire legal, accounting, financial or other advisors, as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. These same rights and responsibilities apply equally to the Subcommittee. A copy of the Charter of the Nominating and Corporate Governance Committee is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2023 were reviewed, pre-approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Charter. +65 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/filing.txt b/raw/filings/0000742278/2024/0001558370-25-001922/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..053adff83c9adddcf18be9d8efd3192db19ebfbb --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/filing.txt @@ -0,0 +1,3722 @@ +RPC, INC._DECEMBER 31, 2024 +211358000 212927000 213331000 GA NYSE P60D P3Y 0.03 P3Y 0.2 0.50 0000742278 --12-31 2024 FY false 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2024-01-01 2024-12-31 0000742278 us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember 2022-01-01 2022-12-31 0000742278 us-gaap:InventoryValuationAndObsolescenceMember 2024-01-01 2024-12-31 0000742278 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1-8726 +RPC, INC. +(Exact name of registrant as specified in its charter) +Delaware +(State of Incorporation) +58-1550825 +(I.R.S. Employer Identification No.) +2801 BUFORD HIGHWAY NE, SUITE 300 +ATLANTA , GEORGIA 30329 +( 404 ) 321-2140 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +COMMON STOCK, $0.10 PAR VALUE +Trading Symbol(s) +RES +Name of each exchange on which registered +NEW YORK STOCK EXCHANGE +Securities registered pursuant to Section 12(g) of the Act: NONE +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ◻ Yes ☒ No +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒ No +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ +Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): +Large accelerated filer ◻ +Accelerated filer ⌧ +Non-accelerated filer ◻ +Smaller reporting company ☐ Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2024, the last business day of the registrant’s most recently completed second fiscal quarter, was $ 520,746,956 based on the closing price on the New York Stock Exchange on June 28, 2024, of $6.25 per share. +RPC, Inc. had 216,052,632 shares of Common Stock outstanding as of February 14, 2025. +Documents Incorporated by Reference +Portions of the proxy statement for the 2025 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report. +RPC, INC. AND SUBSIDIARIES +Table of Contents +Page +No. +Part I +Item 1. +Business +6 +Item 1A. +Risk Factors +14 +Item 1B. +Unresolved Staff Comments +20 +Item 1C. +Cybersecurity +20 +Item 2. +Properties +21 +Item 3. +Legal Proceedings +21 +Item 4. +Mine Safety Disclosures +21 +Part II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +22 +Item 6. +Reserved +23 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +24 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +31 +Item 8. +Financial Statements and Supplementary Data +32 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +65 +Item 9A. +Controls and Procedures +65 +Item 9B. +Other Information +65 +Item 9C. +Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +66 +Part III +Item 10. +Directors, Executive Officers and Corporate Governance +67 +Item 11. +Executive Compensation +67 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +68 +Item 13. +Certain Relationships and Related Party Transactions and Director Independence +68 +Item 14. +Principal Accounting Fees and Services +68 +Part IV +Item 15. +Exhibit and Financial Statement Schedules +68 +Item 16. +Form 10-K Summary +70 +Signatures +71 +Index to Consolidated Financial Statements, Reports and Schedule +72 +Schedule II – Valuation and Qualifying Accounts +73 +PART I +Throughout this report, we refer to RPC, Inc., together with its subsidiaries, as we, us, RPC or the Company. +Forward-Lo oking Statements +Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. The words “may,” “should,” “will,” “expect,” “believe,” “anticipate,” “intend,” “seek,” “project,” “estimate,” “focus,” “plan,” “continue,” “likely,” “design,” “strategies,” “outlook,” “trend,” the negative of such terms and different forms thereof (e.g., different tenses or number or principle parts, as well as gerunds and other parts of speech such as adjectives, adverbs and nouns derived therefrom), and similar expressions generally identify forward-looking statements. +Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include statements regarding: +● common drivers of operational and financial success for our Technical Services and our Support Services; +● our belief that Downhole Tools represents a differentiated service line with opportunities for technological innovation and new product development to drive growth; +● our ability to continue to monitor factors that impact current and expected customer activity levels, such as the prices of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel; +● our strategy of utilizing equipment in unconventional basins; +● our expectation that capital expenditures will be $150 million to $200 million during 2025 and our expectation that such expenditures will be directed primarily towards capitalized maintenance of our existing equipment to improve efficiency and selected growth opportunities; +● our intention to continue upgrading our equipment to Tier 4 DGB over time in response to the industry trending toward lower emission and more cost effective dual-fuel assets ; +● our belief that our financial and operating discipline have resulted in longevity and financial success in an industry where downturns can have significant financial impacts on operator liquidity and economic sustainability; +● our belief that there is an increased likelihood that a potential rapid rise in the use of artificial intelligence would have significant energy consumption requirements and boost demand for power solutions, many of which use oil and gas; +● the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure; +● our belief that as a result of increased asset efficiency, there is a general oversupply of oilfield services (OFS) capacity, particularly in pressure pumping, which has created a high level of price competition as companies seek to keep assets utilized; +● our belief that there is potential for M&A activity to continue as well as become more frequent in the smaller exploration and production (E&P) companies and OFS markets; +● our belief that capital discipline has and should generally reduce the volatility of the rig count over time; +● our plans with respect to investing in electric fleets; +● our belief that the principal competitive factors in the market areas that we serve are price, product availability, and quality of our equipment, service quality, reputation for safety and technical proficiency; +3 +● our primary objective of creating long-term shareholder value by delivering world-class oilfield services to our customers across all services lines and our plans to achieve this objective by executing on strategic investments, both organic and potential M&A, that we believe will increase our scale, diversify our product offering, expand our customer base and improve our profitability and cash flow; +● our plans to monitor industry-wide factors that impact customer activity levels, such as the prices of oil and natural gas, competitive activity, E&P activity and capital market trends; +● our operating strategy, our growth strategy, and our capital allocation strategy; +● our key human capital management objectives and our focus on fostering talent in the following areas: diversity and equality; development and training; and compensation and benefits; +● our belief that our patented items in our operations are important, but not indispensable, to our success; our plans to seek patent protection when possible; and our reliance to a greater extent on the technical expertise and know-how of our personnel to maintain our competitive position; +● our belief that EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and Free cash flow are important indicators of performance; +● our belief that current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity and can be impacted by economic and policy developments as well as geopolitical disruptions; +● our belief that oil prices will remain above levels sufficient to motivate our customers to maintain drilling and completion activities; +● our belief that long-term, projected steady higher demand for oil and natural gas should drive increased activity in most of the basins in which we operate; +● our belief that most of the feasible efficiency gains have been realized, but competition is expected to remain at a high level; +● our belief that the favorable long-term outlook for natural gas demand is sufficient for our customers to maintain natural gas-directed exploration and production activities; +● our plans to continue to monitor the supply and demand for our services and the competitive environment, including trends such as increasing customer preferences for lower emission and more efficient equipment; +● our belief that the growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market; +● our plans to allocate capital to maintain the capacity of our pressure pumping fleet to offset anticipated fleet retirements and our evaluations of our future investments and option to further transition our asset base toward more efficient dual-fleet or electric equipment; +● the strength of our financial condition; +● our plans with respect to our stock buyback program; +● our belief that the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; +● our decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations; +● our belief that we do not expect to utilize our revolving credit facility to meet our liquidity requirements in the near term; +4 +● our expectations to continue to pay cash dividends to common stockholders, subject to industry conditions and our earnings, financial condition and other relevant factors; +● estimates made with respect to our critical accounting estimates and which critical accounting estimates involve estimates that require a higher degree of judgment and complexity; +● our estimates with respect to a calculation of a range of exposure for claims, which as of December 31, 2024, is $17.8 million to $22.3 million; +● the effect of new accounting standards; +● the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition; +● our belief that our sources of supply are adequate to secure our demands at competitive prices; +● our belief that our current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs; +● our belief that our ERP system will be implemented through a phased approach with costs being incurred over the next few years; +● our technology and process investments, which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards and our belief that this reduced exposure to active areas of a job location has led to fewer safety incidents; +● our statements that we may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility; and +● estimates, assumptions and projections related to our application of critical accounting estimates, including those related to credit losses and allowance, self-insurance, goodwill, and acquisitions, the impact of lawsuits, legal proceedings and claims on our financial position and results of operation. +Such forward-looking statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RPC to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. +Risk factors that could cause such future events not to occur as expected include the following: +● the volatility of oil and natural gas prices; +● volatility in demand for our services due to, among other things, fluctuations in price levels of oil and natural gas, activity levels in the oil and gas industry in general, driven in part by customer decisions about capital investment toward the development and production of oil and gas reserves; +● the effects of political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, tariffs, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations; +● fluctuations in drilling rig count and well completions; +● our concentration of customers in the energy industry and periodic downturns; +● our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations; +● dependence on our key personnel; +5 +● our ability to identify or complete acquisitions; +● our ability to attract and retain skilled workers; +● some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers; +● whether outside financing is available or favorable to us; increasing expectations from customers, investors and other stakeholders regarding our environmental, social and governance practices; +● our compliance with regulations and environmental laws; +● the impact of OPEC disputes on our operating results; +● possible declines in the prices of oil and natural gas, which tend to result in a decrease in drilling activity and therefore a decline in the demand for our services; +● the ultimate impact of current and potential political unrest and armed conflict in the oil producing regions of the world, including the current conflict involving Israel and the Gaza Strip, which could impact drilling activity, adverse weather conditions in oil or gas producing regions, including the Gulf of America; +● competition in the oil and gas industry; +● the Company’s ability to implement price increases; +● the potential impact of possible future regulations on hydraulic fracturing on our business; +● risks of international operations; +● reliance on large customers; +● our operations rely on digital systems and processes that are subject to cyberattacks or other threats; +● our risk that we may not have adequate insurance coverage to compensate for losses from any of the risks listed herein, our existing insurance coverage may not continue to be available on acceptable terms or at all, and our insurers may deny coverage as to any future claims; +● our cash and cash equivalents are held primarily at a single financial institution; +● certain ongoing sales and use tax audits in various jurisdictions that involve issues that could result in unfavorable outcomes that cannot be currently estimated; +● inflation in the general economy, upward wage pressures in the labor markets, supply disruptions, and higher costs of certain materials and key equipment components, and decreased supply of skilled labor; and +● changes in assumptions underlying our critical accounting judgments and estimates. See “Risk Factors” on page 14 for a discussion of factors that may cause actual results to differ from our projections. +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several OFS companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of America, Rocky Mountain and Appalachian regions, and in selected international markets. RPC +6 +acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services, which are its operating segments. As of December 31, 2024, RPC had 2,597 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services), or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing and cementing. Customers include major multi-national and independent oil and gas producers and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. Technical Services are provided in all of RPC’s principal geographical markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The primary drivers of operational success for Support Services are offering safe, high quality and in-demand equipment, as well as meeting customer needs and competitive marketing of such services. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. Support Services are provided in all of RPC’s principal geographical markets. +A breakdown of segment and service line revenues and a brief description of the primary services follows: +2024 +2023 +2022 +% of +% of +% of +Revenues +Revenues +Revenues +Revenues +Revenues +Revenues +(in thousands) +0 +Technical Services +$ +1,326,005 +93.7 +% +$ +1,516,137 +93.7 +% +$ +1,516,363 +94.7 +% +Support Services +88,994 +— +6.3 +0.0% +101,337 +— +6.3 +0.0% +85,399 +0 +5.3 +Total Revenues: +$ +1,414,999 +100.0 +% +$ +1,617,474 +100.0 +% +$ +1,601,762 +100.0 +% +Pressure Pumping (Technical Services) +$ +587,051 +41.5 +% +$ +771,542 +54.5 +% +$ +846,939 +59.9 +% +Downhole Tools (Technical Services) +386,085 +27.3 +397,341 +28.1 +374,081 +26.4 +Coiled Tubing (Technical Services) +135,175 +9.6 +152,484 +10.8 +140,889 +10.0 +Cementing (Technical Services) +110,730 +7.8 +64,481 +4.6 +21,178 +1.5 +Rental Tools (Support Services) +65,207 +4.6 +73,301 +5.2 +62,780 +4.4 +Other (both segments) +$ +130,751 +9.2 +% +158,325 +11.2 +% +$ +155,895 +11.0 +% +Technical Services Segment +Pressure Pumping : 41.5% of 2024 total revenues. Services are provided to customers throughout Texas and the mid-continent regions of the United States, with a concentration in the Permian basin. We primarily provide pressure pumping services to customers to enhance the initial production of hydrocarbons in unconventional horizontal well formations. These formations require high volumes of stimulation fluids using a great deal of pressure pumping horsepower to complete the well. Since unconventional wells transitioned from vertical to a long (often 10,000 to over 20,000 feet) horizontal lateral, they require tools and drilling mechanisms that are flexible and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services, such as coiled tubing services and downhole tools, as described in subsections below. +7 +Hydraulic Fracturing, often synonymous with pressure pumping, is performed to stimulate production of oil and natural gas by increasing the permeability of a shale formation. The fracturing process consists of pumping fluids and sand into a cased and perforated well at sufficient pressure to fracture the formation at desired locations and depths. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow into the production tubing and to the surface. +RPC’s frac fleets are comprised of high pressure hydraulic pumps, powered by both diesel and dual-fuel engines, and ancillary equipment such as hoses, valves and blenders, and operational trailers to house personnel and computerized control systems. Pressure pumping equipment is typically truck or skid-mounted equipment for mobility. The Company ended 2024 with 10 horizontal fleets, of which 3 were Tier 4 DGB (dynamic gas blending, also referred to as dual-fuel as they can utilize both diesel and natural gas) and 3 were Tier 4 Diesel. Tier 4 is a set of regulations from the US Environmental Protection Agency (EPA) that aims to reduce harmful emissions from engines and generators. The Company intends to continue upgrading its equipment to Tier 4 DGB over time in response to the industry trending toward lower emission and more cost effective dual-fuel assets, but does not intend to increase its overall number of frac fleets. +Downhole Tools: 27.3% of 2024 total revenues. Services and proprietary downhole motors and other specialized tools, such as fishing devices, are provided to drilling and production operators to enable casing perforation and bridge plug drilling at the completion stage of an oil or gas well. Products are also used during workover operations. The services that Thru Tubing Solutions (TTS) provides are often proprietary solutions developed by the Company, for which the Company maintains an active intellectual property and patent program. Management believes Downhole Tools represents a differentiated service line with opportunities for technological innovation and new product development to drive growth. Examples of newly introduced products include a 3½ inch high performance downhole motor, as well as Unplug, a proprietary alternative solution to traditional bridge plugs using perforation pods to reduce inefficiencies and technical risks associated with traditional plugs. +Coiled Tubing: 9.6% of 2024 total revenues. Services involve the injection of a flexible steel pipe thousands of feet in length into a wellbore to conduct a variety of downhole tasks. Coiled tubing’s flexibility allows it to be steered through horizontal wellbores, while also being strong enough to convey tools or motors at the end of the tube. The hollow tube can convey fluid which powers a motor or may be needed to clean out a wellbore. Coiled tubing units are effective over great distances making them ideal for completion activities in the U.S. domestic market, where lateral lengths have been increasing. +Cementing: 7.8% of 2024 total revenues. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore. The pumping assets used in deploying the cement are the same/similar to the equipment used in hydraulic fracturing, making these operations complementary to our pressure pumping service line. The cement creates a barrier to protect the casing and prevent environmental contamination. In addition to completion uses, cementing can also be used to plug a well at the end of its life cycle. Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The Company’s cementing revenues increased during 2024 primarily due to the effect of owning Spinnaker for a full year. +Snubbing . Services involve using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment while maintaining pressure on the well to minimize operational disruptions. +Nitrogen . Both oilfield customers and industrial users outside of the oilfield use these services to, for example, clean drilling and production pipe or purge non-oilfield industrial pipelines. +Well Control . Services include responding to and controlling oil and gas well emergencies, including blowouts and well fires, as well as supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production so that drilling operations can resume as promptly as safety permits. +Wireline . Services involve unwinding and lowering a spooled wire into a well, conveying various types of tools or equipment. Slick or braided lines are non-conductive and primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric lines carry a conductor line into a well allowing the use of electrically-operated tools such as perforators and bridge plugs. Wireline services can also be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Support Services Segment +Rental Tools: 4.6% of 2024 total revenues . The Company rents specialized equipment for use with onshore and offshore oil and gas well completion, drilling and workover activities. The Company offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. The equipment needed is in +8 +large part determined by the geological features of the production zone and the size of the well. Given the potentially significant range of equipment needs, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. We provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe for major oil companies and pipe producers. +Well Control School . Provides industry and government accredited training for the oil and gas industry, delivering various formats including conventional classroom training and interactive online training. +Refer to note to the consolidated financial statements titled Business Segment and Entity Wide Disclosures for additional financial information on our business segments. +Customers +RPC’s principal customers consist of major and independent oil and natural gas producing companies and can range in size from small and independent E&Ps to large (often public) integrated E&Ps. Smaller customers, often referred to as “spot” or “semi-dedicated” are generally less consistent in terms of demand for services but can increase their activities significantly during upcycles. These customers also often rely on OFS companies to provide materials, logistical support and expertise. These customers are typically highly price-sensitive and generally less focused on new equipment and ESG-related trends. Large customers have scale and often contract with OFS companies for “dedicated” fleets and offer more consistent demand and visibility. Their scale also means they can build their own infrastructure for power and water, acquire and develop high quality acreage due to access to capital, and invest in new technologies (both equipment and IT). RPC’s pressure pumping business is oriented toward spot and semi-dedicated customers in the Permian basin, while other service lines, such as downhole tools, cementing, coiled tubing and rental tools service both large and small customers across several major U.S. oil and gas basins. +Sales are generated by RPC’s business unit specific sales forces and through referrals from existing customers. We monitor the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +One of our customers, a private E&P company, accounted for approximately 13% of the Company’s revenues in 2024; another private E&P company accounted for approximately 11% of the Company’s revenues in 2022. Amounts for customers that exceeded 10% of the Company’s revenues in 2024 and 2022 were primarily associated with the Company’s Technical Services segment. There were no other customers in 2022 or 2024, and no customers in 2023 exceeding 10% of revenues. In addition, there was one customer that was also primarily associated with the Company’s Technical Services segment that accounted for approximately 10% of accounts receivable as of December 31, 2023. +Suppliers +The Company’s suppliers mainly provide equipment and materials used across our service lines. We purchase hydraulic fracturing fleets, including pumps and ancillary components, trucks, sand, chemicals, and cement to support our pressure pumping and cementing service lines. We also procure flexible steel pipe used in coiled tubing. Generally speaking there are multiple suppliers for our key equipment and materials needs and we believe that these sources of supply are adequate to secure our demands at competitive prices. +9 +Industry Overview & Key Themes +RPC provides its services primarily to domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of America, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. Over the years, the oil and gas industry’s cyclical nature has resulted in many OFS companies going bankrupt, ceasing operations, or being forced to get acquired. The Company believes its financial and operating discipline have resulted in longevity and financial success in an industry where downturns can have significant financial impacts on operator liquidity and economic sustainability. +Rig count. During 2024 the average U.S. rig count decreased 12.8% to 600 compared to the prior year. While oil and gas industry demand is influenced by many factors, the rig count is often used as a proxy for current and future industry activity. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles. The most recent significant recent downturn occurred following the onset of the COVID pandemic, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history at 250. Since that point, the industry began to rebound with strong U.S. economic activity, with the rig count reaching an average of 723 in 2022 and 688 in 2023, before trending even lower and averaging 600 during 2024. Over the past several years, there has been oil and gas price volatility sparked by uncertainties related to the Russian invasion of Ukraine, tensions in the Middle East related to Israel’s conflict in the Gaza Strip and continued uncertainty from OPEC+ regarding production levels. Furthermore, there is an increased likelihood that a potential rapid rise in the use of artificial intelligence would have significant energy consumption requirements and boost demand for power solutions many of which use oil and gas. Management believes these factors reinforce the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, reported well completions was 11,659 in 2024, a decrease of approximately 9% compared to 2023. Fluctuations in the prices of commodities, particularly the price of oil, and activity levels as measured by well completions, significantly impact RPC’s financial results. Of note, while there is a sense of energy industry optimism regarding the new presidential administration, which is generally considered to be “pro-business” and supportive of the domestic energy industry, there is limited visibility on a number of regulatory or policy developments and the impact those may have on our business. +2024 +2023 +2022 +Average U.S. domestic rig count +600 +688 +723 +Average natural gas price (per thousand cubic feet (mcf)) +$ +2.19 +$ +2.54 +$ +6.44 +Average oil price (per barrel) +$ +76.60 +$ +77.55 +$ +94.89 +Source: Baker Hughes, Inc., U.S. Energy Information Administration) +10 +Efficiencies in pressure pumping. In the past decade, there have been significant improvements in the efficiency of OFS, with the end result being more oil and gas produced with less equipment. Several factors have contributed to asset efficiency, including the industry’s ability to accurately identify high yielding formations, drill faster and more effectively, complete wells more quickly, and extract the same amount of oil and gas with less rigs and service equipment. Pressure pumpers have also significantly increased pump hours per day, often to 20 to 22 of 24 hours, resulting in assets being “burned” faster and requiring quicker capital investment cycles. Furthermore, more wells are being drilled per pad, or site, each well is being drilled with longer laterals, now often extending several miles, and more stages are being completed within each lateral. All of these factors are increasing hydrocarbon output without creating a correlated increase in cost; however, cost efficiency savings have been disproportionately realized by the E&Ps rather than oilfield service companies. As a result of increased asset efficiency, the Company believes there is a general oversupply of OFS capacity, particularly in pressure pumping, which has created a high level of price competition as OFS companies seek to keep assets utilized. +Consolidation of E&Ps . The oil and gas industry is capital intensive and cyclical. As a result, operating and financial scale have significant benefits related to acquiring attractive land, investing in assets and infrastructure to efficiently extract hydrocarbons, leveraging scale across the value chain, and generating financial leverage to drive investor returns. The recent trend of consolidation among mid-to-large E&Ps has resulted in a more concentrated pool of larger, more powerful E&P companies. Also, as a result of E&P consolidation, there can be significant changes in an OFS company’s customer base, with customers often being acquired (risking loss of business) or making acquisitions (potential customer gains) across service lines. There is the potential for M&A activity to continue as well as become more frequent in the smaller E&P and OFS market. +Capital discipline by E&Ps. During the past cycle, E&P companies have taken a more disciplined approach to capital allocation of operating and free cash flow. They are maintaining steadier operations and not significantly accelerating or decelerating investment with commodity price cycles and providing a more significant and consistent return of capital to shareholders. This has taken the form of both dividends and share buybacks. This level of discipline is intended to boost overall investor returns, in part by limiting activity volatility and enabling more consistent free cash flow generation available to distribute. As a result, many large E&Ps are focused on developing and securing OFS partners who can meet their needs for scale and types of equipment across their large asset base. While the rig count has trended lower due to the efficiencies discussed above, capital discipline has reduced and should generally continue to reduce the volatility of the rig count over time. +Increased adoption of low-emission equipment. Pressure pumping requires emission-intensive equipment as it has historically been powered solely or primarily by diesel fuel. However, in recent years DGB and electric powered fleets have been increasingly adopted. Electric powered fleets use electric motors powered by lower-cost energy sources (e.g., natural gas converted on-site, compressed natural gas, or grid-supplied electricity) and offer reduced emissions compared to diesel fuel or DGB equipment. Electric assets are often desired by customers, especially large public companies, to achieve their ESG goals, while smaller independent E&Ps often place less value on ESG-related benefits. To date, RPC has not invested in electric fleets but is considering future investments in this area. +Low natural gas prices. In 2024 average natural gas prices decreased 13.8% compared to the prior year, despite strong performance in the second half of 2024. Flat consumption of natural gas in the United States has been met with increasing supply from high yielding gas shales and gas collected as byproduct from oil production. This abundant supply has resulted in low natural gas prices, thus reduced gas production activity. The Company believes the favorable long-term outlook for natural gas demand is sufficient for our customers to maintain natural gas-directed E&P activities. However, currently suppressed activity has resulted in OFS companies shifting assets out of gassy basins toward oil basins, resulting in more competition in the Company’s key service lines, particularly pressure pumping in the Permian basin. +Competition +RPC operates in highly competitive areas of the OFS industry. We offer our services and equipment in highly competitive markets, and the revenues and earnings generated are affected by changes in competitive prices for our services with supply and demand dynamics that can change rapidly. RPC competes with many large and small oilfield industry competitors, including the largest integrated OFS companies. The Company believes that the principal competitive factors in the market areas that it serves are price, product availability and quality of our equipment, service quality and reputation for safety and technical proficiency. +Following a period of strong demand and favorable pricing trends when the OFS industry rebounded off the COVID lows, pricing has become far more competitive. In recent years, improving completion services efficiency has served to increase effective capacity, and the Company believes current supply of most OFS exceeds demand. This has had the most significant impact on the Company’s pressure pumping service line, though all the Company’s Permian-focused operations have faced increased competition from assets shifting into the region from gassy basins where activity has been weak. By nature, OFS companies have high fixed costs and pricing competition to keep assets utilized is common. +11 +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Energy, Inc., Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac Holding Corp. and ProPetro Holding Corp., as well as numerous smaller, privately owned competitors. Increased demands for larger-scale and newer technology solutions, as well as business combinations among large oil and gas companies, are driving consolidation of our competitors in certain service lines. +Strategy +RPC’s primary objective is to create long-term shareholder value by delivering world-class OFS to our customers across all service lines, while exercising capital discipline and employing a conservative operational and financial approach. To achieve this objective, we plan to execute strategic investments, both organic and potential M&A, that we believe will increase our scale, diversify our product offering, expand our customer base and improve our profitability and cash flow. In assessing RPC’s strategy, financial condition and operating performance, management generally reviews results and trends related to revenues, asset utilization, pricing, cost structure, profitability, cash flows and the return on our invested capital. We also monitor industry-wide factors that impact customer activity levels, such as the prices of oil and natural gas, competitive activity, E&P activity and capital markets trends. +Our strategies can be broken down into 3 categories: operating, growth and capital allocation. +Operating strategy +● Drive a culture of highly engaged, empowered, and appropriately incentivized employees +● Provide safe, high quality, well-maintained, in-demand equipment and services to our customers through highly trained personnel and strong logistical support processes +● Maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels +● Optimize asset utilization to leverage direct and overhead costs with a focus on profitability and a bias to avoid burning our assets on low-return projects – i.e., idle fleets as appropriate +● Develop new products and offer specialized services to differentiate ourselves in the marketplace +Growth strategy +● Remain highly disciplined with respect to adding new incremental revenue-producing equipment +● Invest selectively in our key service lines to upgrade technologies and capabilities +● Acquire high-quality companies or assets that would increase our scale, diversify our key service lines, bolster our competencies, expand our customer base and deliver attractive financial returns; due to the fragmented nature of the oil and gas services industry, RPC believes a number of suitable acquisition opportunities exist +● Direct growth investments toward domestic (versus international) operations because of attractive activity levels, competitive positioning and lower geopolitical risks +Capital allocation strategy +● Maintain a conservative and low-cost capital structure, with an appropriate use of debt financing, to sustain operational strength and liquidity during industry downturns +● Balance the use of cash invested in the Company (both organic and potential M&A) and returned to stockholders with strong alignment of management and shareholder interests +● Continue paying regular quarterly dividends, though we do not currently intend to steadily grow the regular dividend, nor do we have a target payout ratio of net income or cash flow to dividends; given the capital intensity and cyclical nature of the business, we do not plan to return significant excess cash to investors through special dividends +12 +● Maintain a share buyback program to opportunistically repurchase stock in the open market in compliance with the federal securities laws and the applicable exchange listing requirements, if the Company believes our common stock represents an exceptional value +Human Capital +The table below shows the number of employees at December 31, 2024, and 2023: +At December 31, +2024 +2023 +Employees +2,597 +2,691 +The Company operates in a cyclical business where financial performance and headcount are influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Workplace Inclusion - The company is committed to fostering a diverse and inclusive workforce, where employees collaborate toward a shared purpose. We uphold strong values, cultivate meaningful relationships, and maintain consistency in leadership and management. As part of our commitment to diversity, we actively recruit and hire recently discharged military personnel. The Board of Directors oversees these efforts through the Human Capital Management and Compensation Committee, which monitors compliance with applicable non-discrimination laws pertaining to race, gender, and other protected classes. The Committee regularly monitors these matters and provides updates to the Board as needed, with a minimum annual review. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintain a Code of Conduct to provide guidance for everyone associated with the Company, including its employees, officers, and directors (the Code). The Code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the Code each year. Any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting, and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure and need, has invested more than $1.5 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters are located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents. +13 +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its OFS are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see note to the consolidated financial statements titled Leases. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. +Item 1A. Risk Factors +Risks Related to our Business. +Demand for our equipment and services is affected by the volatility of oil and natural gas prices. +Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment and services. Our business depends in large part on the conditions of the oil and gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these capital investments decline, our customers’ demand for our services declines. +The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 40% of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market. +Although the production sector of the oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to declining oil and gas prices by curtailing capital spending, which would +14 +adversely affect our business. A prolonged low level of customer activity in the oil and gas industry adversely affects the demand for our equipment and services and our financial condition and results of operations. +Reliance upon a large customer may adversely affect our revenues and operating results. +At times our business has had a concentration of one or more major customers. One of our customers, a private E&P company, accounted for approximately 13% of the Company’s revenues in 2024; and another private E&P company accounted for approximately 11% of the Company’s revenues in 2022. There were no other customers in 2022 or 2024, and no customers in 2023 exceeding 10% of revenues. Amounts for customers that exceeded 10% of the Company’s revenues in 2024 and 2022 were primarily associated with the Company’s Technical Services segment. In addition, there was one customer that was also primarily associated with the Company’s Technical Services segment that accounted for approximately 10% of accounts receivable as of December 31, 2023. There were no customers that accounted for 10% or more of accounts receivable as of December 31, 2024. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results. +Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable. +Substantially all of our customers operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and generally do not require collateral in support of our trade receivables. The periodic downturns that our industry experiences may adversely affect our customers' operations, which could cause us to experience increased credit losses for accounts receivable. +Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations. +Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted. +RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues. +RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins. +We may be unable to compete in the highly competitive oil and gas industry in the future. +We operate in highly competitive areas of the OFS industry. The equipment and services in our industry segments are sold in highly competitive markets, and our revenues and earnings have in the past been affected by changes in competitive prices, fluctuations in the level of activity in major markets and general economic conditions. We compete with the oil and gas industry’s many large and small industry competitors, including the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and quality service is good, we cannot assure you that we will be able to maintain our competitive position. +We may be unable to identify or complete acquisitions, and the completion of significant acquisitions involves integration and other risks. +Acquisitions have been and may continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our stockholders. We cannot assure you that we will be able to successfully integrate the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth of acquired businesses could have a material adverse effect on our results of operations and financial condition. +15 +Our operations are affected by adverse weather conditions. +Our operations are directly affected by the weather conditions in several domestic regions, including the Gulf of America, the Gulf Coast, the mid-continent, and the Appalachian region. Hurricanes and other storms prevalent in the Gulf of America and along the Gulf Coast during certain times of the year may also affect our operations, and severe hurricanes may affect our customers' activities for a period of several years. While the impact of these storms may increase the need for certain of our services over a longer period of time, such storms can also decrease our customers' activities immediately after they occur. Such hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in geographic areas not damaged by the storms. Prolonged rain, snow, fire or ice in many of our locations may temporarily prevent our crews and equipment from reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. +Our ability to attract and retain skilled workers may impact growth potential and profitability. +Our ability to be productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is, in part, impacted by our ability to increase our labor force. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. The Company and our industry are being affected by shortages of skilled labor. If labor shortages continue or a significant increase in wages occurs, our capacity and profitability could be diminished, and our growth potential could be impaired. +Some of our equipment and several types of materials used in providing our services are available from a limited number of suppliers. +We purchase equipment provided by a limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits. +We have used outside financing in prior years to accomplish our growth strategy, and outside financing may become unavailable or may be unfavorable to us. +Our business requires a great deal of capital to maintain our equipment and increase our fleet of equipment to expand our operations, and we currently have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and bears interest at a floating rate, which exposes us to market risks as interest rates rise. If our existing capital resources become unavailable, inadequate, or unfavorable for purposes of funding our capital requirements, we would need to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing sources may not be available when we need them or may not be available on favorable terms. If we fund our growth through the issuance of public equity, the holdings of stockholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other potentially profitable business opportunities, which could reduce our future revenues and profits. +Our international operations could have a material adverse effect on our business. +Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, Mexico, Latin America and the Middle East are subject to risks. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, tariffs, boycotts and other civil disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. +16 +Increasing expectations from governments, customers, investors and other stakeholders regarding our environmental, social and governance (ESG) practices may affect our business, may create additional costs for us, or expose us to related risks. +Many companies are receiving greater attention from stakeholders regarding their ESG practices, as well as their oversight of relevant ESG issues. The various stakeholders are placing growing importance on our potential environmental and social issue risk exposure and the impact of our choices. Increased focus on ESG and related decision-making may negatively impact us as customers, investors and other stakeholders may choose not to work with us or may reallocate capital or decline to make an investment as a result of their assessment of our ESG practices. Companies that do not comport with, or do not adapt to, these evolving investor and stakeholder ESG-related expectations and standards, or that are assessed as not having responded appropriately to the growing focus on ESG matters, may have their brand and reputation harmed, and the Company or our stock price may be adversely affected even though we may be in full compliance with all relevant laws and regulations. +We have created and published certain voluntary disclosures regarding ESG matters and will continue to do so from time to time. To the extent that we report Green House Gas (GHG) emissions data, the methodologies that we use to calculate our emissions may change over time based upon changing industry standards. We note that standards and expectations regarding the processes for measuring and counting GHG emissions and GHG emission reductions are evolving, and it is possible that our approach to measuring our emissions may be considered inconsistent with common or best practices with respect to measuring and accounting for such matters. If our approaches to such matters fall out of step with common or best practice, we may be subject to additional scrutiny, criticism, regulatory and investor engagement or litigation, any of which may adversely impact our business, financial condition or results of operation. +Furthermore, the SEC has issued final rules, which are currently stayed pending judicial review; however, if implemented as proposed, these rules would, among other matters, establish a framework for reporting climate-related risks. To the extent that any rules ultimately implemented impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient. Furthermore, in November 2022, the U.S. Department of Labor adopted final rules that allow plan fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights, such as proxy voting. Should plan investors decide not to invest in us based on ESG factors, our business and access to capital may be negatively impacted. In 2023, the State of California enacted legislation that will require large U.S. companies doing business in California to make broad-based climate-related disclosures starting as early as 2026, and other jurisdictions, domestically and internationally, are also considering various climate change disclosure requirements. +In addition, ESG and climate change issues may cause consumer preference to shift toward other alternative sources of energy, lowering demand for oil and natural gas and consequently lowering demand for our services. In some areas these concerns have caused governments to adopt or consider adopting regulations to transition to a lower-carbon economy. These measures may include adoption of cap-and-trade programs, carbon taxes, increased efficiency standards, prohibitions on the manufacture of certain types of equipment (such as new automobiles with internal combustion engines), and requirements for the use of alternate energy sources such as wind or solar. These types of programs may reduce the demand for oil and natural gas and consequently the demand for our services. +Approaches to climate change and a transition to a lower-carbon economy, including government regulation, company policies, and consumer behavior, are continuously evolving. At this time, we cannot predict how such approaches may develop or otherwise reasonably or reliably estimate their impact on our financial condition, results of operations and ability to compete. However, any long-term material adverse effect on the oil and gas industry may adversely affect our financial condition, results of operations and cash flows. +Risk Management Risks. +Our business has potential liability for litigation, personal injury and property damage claims assessments. +Our operations involve the use of vehicles and heavy equipment and exposure to inherent risks, including accidents, well blowouts, explosions, and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from an accident or catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees, and regulators. These occurrences could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise. +17 +Regulatory Risks. +Our operations may be adversely affected if we are unable to comply with regulations and environmental laws. +Our business is significantly affected by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing exploration and development of oil and gas fields in our areas of operations for economic, environmental, or other policy reasons would adversely affect our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation or disposal of hazardous substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits, fines, and other corrective actions, which would negatively affect our future financial results. +Compliance with federal and state regulations relating to pressure pumping services, including hydraulic fracturing, could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. +RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. Compliance with federal and state regulations relating to pressure pumping services could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry; however, more stringent regulations could be imposed in the future, which could have a material adverse impact on our costs and our business. +Risks Related to our Capital and Ownership Structure. +Our management and directors have a substantial ownership interest, and public stockholders may have no effective voice in the management of the Company. +The Company has elected the Controlled Corporation exemption under Section 303A of the New York Stock Exchange (NYSE) Listed Company Manual. The Company is a Controlled Corporation because a group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control (the Controlling Group), controls in excess of 50% of the Company’s voting power. As a Controlled Corporation, the Company need not comply with certain NYSE rules including those requiring a majority of independent directors, and independent compensation and nominating committees. +RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 61% of RPC’s outstanding shares of common stock as of February 14, 2025. As a result, these stockholders effectively control the operations of RPC, including the election of directors and approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. +The Controlling Group could take actions that could negatively impact our results of operations, financial condition or stock price. +The Controlling Group may from time to time and at any time, in their sole discretion, acquire or cause to be acquired, additional equity or other instruments of the Company, its subsidiaries or affiliates, or derivative instruments the value of which is linked to Company securities, or dispose or cause to be disposed, such equity or other securities or instruments, in any amount that the Controlling Group may determine in their sole discretion, through open market transactions, privately negotiated transactions or +18 +otherwise. In addition, depending upon a variety of factors, the Controlling Group may at any time engage in discussions with the Company and its affiliates, and other persons, including retaining outside advisers, concerning the Company’s business, management, strategic alternatives and direction, and in their sole discretion, consider, formulate and implement various plans or proposals intended to enhance the value of their investment in the Company. In the event the Controlling Group were to engage in any of these actions, our common stock price could be negatively impacted, such actions could cause volatility in the market for our common stock or could have a material adverse effect on our results of operations and our financial condition. +Our management and directors have a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited. +The availability of RPC’s common stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. +Provisions in RPC's Certificate of Incorporation and Bylaws may inhibit a takeover of RPC. +RPC’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and director nominations. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board of Directors more difficult or expensive. +Risks Related to Digital Operations, Cybersecurity and Business Disruption. +Our operations rely on digital systems and processes that are subject to cyberattacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyberattacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyberattacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for appropriate employees, simulate phishing attempts and closely manage the accounts and privileges of all employees and contractors. In addition, we have adopted an established cybersecurity framework that provides significant risk management across several areas. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents. We have experienced unsuccessful cyberattack attempts to gain unauthorized access to our network. To date, these attacks have not had a material impact on our operations. +If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. In addition, we may not have adequate insurance coverage to compensate for losses from any of the risks listed herein, our existing insurance coverage may not continue to be available on acceptable terms or at all, and our insurers may deny coverage as to any future claims. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. +We are implementing a new Enterprise Resource Planning system (ERP), and challenges with the implementation of the system may impact our business and operations. +We are beginning the process of a multi-year implementation of a new ERP. The implementation will require the integration of the new ERP with multiple new and existing information systems and business processes and needs to be designed to accurately maintain our books and records and provide information to our management teams for the operation of the business. The implementation of our new ERP will require new procedures and certain modifications to our disclosure controls and procedures and internal control over financial reporting and it will take time for such procedures and controls to become mature in their operation. If we are unable to adequately implement and maintain procedures and controls relating to our new ERP, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired and impact our assessment of the effectiveness of our internal controls over financial reporting. +19 +General Risks. +Our common stock price has been volatile. +Historically, the market price of common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has varied significantly in the past. +Item 1B. Unresolved Staff Comments +None. +Item 1C. Cybersecurity +Risk Management and Strategy +RPC approaches cybersecurity as an enterprise-wide risk and has created an accountability framework that includes oversight of cybersecurity risks. We have implemented policies and processes designed to detect, prevent, and respond to cybersecurity incidents . To help guide its overall program, RPC has adopted the Center for Internet Security (CIS) framework, which provides prioritized guidance to help defend systems and networks against the most prevalent cyber-attacks as well as support for a Zero Trust. RPC has created a cross-departmental team to screen Company vendors (also known as partners and managed service providers) for vulnerabilities on their own systems and compliance with RPC’s policies and procedures, to mitigate risks potentially caused by third party breaches. +As part of its Standard Operating Procedures, RPC has adopted Incident Response Policy (IRP), Data Classification and Handling Policy, and other policies regarding key areas of information security. These policies are reviewed periodically and updated as needed to address emerging risks or gaps in compliance. The IRP also includes guidance on internal and external escalation in the event of an incident or breach. RPC has not experienced a material cybersecurity incident to date. If a material cybersecurity breach occurs, the incident will be reviewed by the cybersecurity team to determine whether further escalation is appropriate. Any incident assessed as potentially being or becoming material will immediately be escalated for further assessment and reported to designated members of our executive leadership team and if deemed necessary, the Board of Directors. The IRP provides for consultation with outside legal counsel and our independent registered public accounting firm as appropriate, including on materiality analysis and disclosure matters, to make the final materiality determination regarding disclosure and other compliance decisions. +The Company maintains a cyber liability insurance policy that is designed to cover certain expenses, business losses, business interruption, and fines and penalties associated with a data breach or other similar incident. Cyber liability insurance also provides coverage in the event of a ransomware attack including assistance in the timely remediation of material cyberattacks and incidents. +Our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats , including as a result of previously identified cybersecurity incidents, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. For more information on our cybersecurity related risks, see Item 1A Risk Factors of this Annual Report on Form 10-K. +Governance +Role of the Board +On an annual basis, the Board reviews and approves the overall enterprise risk management approach and processes implemented by management to identify, assess, manage, and mitigate risk. The Board has delegated its responsibility for oversight of the Company’s cybersecurity and information security framework and risk management to the Audit Committee . The Audit Committee receives information and updates at least quarterly and actively engages with senior leaders with respect to the effectiveness of the Company’s cybersecurity and information security framework, data privacy, and risk management. In addition, the Audit Committee receives reports summarizing threat detection and mitigation plans, audits of internal controls, training and certification, and other cyber related priorities and initiatives, as well as timely updates from senior leaders on material incidents relating to information systems security, including cybersecurity incidents . The Audit Committee includes members with experience in risk management including risks related to cybersecurity. +20 +Role of Management +RPC’s cybersecurity program is overseen by the Chief Information Officer (CIO) as well as several key members of RPC’s Enterprise Technology team . These key leaders collectively have over 50 years of experience in network security, cybersecurity and enterprise risk management. The Chief Executive Officer and CIO receive regular updates on cybersecurity matters, results of mitigation efforts related to existing risks and cybersecurity incident response and remediation. These leaders communicate closely with members of RPC’s Information Security Committee (ISC) which oversees the adopted CIS Control Framework, governs the Company’s information security programs and monitors the effectiveness of the Company’s cybersecurity and technology risk management practices. In addition, ISC provides oversight to align security strategies with business objectives. The Company also maintains business continuity and disaster recovery plans. +Item 2. Properties +RPC owns or leases approximately 90 offices and operating facilities. The Company leases approximately 21,200 square feet of office space in Atlanta, Georgia that serves as its headquarters, a portion of which is allocated and charged to Marine Products Corporation. For additional information see note titled Related Party Transactions. The lease agreement on the headquarters is effective through May 2031. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities used in our operations are as follows: +Owned Locations +Broussard, Louisiana — Operations, sales and equipment storage yard +Elk City, Oklahoma — Operations, sales and equipment storage yard +Houma, Louisiana — Administrative office +Channelview, Texas — Pipe storage yard and inspection services +Newcastle, Oklahoma — Operations, sales and administrative offices +El Reno, Oklahoma — Operations, sales and administrative offices +Pleasanton, Texas — Operations, sales and administrative offices +Leased Locations +Midland, Texas — Operations, sales and administrative offices +Seminole, Oklahoma — Pumping services facility +The Woodlands, Texas — Operations, sales and administrative office +Odessa, Texas — Pumping services facility +Hobbs, New Mexico— Operations, sales and administrative office +Atlanta, Georgia — Headquarters +Item 3. Legal Proceedings +RPC is a party to various routine legal proceedings primarily involving commercial claims, employee liability and workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. RPC is also subject to sales and use tax audits in various jurisdictions. While the outcome of these lawsuits, legal proceedings, claims and audits cannot be predicted with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Item 4. Mine Safety Disclosures +Not applicable. +21 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +Market Information +RPC’s common stock is listed for trading on the New York Stock Exchange under the symbol RES. As of February 14, 2025, there were 216,057,711 shares of common stock outstanding and approximately 26,000 beneficial holders of our common stock. +Dividends +On January 28, 2025, the Board of Directors declared a $0.04 per share cash dividend payable March 10, 2025, to stockholders of record at the close of business on February 10, 2025. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors. +Issuer Purchases of Equity Securities +Shares repurchased by the Company and affiliated purchasers in the fourth quarter of 2024 are outlined below. +Total Number +Maximum +of Shares (or +Number (or +Units) +Approximate +Purchased as +Dollar Value) of +Part of +Shares (or Units) +Total Number of +Average Price +Publicly +that May Yet Be +Shares +Paid Per +Announced +Purchased Under +(or Units) +Share +Plans or +the Plans or +Period +Purchased +(or Unit) +Programs (1) +Programs (2) +October 1, 2024, to October 31, 2024 +— +$ +— +— +12,768,870 +November 1, 2024, to November 30, 2024 +— +— +— +12,768,870 +December 1, 2024, to December 31, 2024 +1,590 +(1) +6.36 +— +12,768,870 +Totals +1,590 +$ +6.36 +— +12,768,870 +(1) Represents shares repurchased by the Company in connection with taxes related to vesting of certain restricted shares. +(2) The Company has a stock buyback program initially adopted in 1998 (and subsequently amended in 2013, 2021 and 2023) that authorized the repurchase of up to 49,578,125 shares in the aggregate. There were no shares purchased on the open market during the fourth quarter of 2024 and 12,768,870 shares remained available to be repurchased under the current authorization as of December 31, 2024. Currently the program does not have a predetermined expiration date. +22 +Performance Graph +The following graph shows a five-year comparison of the cumulative total stockholder return based on the performance of the stock of the Company, assuming dividend reinvestment, as compared with both a broad equity market index and an industry or peer group index. The indices included in the following graph are the Russell 2000 Index (Russell 2000), the Philadelphia Oil Service Index (OSX), and a peer group which includes companies that are considered peers of the Company (the Peer Group). The Company has voluntarily chosen to provide both an industry and a peer group index. +The Company was a component of the Russell 2000 during 2024. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2024 of $3.6 billion, and a median market capitalization of $987 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 companies that provide oil drilling and production services, oilfield equipment, support services and geophysical/reservoir services. The Company is not a component of the OSX, but this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Halliburton Company, Oil States International, Inc., Patterson-UTI Energy, Inc., Liberty Energy, Inc. and ProPetro Holding Corp. The companies included in the Peer Group have been weighted according to each respective issuer's stock market capitalization at the beginning of each year. The peer group used in the immediately preceding fiscal year (the Former Peer Group) included Halliburton Company, Oil States International, Inc., Patterson-UTI Energy, Inc. and Liberty Energy Inc. ProPetro Holding Corp. is included for this fiscal year because it operates similar service lines in similar domestic markets as the Company and has sufficient trading history to be included for this fiscal year. +December 31, +Company/Index +2019 +2020 +2021 +2022 +2023 +2024 +RPC, Inc. Common Stock +100 +60 +87 +170 +142 +119 +Russell 2000 Index +100 +120 +138 +110 +128 +143 +Philadelphia Oil Service Index (OSX) +100 +58 +70 +113 +115 +102 +Peer Group +100 +75 +91 +158 +145 +117 +Former Peer Group +100 +76 +91 +160 +149 +118 +Item 6. Reserved +23 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Presentation +The following discussion should be read in conjunction with Selected Financial Data and the consolidated financial statements included elsewhere in this document. See also Forward-Looking Statements on page 3 . Discussions of year-to-year comparisons of 2023 and 2022 items that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2023, which Item is incorporated herein by reference. +Overview +RPC, Inc. provides a broad range of specialized OFS primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of America, Rocky Mountain and Appalachian regions, and in selected international markets. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. +Several key trends discussed above in Item 1., Business, were key drivers of the Company’s results in 2024: +● Generally lower industry activity, including a 12.8% decline in the rig count and a decrease in the total number of well completions. +● Lower energy prices, which limits the profit incentive for our customers to use our (and our competitors) oilfield services, including pressure pumping and other ancillary product and service offerings. +● Continued efficiencies of oilfield equipment allowing the industry to extract the same or more hydrocarbons with the same or fewer assets. This has resulted in an oversupply of OFS capacity and led to increased price competition. +● Trend toward lower emissions equipment, typically dual fuel or electric assets; the Company has multiple Tier 4 dual fuel frac fleets which have maintained stronger utilization than legacy Tier 2 assets. The Company does not currently offer electric frac fleets. +● E&P consolidation (See section titled Industry Overview and Key Themes in Item 1., Business, for more detail) has resulted in the loss of some customers. +Revenues during 2024 totaled $1.4 billion, a decrease of 12.5% compared to 2023. This decrease was primarily due to lower industry activity levels across service lines and competitive pricing. The Company’s pressure pumping revenues (largest service line within Technical Services) were the largest contributor to the revenue decrease. +Operating Profit for 2024 was $97.5 million, a 60.2% decrease compared to the prior year. This decrease is primarily due to lower industry activity levels, competitive pricing and reduced fixed cost absorption. +Net income for 2024 was $91.4 million, or $0.43 earnings per share compared to net income of $195.1 million, or $0.90 earnings per share in 2023. +Cash flows from operating activities increased to $349.4 million in 2024 compared to $394.8 million in 2023. During 2024, capital expenditures totaled $219.9 million which included the purchase of a new Tier 4 dual-fuel fleet, coupled with capitalized maintenance and upgrades of our existing equipment. +As of December 31, 2024, there were no outstanding borrowings under our credit facility. +How We Evaluate Our Operations +We use Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Adjusted EBITDA, Adjusted EBITDA margin and Free cash flow, all non-GAAP measures, to evaluate and analyze the operating performance of our businesses. +We believe that EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and Free cash flow are important indicators of performance. Adjusted EBITDA is defined as EBITDA, adjusted for unusual (income)/expenses. Adjusted EBITDA margin reflects Adjusted EBITDA as a percentage of revenues. Management believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin enable investors to compare the operating performance of our core business consistently over various time periods without regard to changes in our capital structure. Management believes that Free cash flow, which measures our ability to generate needed cash from +24 +business operations, is an important financial measure for evaluating RPC’s financial condition. Our definition of Free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures, since the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. +EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income/(loss), operating income/(loss), and related margins, or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Similarly, Free cash flow should be considered in addition to, rather than as a substitute for GAAP presentation of net cash provided by operating activities, as a measure of our financial condition. +See Non-GAAP Financial Measures below for a reconciliation of EBITDA and Adjusted EBITDA to net income, and Adjusted EBITDA margin to net income margin, the most directly comparable financial measure calculated and presented in accordance with GAAP and a reconciliation of Free Cash Flow to Operating Cash Flow, the most directly comparable financial measure calculated and presented in accordance with GAAP. +Results of Operations +2024 +2023 +2022 +(in thousands, except for percentages) +Revenues by business segment: +Technical +$ +1,326,005 +$ +1,516,137 +$ +1,516,363 +Support +88,994 +101,337 +85,399 +Total revenue +$ +1,414,999 +$ +1,617,474 +$ +1,601,762 +Cost of revenues (exclusive of depreciation and amortization shown separately below) +$ +1,036,648 +$ +1,089,519 +$ +1,088,115 +Selling, general and administrative expenses +156,437 +165,940 +148,573 +Pension settlement charges +— +18,286 +2,921 +Depreciation and amortization +132,575 +108,123 +83,017 +Gain on disposition of assets +(8,199) +(9,344) +(8,804) +Other income, net +(2,854) +(3,035) +(1,135) +Interest expense +724 +341 +614 +Interest income +(13,134) +(8,599) +(1,171) +Income tax provision +21,358 +61,130 +71,269 +Net income +$ +91,444 +$ +195,113 +$ +218,363 +Net income margin +6.5% +12.1% +13.6% +Net cash provided by operating activities +$ +349,386 +$ +394,763 +$ +201,286 +Non-GAAP Financial Measures +Adjusted EBITDA +$ +232,967 +$ +374,394 +$ +375,013 +Adjusted EBITDA margin +16.5% +23.1% +23.4% +Free cash flow +$ +129,456 +$ +213,758 +$ +61,734 +Year Ended December 31, 2024, Compared to Year Ended December 31, 2023 +Revenues. Revenues of $1.4 billion for 2024 decreased 12.5% compared to 2023, with both Technical Services segment and Support Services segment revenues each declining. The decrease in revenues is primarily due to lower industry activity levels across service lines and competitive pricing. Revenues for pressure pumping, the Company’s largest service line, decreased 24%, while all other service lines combined decreased 2%. +Technical Services segment revenues of $1.3 billion for 2024 decreased 12.5% compared to the prior year. The decrease in Technical Services revenue was primarily due to a decrease in pressure pumping activity and price competition. The decline in pressure pumping, as well as lower revenues in coiled tubing, were partially offset by growth in cementing. Cementing revenue increased compared to 2023 as the Company benefitted from a full year of results from the mid-2023 acquisition of Spinnaker. Support Services segment revenues for 2024 decreased by 12.2% compared to the prior year, primarily due to lower activity levels within rental tools. +Cost of revenues. Cost of revenues decreased 4.9% to $1.0 billion for 2024 compared to the prior year. Cost of revenues decreased primarily due to reduced expenses consistent with lower activity levels, such as materials and supplies expenses and +25 +maintenance and repairs expenses. These costs decreased less than the revenue decrease given the fixed nature of some of these costs, including labor, and the timing of maintenance and repairs. In accordance with SAB Topic 11.B, cost of revenues presented on the Consolidated Statements of Operations excludes depreciation and amortization totaling $120.6 million for 2024, compared to $97.7 million in the prior year. +Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $156.4 million in 2024 compared to $165.9 million in the prior year. The decrease was primarily due to a decrease in variable expenses consistent with lower activity levels as well as lower incentive compensation. +Depreciation and amortization. Depreciation and amortization increased 22.6% to $132.6 million in 2024, compared to $108.1 million in 2023. Depreciation and amortization increased due to capital expenditures in the past year, and to some extent from investments made during 2023 (2024 had a full year of depreciation of those assets versus a partial year in 2023). In addition to standard capital spending on repairs, maintenance, replacements, and upgrades, the Company purchased a Tier 4 dual fuel frac fleet in both 2023 and 2024. The incremental depreciation related to these investments was a key driver in the depreciation increase in 2024. +Gain on disposition of assets, net. Gain on disposition of assets, net was $8.2 million in 2024 compared to a gain on disposition of assets, net of $9.3 million in 2023. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment. +Other income, net. Other income, net was $2.9 million in 2024 compared to other income, net of $3.0 million in the prior year. +Interest expense and interest income. Interest expense was $724 thousand in 2024 compared to $341 thousand in the prior year. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan origination costs. Interest income increased to $13.1 million compared to $8.6 million in the prior year due to higher average cash balances. +Income tax provision. Income tax provision was $21.4 million during 2024, compared to $61.1 million tax provision in the prior year. The effective provision rate was 18.9% for 2024, compared to a 23.9% effective provision rate for the prior year. The decrease in the effective tax rate in 2024 compared to the prior year is due to the strong impact of beneficial discrete adjustments on a decreased pretax income. +Net income, net income margin and diluted earnings per share. Net income was $91.4 million in 2024, or $0.43 diluted earnings per share, compared to net income of $195.1 million in 2023, or $0.90 diluted earnings per share. Net income margin was 6.5% for 2024, compared to 12.1% in 2023. +Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA was $233.0 million, and Adjusted EBITDA margin was 16.5% in 2024 compared to $374.4 million and 23.1% in 2023. The decline in 2024 was primarily due to lower revenues, associated negative operating leverage and fixed cost absorption. +Cash provided by operating activities and Free cash flow. Cash provided by operating activities decreased to $349.4 million in 2024, from $394.8 million in 2023. Free cash flow decreased to $129.5 million in 2024, from $213.8 million in 2023 primarily due to a decrease in cash provided by operating activities, driven by lower net income partially offset by favorable working capital changes. Free cash flow in 2024 was also impacted by an increase in capital expenditures. +Non -GAAP Financial Measures +Reconciliation of GAAP and non-GAAP Financial Measures +Disclosed above are non-GAAP financial measures of EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and Free cash flow. These measures should not be considered in isolation or as a substitute for performance or liquidity measures prepared in accordance with GAAP. +A non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that either 1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheet or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. +26 +Set forth below are reconciliations of these non-GAAP measures with their most directly comparable GAAP measures. +(Unaudited) +Year ended +December 31, +December 31, +December 31, +(In thousands) +2024 +0 +2023 +0 +2022 +Reconciliation of Net Income to EBITDA and Adjusted EBITDA +Net income +$ +91,444 +$ +195,113 +$ +218,363 +Adjustments: +Add: Income tax provision +21,358 +61,130 +71,269 +Add: Interest expense +724 +341 +614 +Add: Depreciation and amortization +132,575 +108,123 +83,017 +Less: Interest income +13,134 +8,599 +1,171 +EBITDA +$ +232,967 +$ +356,108 +$ +372,092 +Add: Pension settlement charges +— +18,286 +2,921 +Adjusted EBITDA +$ +232,967 +$ +374,394 +$ +375,013 +Revenues +$ +1,414,999 +$ +1,617,474 +$ +1,601,762 +Net income margin +6.5% +12.1% +13.6% +Adjusted EBITDA margin +16.5% +23.1% +23.4% +(Unaudited) +Year ended December 31, +(In thousands) +2024 +2023 +Reconciliation of Operating Cash Flow to Free Cash Flow +Net cash provided by operating activities +$ +349,386 +$ +394,763 +Capital expenditures +(219,930) +(181,005) +Free cash flow +$ +129,456 +$ +213,758 +Liquidity and Capital Resources +Cash and Cash Flows +The Company’s cash and cash equivalents were $326.0 million as of December 31, 2024, $223.3 million as of December 31, 2023, and $126.4 million as of December 31, 2022. +Year ended December 31, +2024 +2023 +(In thousands) +Net cash provided by operating activities +$ +349,386 +$ +394,763 +Net cash used for investing activities +(201,551) +(241,712) +Net cash used for financing activities +(45,170) +(56,165) +Cash provided by operating activities for the year ended December 31, 2024, decreased by $45.4 million compared to the year ended December 31, 2023, primarily due to a decrease in net income, partially offset by favorable changes in working capital. Changes in working capital was a source of cash of $116.7 million for the year ended December 31, 2024, compared to a source of cash of $57.8 million in the same period last year. Changes in working capital was a significant source of cash in the current year primarily due to the following: a decrease of $47.9 million in taxes receivable including a $52.8 million federal tax refund received during the second quarter of 2024, coupled with a $48.0 million decrease in accounts receivable. The changes in accounts receivable and the other components of working capital were primarily due to the timing of payments and receipts. +Cash used for investing activities for 2024 decreased by $40.2 million compared to 2023, primarily due to the purchase of Spinnaker during 2023 (as there were no acquisitions in 2024). Capital expenditures were $219.9 million for the year ended December 31, 2024, compared to $181.0 million for the year ended December 31, 2023. Capital investments during 2024 included the purchase of a Tier 4 dual fuel pressure pumping fleet, which replaced a Tier 2 diesel fleet. In addition, certain capital spending items were delayed from 2023 into 2024, which was a contributing factor to the year-over-year increase. +27 +Cash used for financing activities for 2024 decreased by $11.0 million primarily due to a decrease in repurchases of the Company’s common shares in the open market. The Company paid $34.4 million in dividends and repurchased $9.9 million of common stock in 2024 compared to $34.6 million in dividends paid and $21.1 million of common stock repurchased in 2023. +Financial Condition and Liquidity +The Company’s financial condition remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not expect to utilize our revolving credit facility to meet these liquidity requirements in the near term. +The Company currently has a $100.0 million revolving credit facility that matures in June 2027. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company's 100% owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. The Credit Agreement’s maturity date is June 22, 2027, and the interest rate is based on Term Secured Overnight Financing Rate (Term SOFR). In addition, the terms of the agreement have a 1.00% per annum floor for Base Rate borrowings and permits the issuance of letters of credit in currencies other than U.S. dollars. As of December 31, 2024, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $16.3 million; therefore, a total of $83.7 million of the facility was available. The Company is currently in compliance with the credit facility financial covenants. For additional information with respect to RPC’s facility, see note to the consolidated financial statements titled Long-Term Debt. +Cash Requirements +The Company currently expects capital expenditures to be between $150 million and $200 million in 2025 and to be directed towards both capitalized maintenance of our existing equipment and selected growth opportunities. The Company is allocating capital to maintain the capacity of our pressure pumping fleet to offset anticipated future fleet retirements and is evaluating future investments and options to further upgrade our equipment across the business. +The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or are probable and can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated. +The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market, including an additional 8,000,000 shares authorized for repurchase by the Board of Directors in 2023. There were 1,010,258 shares repurchased on the open market during 2024, and 12,768,870 shares remained available to be repurchased under the current authorization as of December 31, 2024. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies. The stock buyback program does not have a predetermined expiration date. For additional information with respect to RPC’s stock buyback program, see note to the consolidated financial statements titled Cash Paid for Common Stock Purchased and Retired. +In the fourth quarter of 2024, the Board of Directors approved the termination of the Supplemental Executive Retirement Plan (SERP). Pursuant to the Internal Revenue Service rules, participant balances will be distributed between 12 and 24 months after termination. The Company is currently evaluating its funding options and timing to distribute participant balances. +In the fourth quarter of 2024, the Company entered into a multi-year systems transformation program to upgrade our ERP and supply chain systems. We are currently in the early phases and expensed the majority of non-recurring costs incurred in 2024. We plan to continue the ERP implementation through a phased approach with costs being incurred over the next few years. +On January 28, 2025, the Board of Directors declared a regular quarterly cash dividend of $0.04 per share payable March 10, 2025, to common stockholders of record at the close of business on February 10, 2025. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors. +28 +Inflation +The Company purchases its equipment and materials from suppliers who provide competitive prices and employ skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressure in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause supply disruptions and higher costs of certain materials and key equipment components used to provide services to the Company’s customers. In recent years, the price of labor and raw materials have increased. These cost increases have moderated but remain high by historical standards. +Outlook +The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity and can be impacted by economic and policy developments as well as geopolitical disruptions, such as the continuing conflicts in the Middle East as well as Russia and Ukraine. RPC believes that oil prices currently remain above levels sufficient to motivate our customers to maintain drilling and completion activities. Long-term, projected steady higher demand for oil and natural gas should drive increased activity in most of the basins in which RPC operates. +We continue to monitor the supply and demand for our services and the competitive environment, including trends such as increasing customer preferences for lower emission and more efficient equipment. Increased asset efficiency in recent years of oilfield completion fleets, particularly in pressure pumping, has inherently contributed to oversupply in the OFS market. We believe that most of the feasible operating efficiency gains have been realized, but competition is expected to remain at a high level. +Contractual Obligations +The Company’s obligations and commitments that require future payments include certain non-cancelable leases, purchase obligations, amounts related to the usage of corporate aircraft, distribution related to SERP terminations, ongoing ERP implementation and other long-term liabilities. We expect to fund these obligations primarily through cash generated from our operations. See note titled Leases and note titled Employee Benefit Plans in the Notes to consolidated financial statements for additional details. +Off Balance Sheet Arrangements +The Company does not have any material off balance sheet arrangements. +Related Party Transactions +See note titled Related Party Transactions in the Notes to consolidated financial statements for a description of related party transactions. +Critical Accounting Estimates +The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating accounting estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. Senior management has discussed the development, selection and disclosure of its critical accounting estimates requiring significant judgments and estimates with the Audit Committee of our Board of Directors. The Company believes the following critical accounting estimates involve estimates that require a higher degree of judgment and complexity: +Credit loss allowance for accounts receivable — Substantially all of the Company’s receivables are due from oil and gas E&Ps in the United States, selected international locations and foreign, nationally owned oil companies. Our credit loss allowance is determined using a combination of factors to estimate the risk of uncollectibility so that our receivables are appropriately stated. Our established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Our customers’ ability to pay is directly related to their ability to generate cash flow on their projects and is significantly affected by the volatility in the price of oil and natural gas. Credit loss allowance for accounts receivable is recorded in selling, general and administrative expenses. Accounts are written off against the allowance when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2024, 2023 and 2022. We record specific provisions when we become aware of a customer's inability to meet its +29 +financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer change, our estimate of the realizability of the receivable would be further adjusted, either upward or downward. +The estimated credit loss allowance is based on our evaluation of the overall trends in the oil and gas industry, financial condition of our customers, our historical write-off experience, current economic conditions, and in the case of international customers, our judgments about the economic and political environment of the related country and region. In addition to reserves established for specific customers, we establish general reserves by using different percentages depending on the age of the receivables which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.4% to 0.8% over the last three years. Increasing or decreasing the estimated general reserve percentage by 0.50 percentage points as of December 31, 2024, would have resulted in a change of approximately $1.1 million in the recorded provision for current expected credit losses. +Insurance expenses — RPC self-insures certain risks related to general liability, workers’ compensation, vehicle, property, and employee health insurance costs, up to policy-specified deductible limits. For employee health insurance, RPC maintains stop-loss coverage to limit its financial exposure on high-cost claims. The estimated cost of claims under these self-insurance programs is accrued as incurred, though actual settlement may occur in future periods. These estimates may be adjusted over time based on claim developments. Any portion of outstanding claims expected to be paid beyond one year is classified as long-term accrued insurance expenses. These claims are monitored, and the cost estimates are revised as developments occur relating to such claims. The Company has retained an independent third-party actuary to assist in the calculation of a range of exposure for these claims. As of December 31, 2024, the Company estimates the range of exposure to be from $17.8 million to $22.3 million. The Company has recorded liabilities as of December 31, 2024, of $20.1 million, which represents management’s best estimate of probable loss. +Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. The Company completes a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Assessment of goodwill impairment is conducted at the level of each reporting unit. Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. +In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. +Acquisition of business — I n accounting for our acquisitions, we evaluate whether a transaction pertains to an acquisition of assets, or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires assets acquired and the liabilities assumed to be recognized at the acquisition date fair values, separately from goodwill. The excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is recorded as goodwill. The Company uses its best estimates and assumptions to accurately value assets acquired, and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable. However, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, the Company may have to record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. +30 +Upon the conclusion of a business acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations. +Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, pre-acquisition contingencies and any contingent consideration, where applicable. Although management believes that the assumptions and estimates the Company has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. +Impact of Recent Accounting Pronouncements +See note titled Significant Accounting Policies in the Notes to the consolidated financial statements, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +The Company is subject to interest rate risk exposure through borrowings on its revolving credit facility. As of December 31, 2024, there were no outstanding interest-bearing advances on our credit facility which bore interest at a floating rate. +Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition. +31 +Item 8. Financial Statements and Supplementary Data +MANAGEMENT’S REPORT ON INTER NAL CONTROL OVER FINANCIAL REPORTING +To the Stockholders of RPC, Inc.: +The management of RPC, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. RPC, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2024. +The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2024, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 33. +/s/ Ben M. Palmer +/s/ Michael L. Schmit +Ben M. Palmer +President and Chief Executive Officer +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate Secretary +Atlanta, Georgia +February 28, 2025 +32 +REPORT OF INDEPEN DENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on internal control over financial reporting +We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2024, and our report dated February 28, 2025 expressed an unqualified opinion on those financial statements. +Basis for opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and limitations of internal control over financial reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ +GRANT THORNTON LLP +Atlanta, Georgia +February 28, 2025 +33 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +RPC, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “consolidated financial statements”) . In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2025 expressed an unqualified opinion. +Basis for opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical audit matters +Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. +/s/ +GRANT THORNTON LLP +We have served as the Company’s auditor since 2004. +Atlanta, Georgia +February 28, 2025 +34 +CONSOLIDATED BALANCE SHEET +RPC, INC. AND SUBSIDIARIES +(in thousands except share information) +December 31, +December 31, +2024 +2023 +ASSETS +Cash and cash equivalents +$ +325,975 +$ +223,310 +Accounts receivable, net of allowance for credit losses of $ 7,906 as of December 31, 2024 and $ 7,109 as of December 31, 2023 +276,577 +324,915 +Inventories +107,628 +110,904 +Income taxes receivable +4,332 +52,269 +Prepaid expenses +16,136 +12,907 +Other current assets +2,194 +2,768 +Total current assets +732,842 +727,073 +Property, plant and equipment, less accumulated depreciation of $ 860,227 as of December 31, 2024 and $ 810,933 as of December 31, 2023 +513,516 +435,139 +Operating lease right-of-use assets +27,465 +24,537 +Finance lease right-of-use assets +4,400 +1,036 +Goodwill +50,824 +50,824 +Other intangibles, net +13,843 +12,825 +Retirement plan assets +30,666 +26,772 +Other assets +12,933 +8,639 +Total assets +$ +1,386,489 +$ +1,286,845 +LIABILITIES AND STOCKHOLDERS’ EQUITY +LIABILITIES +Accounts payable +$ +84,494 +$ +85,036 +Accrued payroll and related expenses +25,243 +30,956 +Accrued insurance expenses +7,942 +5,340 +Accrued state, local and other taxes +3,234 +4,461 +Income taxes payable +446 +275 +Unearned revenue +45,376 +15,743 +Current portion of operating lease liabilities +7,108 +7,367 +Current portion of finance lease liabilities and finance obligations +3,522 +375 +Accrued expenses and other liabilities +4,548 +2,304 +Total current liabilities +181,913 +151,857 +Long-term accrued insurance expenses +12,175 +10,202 +Retirement plan liabilities +24,539 +23,724 +Deferred income taxes +58,189 +51,290 +Long-term operating lease liabilities +21,724 +18,600 +Long-term finance lease liabilities +559 +819 +Other long-term liabilities +9,099 +7,840 +Total liabilities +308,198 +264,332 +Commitments and contingencies (Note 15) +STOCKHOLDERS’ EQUITY +Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, none issued +— +— +Common stock, $ 0.10 par value, 349,000,000 shares authorized, 214,942,138 and 215,026,458 shares issued and outstanding in 2024 and 2023, respectively +21,494 +21,502 +Capital in excess of par value +— +— +Retained earnings +1,059,625 +1,003,380 +Accumulated other comprehensive loss +( 2,828 ) +( 2,369 ) +Total stockholders’ equity +1,078,291 +1,022,513 +Total liabilities and stockholders’ equity +$ +1,386,489 +$ +1,286,845 +The accompanying notes are an integral part of these statements. +35 +CONSOLIDATED STATEMENTS OF OPERATIONS +RPC, INC. AND SUBSIDIARIES +(in thousands except per share data) +Years ended December 31, +2024 +2023 +2022 +Revenues +$ +1,414,999 +$ +1,617,474 +$ +1,601,762 +COSTS AND EXPENSES: +Cost of revenues (exclusive of depreciation and amortization shown separately below) +1,036,648 +1,089,519 +1,088,115 +Selling, general and administrative expenses +156,437 +165,940 +148,573 +Pension settlement charges +— +18,286 +2,921 +Depreciation and amortization +132,575 +108,123 +83,017 +Gain on disposition of assets, net +( 8,199 ) +( 9,344 ) +( 8,804 ) +Operating income +97,538 +244,950 +287,940 +Interest expense +( 724 ) +( 341 ) +( 614 ) +Interest income +13,134 +8,599 +1,171 +Other income, net +2,854 +3,035 +1,135 +Income before income taxes +112,802 +256,243 +289,632 +Income tax provision +21,358 +61,130 +71,269 +Net income +$ +91,444 +$ +195,113 +$ +218,363 +Earnings per share +Basic +$ +0.43 +$ +0.90 +$ +1.01 +Diluted +$ +0.43 +$ +0.90 +$ +1.01 +The accompanying notes are an integral part of these statements. +36 +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +RPC, INC. AND SUBSIDIARIES +(in thousands) +Years ended December 31, +2024 +2023 +2022 +Net income +$ +91,444 +$ +195,113 +$ +218,363 +Other comprehensive income (loss): +Pension settlement and adjustment, net of tax +— +17,307 +764 +Foreign currency translation +( 459 ) +263 +5 +Comprehensive income +$ +90,985 +$ +212,683 +$ +219,132 +The accompanying notes are an integral part of these statements. +37 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +RPC, INC. AND SUBSIDIARIES +(in thousands) +Accumulated +Capital in +Other +Common Stock +Excess of +Retained +Comprehensive +Shares +Amount +Par Value +Earnings +Loss +Total +Balance, December 31, 2021 +215,629 +$ +21,563 +$ +— +$ +640,936 +$ +( 20,708 ) +$ +641,791 +Stock issued for stock incentive plans, net +1,139 +114 +6,261 +— +— +6,375 +Stock purchased and retired +( 159 ) +( 16 ) +( 6,261 ) +5,359 +— +( 918 ) +Net income +— +— +— +218,363 +— +218,363 +Pension adjustment, net of taxes +— +— +— +— +764 +764 +Foreign currency translation +— +— +— +— +5 +5 +Dividends ($ 0.04 per share) +— +— +— +( 8,645 ) +— +( 8,645 ) +Balance, December 31, 2022 +216,609 +21,661 +— +856,013 +( 19,939 ) +857,735 +Stock issued for stock incentive plans, net +1,143 +114 +7,767 +— +— +7,881 +Stock purchased and retired +( 2,726 ) +( 273 ) +( 7,767 ) +( 13,184 ) +— +( 21,224 ) +Net income +— +— +— +195,113 +— +195,113 +Pension settlement and adjustment, net of tax +— +— +— +— +17,307 +17,307 +Foreign currency translation +— +— +— +— +263 +263 +Dividends ($ 0.16 per share) +— +— +— +( 34,562 ) +— +( 34,562 ) +Balance, December 31, 2023 +215,026 +21,502 +— +1,003,380 +( 2,369 ) +1,022,513 +Stock issued for stock incentive plans, net +1,260 +126 +9,060 +— +— +9,186 +Stock purchased and retired +( 1,344 ) +( 134 ) +( 9,060 ) +( 766 ) +— +( 9,960 ) +Net income +— +— +— +91,444 +— +91,444 +Foreign currency translation +— +— +— +— +( 459 ) +( 459 ) +Dividends ($ 0.16 per share) +— +— +— +( 34,433 ) +— +( 34,433 ) +Balance, December 31, 2024 +214,942 +$ +21,494 +$ +— +$ +1,059,625 +$ +( 2,828 ) +$ +1,078,291 +The accompanying notes are an integral part of these statements. +38 +CONSOLIDATED STATEMENTS OF CASH FLOWS +RPC, INC. AND SUBSIDIARIES +(in thousands) +Years ended December 31, +2024 +2023 +2022 +OPERATING ACTIVITIES +Net income +$ +91,444 +$ +195,113 +$ +218,363 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation and amortization +132,575 +108,123 +83,017 +Stock-based compensation expense +9,186 +7,881 +6,375 +Gain on disposition of assets, net +( 8,199 ) +( 9,344 ) +( 8,804 ) +Gain due to benefit plan financing arrangement +( 1,151 ) +— +— +Deferred income tax provision +6,899 +8,647 +19,496 +Pension settlement charges +— +18,286 +2,921 +Other non-cash adjustments +709 +126 +647 +Decrease (increase) in assets: +Accounts receivable +48,032 +104,574 +( 157,894 ) +Income taxes receivable +47,937 +( 9,866 ) +16,101 +Inventories +2,958 +( 12,341 ) +( 18,413 ) +Prepaid expenses +( 1,579 ) +5,233 +( 7,980 ) +Other current assets +( 1 ) +311 +406 +Other non-current assets +( 2,181 ) +( 1,285 ) +9,306 +Increase (decrease) in liabilities: +Accounts payable +278 +( 34,519 ) +35,759 +Income taxes payable +171 +( 224 ) +( 157 ) +Unearned revenue +29,633 +15,743 +— +Accrued payroll and related expenses +( 5,652 ) +( 2,223 ) +17,864 +Pension liabilities +— +( 5,419 ) +— +Accrued insurance expenses +2,602 +2,108 +( 6,897 ) +Accrued state, local and other taxes +( 1,227 ) +165 +2,391 +Other accrued expenses +( 6,489 ) +( 5,732 ) +( 3,703 ) +Pension and retirement plan liabilities +815 +618 +( 4,589 ) +Long-term accrued insurance expenses +1,973 +3,053 +( 4,621 ) +Other long-term liabilities +653 +5,735 +1,698 +Net cash provided by operating activities +349,386 +394,763 +201,286 +INVESTING ACTIVITIES +Capital expenditures +( 219,930 ) +( 181,005 ) +( 139,552 ) +Proceeds from sale of assets +18,379 +18,091 +15,837 +Purchase of business +— +( 78,798 ) +— +Proceeds from benefit plan financing arrangement +2,380 +— +— +Re-investment in benefit plan financing arrangement +( 2,380 ) +— +— +Net cash used for investing activities +( 201,551 ) +( 241,712 ) +( 123,715 ) +FINANCING ACTIVITIES +Payment of dividends +( 34,433 ) +( 34,562 ) +( 8,645 ) +Cash paid for common stock purchased and retired +( 9,938 ) +( 21,088 ) +( 918 ) +Cash paid for finance lease and finance obligations +( 799 ) +( 515 ) +( 24,017 ) +Net cash used for financing activities +( 45,170 ) +( 56,165 ) +( 33,580 ) +Net increase in cash and cash equivalents +102,665 +96,886 +43,991 +Cash and cash equivalents at beginning of period +223,310 +126,424 +82,433 +Cash and cash equivalents at end of period +$ +325,975 +$ +223,310 +$ +126,424 +Supplemental cash flows disclosure: +Interest paid +$ +170 +$ +166 +$ +170 +Supplemental disclosure of noncash investing activities: +Capital expenditures included in accounts payable +$ +8,199 +$ +9,036 +$ +9,334 +The accompanying notes are an integral part of these statements. +39 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 1: Significant Accounting Policies +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of RPC, Inc. and its wholly owned subsidiaries (RPC or the Company). All significant intercompany accounts and transactions have been eliminated. +Certain prior year amounts have been reclassified to conform to the presentation in the current year. +Common Stock +RPC is authorized to issue 349,000,000 shares of common stock, $ 0.10 par value. Holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of legally available funds. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. +Preferred Stock +RPC is authorized to issue up to 1,000,000 shares of preferred stock, $ 0.10 par value. As of December 31, 2024, there were no shares of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights, exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common stock with respect to dividend rights and rights on liquidation. +Use of Estimates in the Preparation of Financial Statements +The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are used in the determination of the credit loss allowance, income taxes, goodwill and other impairment assessments, accrued insurance expenses and acquisition of businesses. +Revenues +RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See note to the consolidated financial statements titled Revenues for additional information. +Concentration of Credit Risk +Substantially all of the Company’s customers are engaged in the oil and gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company provided oilfield services to several hundred customers during each of the past three years. One of our customers, a private E&P company, accounted for approximately 13 % of the Company’s revenues in 2024, another private E&P company accounted for approximately 11 % of the Company’s revenues in 2022. There were no other customers in 2022 or 2024, and no customers in 2023 exceeding 10 % of revenues. Amounts for customers that exceeded 10 % of the Company’s revenues in 2024 and 2022 were primarily associated with the Company’s Technical Services segment. In addition, there was one customer that accounted for approximately 10 % of accounts receivable as of December 31, 2023. There were no customers that accounted for 10 % or more of accounts receivable as of December 31, 2024. +40 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Cash and Cash Equivalents +Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. RPC maintains cash equivalents and investments in one or more large financial institutions, and RPC’s policy restricts investment in any securities rated less than investment grade by national rating services. +Investments +Investments classified as available-for-sale securities are stated at their fair values, with all gains and losses included in other income. The Company recorded gains on its available-for-sale securities of $ 4 thousand in 2024, $ 18 thousand in 2023, and $ 107 thousand in 2022. During 2024, the Company sold all of its investments in equity securities. The Securities that are held in the non-qualified SERP are classified as trading. See note titled Employee Benefit Plans for further information regarding the SERP. The change in fair value of trading securities is presented as compensation cost in selling, general and administrative expenses on the Consolidated Statements of Operations. +Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designations as of each balance sheet date. +Accounts Receivable +The majority of the Company’s accounts receivable is due principally from major and independent oil and natural gas E&P’s. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are considered past due after 60 days and are stated at amounts due from customers, net of a credit loss allowance. +Credit Loss Allowance for Accounts Receivable +Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +Inventories +Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. +Property, Plant and Equipment +Property, plant and equipment, including software costs, are reported at cost less accumulated depreciation and amortization, which is provided on a straight-line basis over the estimated useful lives of the assets. Annual depreciation and amortization expenses are computed using the following useful lives: operating equipment, 3 to 20 years ; buildings and leasehold improvements, 15 to 39 years or the life of the lease; furniture and fixtures, 5 to 7 years ; software, 5 years ; and vehicles, 3 to 5 years . The cost of assets retired or otherwise disposed of, and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income from operations. Expenditures for additions, major renewals, and betterments are capitalized. Expenditures for restoring an identifiable asset to working condition or for maintaining the asset in good working order constitute repairs and maintenance and are expensed as incurred. +RPC records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of +41 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +those assets. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment, to determine if any impairments should be recognized. There was no impairment recorded during 2024, 2023 or 2022. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reporting segment was as follows: +Years Ended December 31, +2024 +2023 +(in thousands) +Technical Services +$ +49,666 +$ +49,666 +Support Services +1,158 +1,158 +Goodwill +$ +50,824 +$ +50,824 +Goodwill is reviewed annually, or more frequently, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, for impairment. In both 2024 and 2023, due to improved industry conditions, its reporting units’ performance and public market indications of value, the Company elected to perform a qualitative assessment of its goodwill and concluded that it is more likely than not that fair value of each of its reporting units is more than the carrying amounts, including goodwill. Based on these assessments the Company concluded that the fair value of its reporting units exceeded their carrying amounts and therefore no impairment of goodwill occurred during the years ended December 31, 2024, and 2023. +Other intangibles, net +Oher intangibles with finite lives include customer relationships, Trade names and Trademarks and software licenses. These assets are amortized over their legal or estimated useful lives based on methods that approximate the pattern in which the economic benefits are expected to be realized. The amortization periods range from three to 10 years . +Software Licenses +The Company accounts for costs related to internal-use software as follows: (1) hosting arrangement where the Company obtains access to a software license and it is feasible for the Company to take possession and run the software on its own hardware, the Company records an intangible asset and a liability to the extent that all or a portion of the software fees have not been paid, see note titled Other intangibles, net for details of software licenses recorded as part of intangible assets, (2) capitalizes costs related to application development stage after the preliminary project stage is completed and management has authorized and committed to funding the project and it is probable that the project will be completed, and the software will be used to perform as intended, and (3) expenses costs related to arrangements considered software as a service where the Company has access to a vendor managed software that do not meet the criteria for software purchase or license. +42 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Insurance Expenses +RPC self-insures certain risks related to general liability, workers’ compensation, vehicle, property, and employee health insurance costs, up to policy-specified deductible limits. For employee health insurance, RPC maintains stop-loss coverage to limit its financial exposure on high-cost claims. The estimated cost of claims under these self-insurance programs is accrued as incurred, though actual settlement may occur in future periods. These estimates may be adjusted over time based on claim developments. Any portion of outstanding claims expected to be paid beyond one year is classified as long-term accrued insurance expenses. +Income Taxes +Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance against the carrying value of deferred tax assets when the Company determines that it is more likely than not that the asset will not be realized through future taxable income. +Share Repurchases +The Company records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period and discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity. +Earnings per Share +Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See note titled Employee Benefit Plans for further information on restricted stock granted to employees. +Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows: +2024 +2023 +2022 +(in thousands) +Net income available for stockholders +$ +91,444 +$ +195,113 +$ +218,363 +Less: Adjustments for earnings attributable to participating securities +( 1,547 ) +( 3,099 ) +( 3,197 ) +Net income used in calculating earnings per share +$ +89,897 +$ +192,014 +$ +215,166 +Weighted average shares outstanding (including participating securities) +214,942 +216,472 +216,518 +Adjustment for participating securities +( 3,584 ) +( 3,545 ) +( 3,187 ) +Shares used in calculating basic and diluted earnings per share +211,358 +212,927 +213,331 +Fair Value of Financial Instruments +The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, and debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The Company’s investments as of December 31, 2024, are classified as trading securities. Trading securities are comprised of the SERP assets, as described in the note titled Employee Benefit Plans, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance or investment company. See note titled Fair Value Disclosures for additional information. +43 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Stock-Based Compensation +Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. Thus, compensation cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See note titled Employee Benefit Plans for additional information. +Advertising +Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $ 2.3 million in 2024, $ 2.4 million in 2023, and $ 2.0 million in 2022. +Leases +The Company determines at contract inception if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, storage containers and office equipment. The Company’s population of month-to-month real estate leases have been classified as short-term leases. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred. +Recent Accounting Pronouncements +The Financial Accounting Standards Board issued the following applicable Accounting Standards Updates (ASU): +Recently Adopted Accounting Standards: +Accounting Standards Update (ASU) No. 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures: The amendments in this ASU require an entity to disclose the title and position of the Chief Operating Decision Maker (CODM) and the significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss. The Company has two reportable segments and adopted these provisions in the fourth quarter of 2024. The updated disclosure is reflected in the footnote titled Business Segment and Entity Wide Disclosures. +ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures: The amendments in this ASU require an entity to include consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid, disaggregated by jurisdiction. The Company early adopted these provisions in the fourth quarter of 2024. The updated disclosures are reflected in the footnote titled Income Taxes. +Recently Issued Accounting Standards Not Yet Adopted: +Securities and Exchange Commission (SEC) Final Rules: Climate related Disclosure: The SEC adopted final rules designed to enhance public company disclosures related to the risks and impacts of climate-related matters. The new rules require disclosures relating to climate-related risks and risk management as well as the board and management’s governance of such risks. In addition, the rules include requirements to disclose the financial effects of severe weather events and other natural conditions in the audited financial statements and disclose information about greenhouse gas emissions, which will be subject to a phased-in assurance requirement. On April 4, 2024, the SEC stayed its climate disclosure rules to “facilitate the orderly judicial resolution” of pending legal challenges. If litigation is resolved in favor of the SEC, a majority of the final rules are effective for the Company beginning in the year 2026. +ASU 2024-03: Income Statement (Topic 220): Disaggregation of Income Statement Expenses: +The amendments in this ASU require public companies to disclose, in interim and reporting periods, additional information about certain expenses in the financial statements. ASU 2024-03 is effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and is effective on either a prospective basis or retrospective basis. The Company is currently assessing the potential impacts of adoption on the consolidated financial statements. +44 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 2: Business Acquisition +Effective July 1, 2023, the Company completed its acquisition of all of the outstanding equity interests in Spinnaker Oilwell Services, LLC (Spinnaker), pursuant to a Merger Agreement with Catapult Energy Services Group, LLC, as the representative of the Sellers. Spinnaker, headquartered in Oklahoma City, Oklahoma, is a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. This acquisition significantly expanded RPC's cementing business from its presence in South Texas to basins in which it currently provides other services. Spinnaker is included in our Technical Services Segment. +The supplemental pro forma financial information presented below was prepared using the acquisition method of accounting and was based on the historical financial information of Spinnaker and RPC. This proforma financial information does not necessarily represent what the combined company’s revenues or results of operations would have been had the acquisition been completed on January 1, 2023, nor do they intend to be a projection of future operating results of the combined company. +The following table provides unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2023. +Twelve Months Ended +December 31, 2023 +(in thousands) +Revenues +$ +1,669,231 +Net income +204,222 +Note 3: Revenues +Accounting Policy +RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC satisfies its performance obligations over time as the services are performed and records revenues accordingly. RPC records revenues based on the transaction price agreed upon with its customers. +Sales tax charged to customers is presented on a net basis within the Consolidated Statements of Operations and therefore excluded from revenues. +Nature of services +RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see note titled Business Segment and Entity Wide Disclosures. +RPC contracts with its customers to provide the following services by reportable segment: +Technical Services +● Includes pressure pumping, downhole tools, coiled tubing, cementing, snubbing, nitrogen, well control, wireline and fishing. +45 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Support Services +● Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. +● Other support services include pipe handling and pipe inspection and storage services, and well control training. +Our contracts with customers are generally short-term in nature and consist of a single performance obligation – the provision of oilfield services. +Payment terms +RPC’s contracts with customers state the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to 60 days after invoicing. As the Company enters into contracts with its customers, it generally expects there to be no significant timing difference between the date the services are provided to the customer (satisfaction of the performance obligation) and the date cash consideration is received. Accordingly, there is no financing component to our arrangements with customers. +Significant judgments +RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations. +Disaggregation of revenues +See note titled Business Segment and Entity Wide Disclosures for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. +Contract balances +Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the Consolidated Balance Sheet are shown below: +December 31, +2024 +2023 +2022 +(in thousands) +Unbilled trade receivables +$ +60,951 +$ +59,831 +$ +103,498 +Substantially all of the unbilled trade receivables as of December 31, 2024, and December 31, 2023, were invoiced during the following quarter. +Unearned Revenue +Contract liabilities represent the payments received in advance of satisfying the Company’s performance obligation and are recognized over time as the service is performed. As of December 31, 2024, and 2023, such amounts were $ 45.4 million and $ 15.7 million respectively and were recorded as unearned revenue on the Consolidated Balance Sheet. All of the $ 15.7 million recorded as unearned revenue as of December 31, 2023, was recognized during 2024. There was no unearned revenue recorded for the year ended December 31, 2022. +46 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 4: Depreciation and Amortization +Depreciation and amortization disclosed in the Consolidated Statements of Operations related to the following components: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +Cost of revenues +$ +120,647 +$ +97,685 +$ +74,294 +Selling, general and administrative expenses +11,928 +10,438 +8,723 +Total +$ +132,575 +$ +108,123 +$ +83,017 +Note 5: Accounts Receivable +Accounts receivable, net consists of the following: +December 31, +2024 +2023 +(in thousands) +Trade receivables: +Billed +$ +221,025 +$ +271,515 +Unbilled +60,951 +59,831 +Other receivables +2,507 +678 +Total +284,483 +332,024 +Less: allowance for credit losses +( 7,906 ) +( 7,109 ) +Accounts receivable, net +$ +276,577 +$ +324,915 +Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consist primarily of net amounts receivable from an agent that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers. +Note 6: Current Expected Credit Losses +The Company utilizes an expected credit loss model for valuing its accounts receivable, a financial asset measured at amortized cost. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. +The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected: +Years Ended December 31, +2024 +2023 +2022 +(in thousands) +Beginning balance +$ +7,109 +$ +7,078 +$ +6,765 +Provision for current expected credit losses +1,527 +2,656 +2,029 +Write-offs +( 814 ) +( 2,737 ) +( 1,752 ) +Recoveries collected (net of expenses) +84 +112 +36 +Ending balance +$ +7,906 +$ +7,109 +$ +7,078 +Note 7: Inventories +Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in +47 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using either the first-in, first-out, or the weighted average cost method. +December 31, +2024 +2023 +(in thousands) +Raw materials and supplies +$ +97,857 +$ +101,194 +Finished goods +9,771 +9,710 +Total inventory +$ +107,628 +$ +110,904 +Note 8: Property, Plant and Equipment +Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following: +December 31, +2024 +2023 +(in thousands) +Land +$ +19,802 +$ +18,165 +Buildings and leasehold improvements +132,871 +129,513 +Operating equipment +884,793 +784,826 +Computer software +19,297 +19,535 +Furniture and fixtures +5,157 +5,298 +Vehicles +311,823 +288,735 +Gross property, plant and equipment +1,373,743 +1,246,072 +Less: accumulated depreciation +( 860,227 ) +( 810,933 ) +Net property, plant and equipment +$ +513,516 +$ +435,139 +Depreciation expense was $ 130.5 million in 2024, $ 107.3 million in 2023, and $ 82.2 million in 2022. The Company transferred inventory to property, plant and equipment totaling $ 17.0 million in 2024 and $ 10.9 million in 2023 and $ 9.9 million in 2022. +Note 9: Other Intangibles, net +The following table provides a summary of the gross carrying value and accumulated amortization by each major intangible class: +December 31, 2024 +December 31, 2023 +Estimated Useful Life (in years) +Gross +Carrying +Amount +Accumulated Amortization +Gross +Carrying +Amount +Accumulated Amortization +(in thousands) +Finite-lived Intangibles: +Customer relationships +10 +$ +10,000 +$ +( 1,500 ) +$ +10,000 +$ +( 500 ) +Trade names and trademarks +10 +3,519 +( 799 ) +3,519 +( 479 ) +Software licenses +3 +5,350 +( 2,727 ) +2,202 +( 1,917 ) +$ +18,869 +$ +( 5,026 ) +$ +15,721 +$ +( 2,896 ) +Amortization expense for each of the periods presented was as follows: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +Amortization of finite-lived intangible assets +$ +1,843 +$ +1,459 +$ +796 +Estimated future amortization expense based on balances as of December 31, 2024, is as follows; $ 2.4 million for the years 2025 and 2026; $ 1.8 million for the year 2027 and $ 1.3 million for the years 2028 and 2029. +48 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 10: Income Taxes +For financial reporting purposes, income before income taxes includes the following components: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +United States +$ +102,415 +$ +253,407 +$ +287,987 +Foreign +10,387 +2,836 +1,645 +Income before income taxes +$ +112,802 +$ +256,243 +$ +289,632 +The following table lists the components of the provision for income taxes: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +Current provision: +Federal +$ +11,468 +$ +45,146 +$ +47,744 +State +2,310 +6,502 +3,164 +Foreign +681 +835 +865 +Deferred provision (Benefit): +Federal +8,067 +7,116 +14,026 +State +1 +1,531 +5,470 +Foreign +( 1,169 ) +— +— +Total income tax provision +$ +21,358 +$ +61,130 +$ +71,269 +The Organization for Economic Co-operation and Development (OECD) has released the Base Erosion and Profit Shifting framework 2.0 (Pillar Two) to introduce a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds. As of December 31, 2024, certain countries we operate in have enacted legislation related to the global minimum tax rules under Pillar Two. The United States has not yet enacted legislation to adopt Pillar Two. There are no recorded effects for Pillar Two in our 2024 financial statements as we do not estimate a material impact, if any, to our consolidated financial statements. We will continue to monitor the impact as additional countries enact legislation going forward. +Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +Federal statutory rate +$ +23,688 +21.0 +% +$ +53,811 +21.0 +% +$ +60,823 +21.0 +% +State income taxes, net of federal benefit (a) +2,491 +2.2 +5,401 +2.1 +5,148 +1.8 +Foreign taxes, net of federal benefit +Canada +Change in valuation allowance +( 1,187 ) +( 1.1 ) +614 +0.2 +573 +0.2 +Other +61 +0.1 +( 500 ) +( 0.2 ) +( 541 ) +( 0.2 ) +Other foreign jurisdiction +436 +0.4 +721 +0.3 +833 +0.3 +Tax credits +( 1,036 ) +( 0.9 ) +( 703 ) +( 0.3 ) +( 424 ) +( 0.1 ) +Change in unrecognized tax benefits +( 1,637 ) +( 1.5 ) +251 +0.1 +144 +— +Non-deductible expenses +1,833 +1.6 +2,154 +0.9 +2,254 +0.8 +Cross-border tax laws +( 315 ) +( 0.3 ) +( 256 ) +( 0.1 ) +( 250 ) +( 0.1 ) +Change in valuation allowance +— +— +— +— +( 174 ) +( 0.1 ) +Interest related to tax matters +( 2,189 ) +( 1.9 ) +( 1,757 ) +( 0.7 ) +( 1,306 ) +( 0.5 ) +Other +( 787 ) +( 0.7 ) +1,394 +0.6 +4,189 +1.5 +Income tax provision and effective tax rate +$ +21,358 +18.9 +% +$ +61,130 +23.9 +% +$ +71,269 +24.6 +% +(a) Income taxes in Texas, Oklahoma, and New Mexico made up the majority (greater than 50 percent) of the state tax effect. +49 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Significant components of the Company’s deferred tax assets and liabilities are as follows: +December 31, +2024 +2023 +(in thousands) +Deferred tax assets: +Self-insurance +$ +3,386 +$ +4,303 +Long-term retirement plan +5,276 +5,101 +State net operating loss carryforwards +2,010 +1,520 +Allowance for credit losses +1,826 +1,634 +Stock-based compensation +1,995 +1,414 +Inventory reserve +3,178 +3,330 +Lease liability +7,067 +5,777 +Capitalized research and development +4,721 +3,066 +All others, net +1,959 +1,535 +Gross deferred tax assets +31,418 +27,680 +Deferred tax liabilities: +Depreciation +( 75,559 ) +( 66,784 ) +Right of use asset +( 7,013 ) +( 5,461 ) +Goodwill amortization +( 7,035 ) +( 6,725 ) +Gross deferred tax liabilities +( 89,607 ) +( 78,970 ) +Net deferred tax liabilities +$ +( 58,189 ) +$ +( 51,290 ) +Total net income tax (refunds) payments were $( 31.7 ) million in 2024, $ 62.2 million in 2023, and $ 35.8 million in 2022. The following table lists the components of the payments for income taxes: +Years ended December 31, +2024 +2023 +2022 +(in thousands) +Federal +$ +( 35,538 ) +$ +56,000 +$ +33,852 +State +Texas +2,021 +1,823 +400 +Oklahoma +— +1,000 +( 668 ) +Other +1,330 +2,345 +1,203 +Foreign +511 +1,058 +1,022 +Total net (refunds) payments +$ +( 31,676 ) +$ +62,226 +$ +35,809 +As of December 31, 2024, the Company has net operating loss carryforwards recorded related to state income taxes of $ 37.2 million (gross) that will expire between 2025 and 2045. +The Company’s policy is to record interest and penalties related to income tax matters, as part of income tax expense. Accrued interest and penalties were $ 2.5 million as of December 31, 2024, and $ 1.8 million as of December 31, 2023. +During 2024, the Company recognized a decrease in its liability for unrecognized tax benefits primarily due to the true-up of tax accruals related to refunds received during the year. The liability is recorded as part of other long-term liabilities on the Consolidated Balance Sheet. This liability, if released, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: +2024 +2023 +(in thousands) +Balance at January 1 +$ +2,168 +$ +1,917 +Additions based on tax positions related to the current year +167 +337 +(Reductions) for tax positions of prior years +( 1,804 ) +( 86 ) +Balance at December 31 +$ +531 +$ +2,168 +The Company and its subsidiaries are subject to U.S. federal and state and foreign income tax in multiple jurisdictions. In many cases, the uncertain tax positions are related to tax years that remain open and subject to examination by the relevant taxing +50 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +authorities. In general, the Company’s 2021 through 2023 tax years remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year. +Note 11: Long-Term Debt +The Company has a revolving Credit Agreement with Bank of America and four other lenders which provides for a line of credit of up to $ 100 million, including a $ 35 million letter of credit sub-facility, and a $ 35 million swingline sub-facility. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. The revolving credit facility includes a full and unconditional guarantee by the Company's 100% owned domestic subsidiaries whose assets equal substantially all of the consolidated assets of the Company and its subsidiaries. Certain of the Company’s minor subsidiaries are not guarantors. The Credit Agreement’s maturity date is June 22, 2027, and the interest rate is based on Term Secured Overnight Financing Rate (Term SOFR). In addition, the terms of the agreement have a 1.00 % per annum floor for Base Rate borrowings and permits the issuance of letters of credit in currencies other than U.S. dollars. +Under the Credit Agreement, when RPC’s trailing four quarter Adjusted EBITDA (as calculated under the Credit Agreement) is equal to or greater than $ 50 million: (i) the consolidated leverage ratio cannot exceed 2.50 :1.00 and (ii) the debt service coverage ratio must be equal to or greater than 2.00 :1.00; otherwise, the minimum tangible net worth must be greater than or equal to $ 400 million. As of both December 31, 2024, and December 31, 2023, the Company was in compliance with these covenants. +Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election: +● Term SOFR; plus, a margin ranging from 1.25 % to 2.25 % , based on a quarterly consolidated leverage ratio calculation, and an additional SOFR Adjustment ranging from 10 to 30 basis points depending upon maturity length; or +● the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 % , (b) Bank of America’s publicly announced “prime rate,” and (c) the Term SOFR plus 1.00 % , or (d) 1.00 % ; in each case plus a margin that ranges from 0.25 % to 1.25 % based on a quarterly consolidated leverage ratio calculation. +In addition, the Company pays an annual fee ranging from 0.20 % to 0.30 %, based on a quarterly consolidated leverage ratio calculation, on the unused portion of the credit facility. +As of December 31, 2024, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $ 16.3 million; therefore, a total of $ 83.7 million of the facility was available. Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated: +Years Ended December 31, +2024 +2023 +2022 +(in thousands) +Interest incurred +$ +244 +$ +242 +$ +246 +Interest paid +$ +170 +$ +166 +$ +170 +51 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 12: Accumulated Other Comprehensive Loss +Accumulated other comprehensive loss consists of the following: +Foreign +Pension +Currency +Adjustment +Translation +Total +(in thousands) +Balance at December 31, 2022 +$ +( 17,307 ) +$ +( 2,632 ) +$ +( 19,939 ) +Change during 2023: +Before-tax amount +3,964 +263 +4,227 +Tax benefit +( 911 ) +— +( 911 ) +Pension settlement loss, net of taxes +14,080 +— +14,080 +Reclassification adjustment, net of taxes: +Amortization of net loss (1) +174 +— +174 +Total activity in 2023 +17,307 +263 +17,570 +Balance at December 31, 2023 +— +( 2,369 ) +( 2,369 ) +Change during 2024: +Before-tax amount +— +( 459 ) +( 459 ) +Total activity in 2024 +— +( 459 ) +( 459 ) +Balance at December 31, 2024 +$ +— +$ +( 2,828 ) +$ +( 2,828 ) +(1) Reported as selling, general and administrative expenses. +Note 13: Cash Paid for Common Stock Purchased and Retired +The Company has a stock buyback program to repurchase up to 49,578,125 shares in the open market. As of December 31, 2024, 12,768,870 shares remained available to be repurchased under the current authorizations. The program does not have a preset expiration date. Repurchases of shares of the Company’s common stock may be made from time to time in the open market, by block purchases, in privately negotiated transactions or in such other manner as determined by the Company. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the market price of the Company's shares, general market and economic conditions, and other factors. The stock repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or discontinued at any time. +Shares purchased for withholding taxes represent taxes due upon vesting of time-lapse restricted shares granted to employees. Total share repurchases for 2024 and 2023 year-to-date are detailed below: +Year ended December 31, 2024 +Year ended December 31, 2023 +No. of Shares +Avg. Price +Total Cost +No. of Shares +Avg. Price +Total Cost +(in thousands except per share data) +Shares purchased for withholding taxes +333 +$ +7.28 +$ +2,426 +257 +$ +9.24 +$ +2,370 +Open market purchases +1,010 +7.44 +7,512 +2,469 +7.58 +18,718 +Total +1,343 +$ +7.40 +$ +9,938 +2,726 +$ +7.74 +$ +21,088 +Excise tax payable on share repurchases totaling $ 136 thousand in 2024 and $ 22 thousand in 2023 has not been included in the amounts shown above. +52 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Note 14: Fair Value Disclosures +The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows: +1. Level 1 – Quoted market prices in active markets for identical assets or liabilities. +2. Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. +3. Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. +The following table shows investments measured at net asset value as of December 31, 2024, and 2023: +December 31, +2024 +2023 +(in thousands) +Investments measured at net asset value +$ +30,666 +$ +26,772 +The Company determines the fair value of equity securities that have a readily determinable fair value through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. +Trading securities are comprised of the SERP assets, as described in the note titled Employee Benefit Plans, and are recorded primarily at their net cash surrender values, calculated using their net asset values which approximates fair value, as provided by the issuing insurance or investment company. Significant observable inputs, in addition to quoted market prices, were used to value the equity securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2024, there were no significant transfers in or out of levels 1, 2 or 3. +The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future. +Note 15: Commitments and Contingencies +Income Taxes - The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed assessments. Other long-term liabilities included the Company’s estimated liabilities for probable assessments and totaled approximately $ 0.5 million as of December 31, 2024, compared to $ 2.2 million as of December 31, 2023. See note titled Income Taxes for further information related to those liabilities. +Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. In accordance with ASC 450-20, Loss Contingencies , any probable and reasonable estimate of assessment costs have been included in accrued state, local and other taxes. +The Company has received a state tax notification of audit results related to sales and use tax and, with its outside legal counsel, has evaluated the perceived merits of this tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows. +Litigation - RPC is a party to various routine legal proceedings primarily involving commercial claims, employee liability and workers’ compensation claims and claims for personal injury. RPC insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will, in every case, fully indemnify RPC against liabilities arising out of pending and future legal proceedings related to its business activities. RPC is also subject to sales and use tax audits in various jurisdictions. While the outcome of these lawsuits, legal proceedings, claims and audits cannot be predicted +53 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +with certainty, management believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on RPC’s business or financial condition. +Note 16: Employee Benefit Plans +Defined Benefit Pension Plan +The Company’s multiemployer Retirement Income Plan (the Plan), a trusteed defined benefit pension plan, in which Marine Products Corporation (Marine Products) also participated, was fully terminated in 2023. As part of termination, the Company settled its participant liabilities in one of the following ways – (i) through a lump-sum settlement at the election of the participants; or (ii) transfer to a commercial annuity provider or a government agency. The Company funded this transfer through the liquidation of investments in the Plan assets and additional cash contributions. The Company recognized a pre-tax, non-cash settlement charge of $ 18.3 million during 2023 which represented the accelerated recognition of net actuarial loss that was previously recorded in accumulated other comprehensive loss (net of tax) and deferred taxes (tax effect). In addition, the Company utilized funds related to Marine Products’ plan assets to settle its participant liabilities. +The following table sets forth the funded status of the Plan and the amounts recognized in RPC’s Consolidated Balance Sheet: +December 31, +2023 +(in thousands) +Accumulated benefit obligation at end of year +$ +— +Change in projected benefit obligation: +Benefit obligation at beginning of year +$ +29,651 +Service cost +— +Interest cost +22 +Actuarial gain +( 3,715 ) +Benefits paid +( 836 ) +Settlement +( 25,122 ) +Projected benefit obligation at end of year +$ +— +Change in Plan assets: +Fair value of Plan assets at beginning of year +$ +20,041 +Actual return on Plan assets +249 +Employer contribution +5,454 +Benefits paid +( 836 ) +Transfer of assets +524 +Refund related to Plan trust dissolution +( 310 ) +Settlement +( 25,122 ) +Fair value of Plan assets at end of year +$ +— +Funded status at end of year +$ +— +The components of net periodic cost of the Retirement Income Plan are summarized as follows: +2023 +2022 +(in thousands) +Interest cost (1) +$ +22 +$ +972 +Amortization of net losses (1) +226 +1,010 +Settlement loss +18,286 +2,921 +Net periodic benefit cost +$ +18,534 +$ +4,903 +54 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +(1) Reported as part of Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. +The pre-tax amounts recognized in accumulated other comprehensive (loss) income for the years ended December 31, 2023, and 2022 are summarized as follows: +December 31, +2023 +2022 +(in thousands) +Net (loss) gain +$ +( 3,964 ) +$ +2,939 +Amortization of net loss +( 226 ) +( 1,010 ) +Settlement loss +( 18,286 ) +( 2,921 ) +Amount recognized in accumulated other comprehensive (loss) income +$ +( 22,476 ) +$ +( 992 ) +The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows: +December 31, +2023 +2022 +Net Benefit Cost: +Discount rate +N/A +4.86 +% +Expected return on Plan assets +N/A +0.0 +% +Rate of compensation increase +N/A +N/A +Supplemental Executive Retirement Plan (SERP) +The Company permitted through December 31, 2024, selected highly compensated employees to defer a portion of their compensation to the SERP. The liabilities related to these deferrals are recognized as retirement plan liabilities in the Consolidated Balance Sheet. +The SERP assets are invested primarily in company-owned life insurance (COLI) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them for another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $ 49.9 million as of December 31, 2024, and $ 49.3 million as of December 31, 2023. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+. +The Company classifies the SERP assets as trading securities as described in the note titled Significant Accounting Policies. The fair value of these assets totaled $ 30.7 million as of December 31, 2024, and $ 26.8 million as of December 31, 2023. The SERP assets are reported as part of retirement plan assets in the Consolidated Balance Sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the Consolidated Statements of Operations as compensation cost within selling, general and administrative expenses. Trading gains (losses) related to the SERP assets totaled $ 2.7 million in 2024, $ 2.6 million in 2023, and $( 4.4 million) in 2022. The SERP liability includes participant deferrals net of distributions and is recorded on the Consolidated Balance Sheet as part of retirement plan liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the Consolidated Statements of Operations. Trading gains (losses) related to the SERP liability totaled $ 2.6 million in 2024, $ 2.8 million in 2023, and $( 4.1 million) in 2022. +In the fourth quarter of 2024, the Board of Directors approved the termination of the SERP and deferrals ceased effective December 31, 2024. Pursuant to the Internal Revenue Service rules, participant balances will be distributed between 12 and 24 months after termination. The Company is currently evaluating its funding options and timing to distribute participant balances. +401(k) Plan +RPC sponsors a defined contribution 401(k) Plan that is available to substantially all full-time employees with more than three months of service. This Plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. The Company makes 100 percent matching contributions for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her +55 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +annual compensation and fifty cents $(0.50) for each dollar $( 1.00 ) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. Employees vest in the RPC contributions after two years of service. The charges to expense for the Company’s contributions to the 401(k) Plan were $ 11.6 million in 2024, $ 11.3 million in 2023, and $ 9.8 million in 2022. +Stock Incentive Plans +The Company has issued various forms of stock-based incentives, including incentive and non-qualified stock options, time-lapse restricted shares and performance share unit awards under its Stock Incentive Plans to officers, selected employees and non-employee directors. In April 2024, the Company reserved 8,000,000 shares of common stock under the 2024 Stock Incentive Plan with a term of 10 years expiring in April 2034. As of December 31, 2024, there were 7,324,824 shares available for grant under the Company’s 2024 Stock Incentive Plan (SIP). +The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their fair value at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. +Pre-tax stock-based employee compensation expense included as part of selling, general and administrative expense was $ 9.2 million in 2024 $( 7.4 million after tax), $ 7.9 million in 2023 $( 6.1 million after tax) and $ 6.4 million in 2022 $( 4.9 million after tax). +Restricted Stock +The Company grants certain employees and non-employee directors time-lapse restricted stock which vests after a stipulated number of years from the grant date in the case of employees and vests immediately for non-employee directors, depending on the terms of the issue. Time-lapse restricted shares granted to employees in 2024 and thereafter vest ratably over a period of three years ; the shares granted to employees in 2023 vest ratably over a period of four years ; and the shares granted in 2022 vest ratably over a period of five years . Prior to 2022, the time-lapse restricted shares vested one -fifth per year beginning on the second anniversary of the grant date. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from the Company, with the exception of death (fully vests) or normal retirement/disability (partially vests based on pre-approved formula), shares with restrictions are forfeited in accordance with the SIP. +In addition to time-lapse restricted stock, officers and selected employees are granted Performance Share Unit (PSU) awards that vest at different levels based on pre-established financial performance targets with a modifier for stock performance based on total shareholder return (TSR). The Company periodically evaluates the portion of performance share unit awards that are probable to vest and updates compensation expense accruals accordingly. The PSUs typically cliff-vest at the end of a three-year performance period. Upon termination of employment (other than due to death or disability as defined in the agreements), the unvested PSUs will be forfeited. In the event of death or disability as defined in the agreements, all unvested PSUs shall vest immediately at 100 % of target levels, without regard to the actual EBITDA performance, and with no adjustment for the TSR modifier. PSU awards also include the right to dividend equivalents with respect to the underlying shares which are accrued over the performance period, based upon target payout level and paid out in cash upon vesting of the PSUs. To the extent the awards fail to vest or are forfeited, or the performance goals are not met, no such dividend equivalents will be payable. PSUs confer no voting rights with respect to the underlying shares prior to vesting and payout. +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2024: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2024 +3,532,185 +$ +7.35 +Granted +1,414,376 +7.27 +Vested +( 1,102,849 ) +8.08 +Forfeited +( 154,995 ) +6.81 +Non-vested shares at December 31, 2024 +3,688,717 +$ +7.13 +56 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2023: +Weighted Average +Shares +Grant-Date Fair Value +Non-vested shares at January 1, 2023 +3,248,728 +$ +6.87 +Granted +1,235,728 +9.50 +Vested +( 859,485 ) +8.63 +Forfeited +( 92,786 ) +7.74 +Non-vested shares at December 31, 2023 +3,532,185 +$ +7.35 +The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $ 7.27 for 2024, $ 9.50 for 2023 and $ 6.72 for 2022. The total fair value of shares vested was $ 7.6 million during 2024, $ 7.8 million during 2023 and $ 2.9 million during 2022. The above table does not include any activity related to PSUs since they are not currently granted or vested. +For the year ending December 31, 2024, approximately $ 57 thousand of net tax deficits for stock-based compensation awards were recorded as a discrete tax adjustment and classified within operating activities in the consolidated statements of cash flows compared to approximately $ 222 thousand of excess tax benefits for the year ending December 31, 2023. +Other Information +As of December 31, 2024, total unrecognized compensation cost related to non-vested restricted shares was $ 16.6 million which is expected to be recognized over a weighted-average period of 2.0 years. +Note 17: Related Party Transactions +Marine Products Corporation +In conjunction with RPC’s spin-off of its powerboat manufacturing business, RPC and Marine Products entered into various agreements that define the companies’ relationship. Per the terms of their Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 1.1 million in 2024, $ 1.0 million in 2023, and $ 922 thousand in 2022. The Company’s receivable due from Marine Products for these services was $ 99 thousand as of December 31, 2024, and $ 120 thousand as of December 31, 2023. During 2023, the Company owed $ 524 thousand to Marine Products for using Marine Products’ assets in the Plan to settle its participant liabilities, which was fully settled in 2024. All of the Company’s directors are also directors of Marine Products, and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of or affiliated with certain directors of RPC. The total amounts paid to these affiliated parties were $ 1.6 million in 2024, $ 1.8 million in 2023 and $ 1.8 million in 2022. All of the related party transactions are reviewed and approved by a subcommittee of the Nominating and Corporate Governance Committee consisting of independent members. +Prior to 2024, RPC received certain administrative services from Rollins, Inc. (a company that has a significant shareholder group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company). That significant shareholder group had a controlling interest in Rollins, Inc. prior to June 2023. The service agreement between Rollins, Inc. and the Company provided for the provision of services on a cost reimbursement basis; the agreement was terminated in November 2023. The services covered by these agreements included administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 3 thousand in 2023 and $ 71 thousand in 2022. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of 50 % of the Company’s voting power. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +RPC and Marine Products own 50 % each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $ 230 thousand in 2024, $ 200 thousand in 2023 and $ 200 thousand in 2022 for the corporate aircraft. The Company had a payable to 255 RC, LLC of $ 2.0 million as of December 31, 2024, and $ 1.8 million as of December 31, 2023. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2024, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings were approximately $ 675 thousand. +Note 18: Business Segment and Entity Wide Disclosures +RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. +Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, cementing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. +Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. +The Company’s Chief Operating Decision Maker (CODM) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above. +The accounting policies of the reportable segments are the same as those described in the note titled Significant Accounting Policies. Gains or losses on disposition of assets are reviewed on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Intersegment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results. +58 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +RPC's CODM is its Chief Executive Officer. For each of the reportable segments, the CODM uses operating income to allocate resources (equipment, financial, and human resources). +Significant segment expense by reportable segment for the years ended December 31, 2024, 2023 and 2022 are shown in the following tables: +Technical +Support +Services +Services +Total +(in thousands except headcount) +2024 +Revenues +$ +1,326,005 +$ +88,994 +$ +1,414,999 +Employment costs (1) +303,327 +20,458 +323,785 +Materials and supplies +332,781 +3,519 +336,300 +Maintenance & repairs +190,996 +11,540 +202,536 +Fleet and transportation +61,148 +3,097 +64,245 +Other cost of revenues (2) +104,340 +5,442 +109,782 +Cost of revenues (exclusive of depreciation and amortization) +$ +992,592 +$ +44,056 +$ +1,036,648 +Employment costs (1) +57,649 +9,170 +66,819 +Enterprise shared services (3) +35,357 +1,486 +36,843 +Other selling, general and administrative expenses (4) +31,080 +6,174 +37,254 +Selling, general and administrative expenses +$ +124,086 +$ +16,830 +$ +140,916 +Segment depreciation and amortization +120,226 +12,272 +132,498 +Segment operating income +$ +89,101 +$ +15,836 +$ +104,937 +Unallocated corporate expenses (5) +15,598 +(Gain) on sale of assets +( 8,199 ) +Operating income +$ +97,538 +Technical +Support +Services +Services +Total +(in thousands except headcount) +2023 +Revenues +$ +1,516,137 +$ +101,337 +$ +1,617,474 +Employment costs (1) +307,396 +22,186 +329,582 +Materials and supplies +337,006 +3,416 +340,422 +Maintenance & repairs +186,703 +12,031 +198,734 +Fleet and transportation +102,723 +4,114 +106,837 +Other cost of revenues (2) +108,925 +5,019 +113,944 +Cost of revenues (exclusive of depreciation and amortization) +$ +1,042,753 +$ +46,766 +$ +1,089,519 +Employment costs (1) +61,158 +9,922 +71,080 +Enterprise shared services (3) +29,179 +2,225 +31,404 +Other selling, general and administrative expenses (4) +39,370 +5,670 +45,040 +Selling, general and administrative expenses +$ +129,707 +$ +17,817 +$ +147,524 +Segment depreciation and amortization +97,773 +10,293 +108,066 +Segment operating income +$ +245,904 +$ +26,461 +$ +272,365 +Unallocated corporate expenses (5) +18,473 +Pension settlement charges +18,286 +(Gain) on sale of assets +( 9,344 ) +Operating income +$ +244,950 +59 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Technical +Support +Services +Services +Total +(in thousands except headcount) +2022 +Revenues +$ +1,516,363 +$ +85,399 +$ +1,601,762 +Employment costs (1) +284,439 +18,321 +302,760 +Materials and supplies +356,538 +4,045 +360,583 +Maintenance & repairs +194,178 +9,638 +203,816 +Fleet and transportation +127,206 +3,898 +131,104 +Other cost of revenues (2) +84,221 +5,631 +89,852 +Cost of revenues (exclusive of depreciation and amortization) +$ +1,046,582 +$ +41,533 +$ +1,088,115 +Employment costs (1) +58,723 +9,026 +67,749 +Enterprise shared services (3) +26,767 +2,167 +28,934 +Other selling, general and administrative expenses (4) +29,653 +4,738 +34,391 +Selling, general and administrative expenses +$ +115,143 +$ +15,931 +$ +131,074 +Segment depreciation and amortization +73,016 +9,840 +82,856 +Segment operating income +$ +281,622 +$ +18,095 +$ +299,717 +Unallocated corporate expenses (5) +17,660 +Pension settlement charges +2,921 +(Gain) on sale of assets +( 8,804 ) +Operating income +$ +287,940 +(1) Employment costs include employee payroll, share-based compensation, bonuses and amounts related to benefits for each of the income statement items. Additional employment costs are included within the shared services amount. +(2) Includes expenses related to rent, travel, insurance and other costs. +(3) Includes costs incurred at the enterprise level that are allocated to each reportable segment based on payroll cost, headcount and revenues. +(4) Includes professional fees, utilities, travel & entertainment and other costs. +(5) Unallocated corporate expenses are included in selling general and administrative expenses at the consolidated level. +60 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +The table below shows the reconciliation of segment totals to the consolidated level for the years ended December 31, 2024, 2023, and 2022: +Technical +Support +Segment +Unallocated +Consolidated +Services +Services +Total +Total +Total +(in thousands) +2024 +Selling, general and administrative expenses +$ +124,086 +$ +16,830 +$ +140,916 +$ +15,521 +$ +156,437 +Depreciation and amortization +120,226 +12,272 +132,498 +77 +132,575 +Capital expenditures (1) +195,263 +21,119 +216,382 +3,548 +219,930 +Total assets (2) +$ +895,067 +$ +85,803 +$ +980,870 +$ +405,619 +$ +1,386,489 +2023 +Selling, general and administrative expenses +$ +129,707 +$ +17,817 +$ +147,524 +$ +18,416 +$ +165,940 +Depreciation and amortization +97,773 +10,293 +108,066 +57 +108,123 +Capital expenditures (1) +160,799 +15,634 +176,433 +4,572 +181,005 +Total assets (2) +$ +867,550 +$ +81,754 +$ +949,304 +$ +337,541 +$ +1,286,845 +2022 +Selling, general and administrative expenses +$ +115,143 +$ +15,931 +$ +131,074 +$ +17,499 +$ +148,573 +Depreciation and amortization +73,016 +9,840 +82,856 +161 +83,017 +Capital expenditures (1) +126,327 +12,320 +138,647 +905 +139,552 +Total assets (2) +$ +823,434 +$ +80,104 +$ +903,538 +$ +225,475 +$ +1,129,013 +(1) Primarily related to unallocated corporate capital expenditures. +(2) Unallocated total primarily consists of cash and cash equivalents of $ 326.0 million, $ 223.3 million and $ 126.4 million managed at corporate for the years ended December 31, 2024, 2023, and 2022, respectively. +The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2024, 2023 and 2022. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10% of RPC’s consolidated assets and therefore are not presented. +2024 +2023 +2022 +(in thousands) +United States revenues +$ +1,375,398 +$ +1,588,774 +$ +1,569,160 +International revenues +39,601 +28,700 +32,602 +Total revenues +$ +1,414,999 +$ +1,617,474 +$ +1,601,762 +61 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Segment Revenues: +RPC’s reportable segment revenues by major service lines are shown in the following table: +2024 +2023 +2022 +(in thousands) +Technical Services: +Pressure Pumping +$ +587,051 +$ +771,542 +$ +846,939 +Downhole Tools +386,085 +397,341 +374,081 +Coiled Tubing +135,175 +152,484 +140,889 +Cementing +110,730 +64,481 +21,178 +Nitrogen +34,963 +47,306 +39,596 +Snubbing +27,057 +26,345 +28,028 +All other +44,944 +56,638 +65,652 +Total Technical Services +$ +1,326,005 +$ +1,516,137 +$ +1,516,363 +Support Services: +Rental Tools +$ +65,207 +$ +73,301 +$ +62,780 +All other +23,787 +28,036 +22,619 +Total Support Services +$ +88,994 +$ +101,337 +$ +85,399 +Total revenues +$ +1,414,999 +$ +1,617,474 +$ +1,601,762 +Note 19: Leases +The Company recognizes operating and finance leases with a duration greater than 12 months on the Consolidated Balance Sheet with a Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. Leases that include rental escalation clauses or renewal options are factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate at lease commencement to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received. +The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2024, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2024, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below. +During the year ended December 31, 2024, the Company assumed certain leases as part of its acquisition of Spinnaker. The disclosures below include the information related to the leases after the acquisition. See note titled Business Acquisition for further information related to those leases. +62 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Lease Position: +The table below represents the assets and liabilities related to operating leases recorded on the Consolidated Balance Sheet: +December 31, +2024 +2023 +(in thousands) +Assets: +Operating lease right-of-use assets +$ +27,465 +$ +24,537 +Finance lease right-of-use assets +4,400 +1,036 +Total lease assets +$ +31,865 +$ +25,573 +Liabilities: +Current portion of operating leases +$ +7,108 +$ +7,367 +Current portion of finance lease liabilities and finance obligations +3,522 +375 +Long-term finance lease liabilities +559 +819 +Long-term operating lease liabilities +21,724 +18,600 +Total lease liabilities +$ +32,913 +$ +27,161 +Lease costs: +The components of finance lease are included in depreciation and amortization and interest expense; operating lease expense are included in costs of goods sold, and selling, general and administrative expenses in the Consolidated Statements of Operations as disclosed below. +Year ended December 31, +2024 +2023 +2022 +(in thousands) +Finance lease cost +Amortization of leased assets +$ +265 +$ +129 +$ +3,390 +Interest on lease liabilities +174 +48 +283 +Total finance lease cost +$ +439 +$ +177 +$ +3,673 +Operating lease cost +$ +17,206 +$ +15,096 +$ +9,615 +Short-term lease cost +2,289 +1,862 +9,192 +Variable lease cost +855 +774 +647 +Sublease income +( 1,943 ) +( 1,400 ) +( 1,021 ) +Total operating lease cost +$ +18,407 +$ +16,332 +$ +18,433 +Total lease cost +$ +18,846 +$ +16,509 +$ +22,106 +Other Information: +As of December 31, +2024 +2023 +Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) +$ +12,230 +$ +12,475 +Cash paid for amounts included in the measurement of lease liabilities – finance lease and finance obligations (in thousands) +$ +799 +$ +515 +ROU assets obtained in exchange for operating lease liabilities (in thousands) +$ +15,094 +$ +8,151 +ROU assets obtained in exchange for finance lease liabilities (in thousands) +$ +3,622 +$ +1,036 +Weighted average remaining lease term – finance lease (years) +3.00 +4.00 +Weighted average remaining lease term – operating leases (years) +5.96 +5.06 +Weighted average discount rate – finance lease +2.3 +% +2.3 +% +Weighted average discount rate – operating leases +4.57 +% +4.42 +% +63 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +Lease Commitments: +Maturity of lease liabilities and finance obligations: +As of December 31, +2024 +(in thousands) +Operating +Finance +2025 +$ +8,231 +4,095 +2026 +7,216 +283 +2027 +4,733 +288 +2028 +3,036 +— +2029 +2,040 +— +Thereafter +7,784 +— +Total lease payments +33,040 +4,666 +Less: Amounts representing interest +( 4,208 ) +( 585 ) +Present value of lease liabilities +$ +28,832 +$ +4,081 +Note 20. Subsequent Event +On January 28, 2025 , the Board of Directors declared a $ 0.04 per share cash dividend payable March 10, 2025 , to stockholders of record at the close of business on February 10, 2025 . +64 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2024 (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s Report on Internal Control over Financial Reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2024, and issued a report thereon which is included on page 33 of this report. +Changes in internal control over financial reporting — During 2023, the Company completed its acquisition of all of the outstanding equity interests in Spinnaker Oilfield Services LLC (Spinnaker). Management had elected to exclude Spinnaker’s internal controls from its assessment of the Company’s internal control over financial reporting contained in its 10-K for the year ended December 31, 2023, based on the guidelines established by the Securities and Exchange Commission. As of July 1, 2024, Spinnaker was fully integrated into our reporting systems and all of our disclosure controls and procedures have incorporated Spinnaker effectively. There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2024 which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information +During the year ended December 31, 2024, no director or officer, as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended, of the Company adopted or terminated a “ Rule 10b5-1 trading arrangement” or “ non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation SK. +On February 27, 2025, we and our largest stockholder, LOR, Inc. (LOR), entered into a registration rights agreement (the Agreement), pursuant to which we have granted LOR and certain of its affiliates (collectively, the Selling Stockholders) and their permitted transferees the right to require, subject to certain conditions and limitations, us to register for resale all Company securities held by such stockholders, and certain customary piggy back registration rights with respect to registrations initiated by us. The Agreement also contains customary provisions relating to indemnification. The Selling Stockholders own approximately 60% of the outstanding shares of our common stock in the aggregate, and the Agreement calls for us to register all of those shares on a Form S-3 shelf registration statement, if available, by filing the registration statement with the SEC as soon as reasonably practicable on or after April 15, 2025, but in any event not later than April 30, 2025. The Agreement has a term of 15 years, and in addition to piggyback registration rights, allows the Selling Stockholders to make up to two demands for shelf takedowns per year, subject to a maximum of ten takedowns in total and a minimum requirement that at least $35 million of common stock, in the aggregate, be included in each takedown. All registration and filing fees with respect to filings required to be made with the SEC shall be paid by LOR. In addition, LOR shall reimburse the Company for other specified expenses in connection with SEC registration and takedowns from the shelf, subject to specified expense caps. The Selling Stockholders include Gary W. Rollins, Pamela R. Rollins, Amy R. Kreisler, and Timothy C. Rollins, each of whom is a current director of the Company, and certain additional entities that are under their control or otherwise affiliated with them. During 2024, a subsidiary of RPC conducted business with companies owned by LOR. Payments totaling approximately $1.6 million were made in 2024 to these LOR companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. The foregoing description is qualified in its entirety by reference to the full text of the Agreement, a copy of which is attached hereto as Exhibit 10.25 and is incorporated herein by reference. +65 +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not Applicable +66 +PART III +Item 10. Directors, Executive Officers and Corporate Governance +Information concerning directors, director nominees and executive officers will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the sections titled Information Regarding Director Nominees, Continuing Directors and Executive Officers. +Audit Committee and Audit Committee Financial Expert +Information concerning the Audit Committee of the Company and the Audit Committee Financial Expert(s) will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the section titled Board of Directors and Corporate Governance, Meetings and Committees of the Board of Directors – Audit Committee. This information is incorporated herein by reference. +Code of Ethics +RPC, Inc., has a Code of Business Conduct that applies to all employees. In addition, the Company has a Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transaction Policy. Both of these documents are available on the Company’s website at rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway N.E., Suite 300, Atlanta, GA 30329. +RPC, Inc. intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its Code that relates to any elements of the Code of ethics definition enumerated in SEC rules by posting such information on its internet website, the address of which is provided above. +Section 16(a) Beneficial Ownership Reporting Compliance +Information regarding compliance with Section 16(a) of the Exchange Act will be included under Section 16(a) Beneficial Ownership Reporting Compliance in the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is incorporated herein by reference. +Insider Trading Policies and Procedures +Information regarding the Company’s insider trading policies and procedures will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders in the section titled “Board of Directors and Corporate Governance - Insider Trading Policy”. This information is incorporated herein by reference +Item 11. Executive Compensation +Information concerning director and executive compensation will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the sections titled Human Capital Management and Compensation Committee Interlocks and Insider Participation, Director Compensation, Compensation Discussion and Analysis, Human Capital Management and Compensation Committee Report and Executive Compensation. This information is incorporated herein by reference. +67 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +Information concerning security ownership of certain beneficial owners and management, and such all officers and directors as a group, will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the section titled Stock Ownership of Certain Beneficial Owners and Management. This information is incorporated herein by reference. +Securities Authorized for Issuance Under Equity Compensation Plans +The following table sets forth certain information regarding equity compensation plans as of December 31, 2024. +(A) +(C) +Number of Securities +(B) +Number of Securities Remaining +To Be Issued Upon +Weighted Average +Available for Future Issuance Under +Exercise of Outstanding +Exercise Price of +Equity Compensation Plans +Options, Warrants and +Outstanding Options, +(Excluding Securities Reflected in +Plan category +Rights +Warrants and Rights +Column (A)) +Equity compensation plans approved by securityholders +— +$ +— +7,324,824 +(1) +Equity compensation plans not approved by securityholders +— +— +— +Total +— +$ +— +7,324,824 +(1) All of the securities can be issued in the form of restricted stock or other stock awards. +See note titled Employee Benefit Plans to the consolidated financial statements for information regarding the material terms of the equity compensation plans. +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the sections titled, Certain Relationships and Related Party Transactions. Information regarding director independence will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders in the section titled Director Independence and NYSE Requirements. This information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services +Information regarding principal accountant fees and services will be included in the section titled Audit Matters, Independent Registered Public Accounting Firm in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders. This information is incorporated herein by reference. +PART IV +Item 15. Exhibit and Financial Statement Schedules +Consolidated Financial Statements, Financial Statement Schedule and Exhibits +1. Consolidated financial statements listed in the accompanying Index to consolidated financial statements and Schedule are filed as part of this report. +2. The financial statement schedule listed in the accompanying Index to consolidated financial statements and Schedule is filed as part of this report. +3. Exhibits listed in the accompanying Index to Exhibits are filed as part of this report. The following such exhibits are management contracts or compensatory plans or arrangements: +10.8 Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +68 +10.11 +Summary of Compensation Arrangements with Executive Officers. +10.14 +Form of Time-Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.24 +RPC, Inc. 2024 Stock Incentive Plan (incorporated herein by reference to the Registrant’s Proxy Statement filed on March 14, 2024). +10.26 Form of performance share unit award agreement. (incorporated herein by reference to Exhibit 10.24 to the Form 10-Q filed on April 28, 2023). +Exhibits (inclusive of item 3 above): +Exhibit +Number +Description +3.1A +Restated certificate of incorporation of RPC, Inc. (incorporated herein by reference to exhibit 3.1 to the Annual Report on Form 10-K filed on March 24, 2000). +3.1B +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May 8, 2006). +3.1C +Certificate of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q filed August 2, 2011). +3.2 +Amended and Restated Bylaws of RPC, Inc. +4 +Form of Stock Certificate (incorporated herein by reference to Exhibit 4 to the Annual Report on Form 10-K filed on March 25, 1999). +4.2 +Description of Registrant's Securities. (incorporated herein by reference to Exhibit 4.2 to the Form 10-K filed on February 26, 2022). +10.3 +Employee Benefits Agreement dated February 12, 2001, by and between RPC, Inc., Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.3 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.4 +Transition Support Services Agreement dated February 12, 2001, by and between RPC, Inc. and Marine Products Corporation (incorporated herein by reference to Exhibit 10.4 to the Marine Products Corporation Form 10 filed on February 13, 2001). +10.8 +Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10-K filed on March 16, 2005). +10.10 +Performance-Based Incentive Cash Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed April 28, 2006). +10.11 +Summary of Compensation Arrangements with Executive Officers. +10.12 +Credit Agreement dated August 31, 2010, between the Company, Banc of America, N.A., SunTrust Bank, Regions Bank and certain other lenders party thereto (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on September 7, 2010). +10.13 +Amendment No. 1 to Credit Agreement dated as of June 16, 2011, between the Company, the Subsidiary Loan Parties party thereto, Bank of America, N.A. and certain other lenders party thereto (incorporated herein by reference to Exhibit 10.16 to the Form 10-K filed on February 29, 2012). +10.14 +Form of Time-Lapse Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on May 2, 2012). +10.16 +Amendment No. 2 to Credit Agreement and Amendment No. 1 to Subsidiary Guaranty Agreement dated as of January 17, 2014 between RPC, Bank of America, N.A., certain other Lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on January 24, 2014). +10.17 +2014 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s definitive Proxy Statement filed on March 17, 2014). +69 +Exhibit +Number +Description +10.18 +Reduction of Commitment Notice, dated November 3, 2015 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed on November 6, 2015). +10.19 +Amendment No. 3 to Credit Agreement dated as of June 30, 2016 among RPC, Inc., Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed on July 7, 2016). +10.20 +Form of award agreement under Performance-Based Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.20 to the Form 10-K filed on February 28, 2017). +10.21 +Amendment No. 4 to Credit Agreement dated as of July 26, 2018 among RPC, Inc., Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 31, 2018). +10.22 +Amendment to No. 5 to Credit Agreement dated as of September 25, 2020 among RPC, Inc., Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99.1 to the Registrants Form 8-K filed on October 1, 2020). +10.23 +Amendment to No. 6 to Credit Agreement dated as of June 22, 2022 among RPC Inc., Bank of America, N.A., certain other lenders party thereto, and the Subsidiary Loan Parties party thereto (incorporated herein by reference to Exhibit 99 to the Registrants Current Report on Form 8-K filed on June 23, 2023). +10.24 +10.25 +RPC, Inc. 2024 Stock Incentive Plan (incorporated herein by reference to the Registrant’s Proxy Statement filed on March 14, 2024). +Registration rights agreement . +10.26 +Form of performance share unit award agreement. (incorporated herein by reference to Exhibit 10.24 to the Form 10-Q filed on April 28, 2023). +19 +Insider trading policies and procedures +21 +Subsidiaries of RPC +23 +Consent of Grant Thornton LLP +24 +Powers of Attorney for Directors +31.1 +Section 302 certification for Chief Executive Officer +31.2 +Section 302 certification for Chief Financial Officer +32.1 +Section 906 certifications for Chief Executive Officer and Chief Financial Officer +97.1 +Policy relating to recovery of erroneously awarded compensation (incorporated herein by reference to Exhibit 97.1 to the Form 10-K filed on February 28, 2024). +101.INS +Inline XBRL Instance Document +101.SCH +Inline XBRL Taxonomy Extension Schema Document +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +The cover page from the Company’s Annual Report for the year ended December 31, 2024, formatted in Inline XBRL +Item 16. Form 10-K Summary +Not Applicable +70 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +RPC, Inc. +/s/ +Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2025 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Ben M. Palmer +Ben M. Palmer +President and Chief Executive Officer +(Principal Executive Officer) +February 28, 2025 +/s/ Michael L. Schmit +Michael L. Schmit +Vice President, Chief Financial Officer and Corporate +Secretary (Principal Financial and Accounting Officer) +February 28, 2025 +The Directors of RPC (listed below) executed a power of attorney, appointing Ben M. Palmer their attorney-in-fact, empowering him to sign this report on their behalf. +Richard A. Hubbell, Director +Gary W. Rollins, Director +Jerry W. Nix, Director +Patrick J. Gunning, Director +Susan R. Bell, Director +John F. Wilson, Director +Pamela R. Rollins, Director +Amy R. Kreisler, Director +Timothy C. Rollins, Director +/s/ +Ben M. Palmer +Ben M. Palmer +Director and as Attorney-in-fact +February 28, 2025 +71 +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE +The following documents are filed as part of this report. +FINANCIAL STATEMENTS AND REPORTS +PAGE +Management’s Report on Internal Control Over Financial Reporting +32 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) on Internal Control Over Financial Reporting +33 +Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) on Consolidated Financial Statements +34 +Consolidated Balance Sheet as of December 31, 2024, and 2023 +35 +Consolidated Statements of Operations for each of the three years ended December 31, 2024 +36 +Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2024 +37 +Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2024 +38 +Consolidated Statements of Cash Flows for each of the three years ended December 31, 2024 +39 +Notes to Consolidated Financial Statements +40 +SCHEDULE +Schedule II — Valuation and Qualifying Accounts +73 +Schedules not listed above have been omitted because they are not applicable, or the required information is included in the consolidated financial statements or notes thereto. +72 +SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS +For the years ended +December 31, 2024, 2023 and 2022 +Balance at +Charged to +Net +Balance +Beginning +Costs and +(Deductions) +at End of +(in thousands) +of Period +Expenses +Recoveries/Increases +Period +Year ended December 31, 2024 +Credit loss allowance for accounts receivable +$ +7,109 +$ +1,428 +$ +( 631 ) +(1) +$ +7,906 +Deferred tax asset valuation allowance +$ +1,591 +$ +— +$ +( 1,200 ) +(2) +$ +391 +Reserve for obsolete or slow moving inventory +$ +15,925 +$ +3,449 +$ +( 4,014 ) +(3) +$ +15,360 +Year ended December 31, 2023 +Credit loss allowance for accounts receivable +$ +7,078 +$ +2,656 +$ +( 2,625 ) +(1) +$ +7,109 +Deferred tax asset valuation allowance +$ +990 +$ +601 +$ +— +(2) +$ +1,591 +Reserve for obsolete or slow moving inventory +$ +15,374 +$ +3,063 +$ +( 2,512 ) +(3) +$ +15,925 +Year ended December 31, 2022 +Credit loss allowance for accounts receivable +$ +6,765 +$ +2,029 +$ +( 1,716 ) +(1) +$ +7,078 +Deferred tax asset valuation allowance +$ +865 +$ +— +$ +125 +(2) +$ +990 +Reserve for obsolete or slow moving inventory +$ +13,236 +$ +4,080 +$ +( 1,942 ) +(3) +$ +15,374 +(1) Net (deductions) recoveries in the credit loss allowance principally reflect the write-off of previously reserved accounts net of recoveries. +(2) The valuation allowance for deferred tax assets is increased or decreased each year to reflect the state and foreign net operating losses and capital losses that management believes will not be utilized before they expire. Change in valuation allowance for the year ended December 31, 2024, resulted primarily from a tax planning strategy implemented in a certain foreign jurisdiction. +(3) Net (deductions) recoveries in the reserve for obsolete or slow-moving inventory principally reflect the write-off and/or disposal of previously reserved inventory. +73 \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/filing_metadata.csv b/raw/filings/0000742278/2024/0001558370-25-001922/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..500b1c2837e437f27887613b8d1485d6a00d358f --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000742278,RES,RPC INC,10-K,2025-02-28,2024-12-31,2025-02-28T19:42:35.000Z,0001558370-25-001922,res-20241231x10k.htm,10-K,15097587,1,1,https://www.sec.gov/Archives/edgar/data/742278/000155837025001922/res-20241231x10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000155837025001922/,2024,2024,1 diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/item1.txt b/raw/filings/0000742278/2024/0001558370-25-001922/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0d7932e94277ebbf9389afc07e3eb1e32de1a623 --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/item1.txt @@ -0,0 +1,226 @@ +Item 1. Business +Organization and Overview +RPC is a Delaware corporation originally organized in 1984 as a holding company for several OFS companies and is headquartered in Atlanta, Georgia. +RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of America, Rocky Mountain and Appalachian regions, and in selected international markets. RPC +6 +acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services, which are its operating segments. As of December 31, 2024, RPC had 2,597 employees. +Business Segments +RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services), or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. +Technical Services include RPC’s oil and gas services that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This operating segment consists primarily of pressure pumping, downhole tools, coiled tubing and cementing. Customers include major multi-national and independent oil and gas producers and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. Technical Services are provided in all of RPC’s principal geographical markets. +Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The primary drivers of operational success for Support Services are offering safe, high quality and in-demand equipment, as well as meeting customer needs and competitive marketing of such services. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies. Support Services are provided in all of RPC’s principal geographical markets. +A breakdown of segment and service line revenues and a brief description of the primary services follows: +2024 +2023 +2022 +% of +% of +% of +Revenues +Revenues +Revenues +Revenues +Revenues +Revenues +(in thousands) +0 +Technical Services +$ +1,326,005 +93.7 +% +$ +1,516,137 +93.7 +% +$ +1,516,363 +94.7 +% +Support Services +88,994 +— +6.3 +0.0% +101,337 +— +6.3 +0.0% +85,399 +0 +5.3 +Total Revenues: +$ +1,414,999 +100.0 +% +$ +1,617,474 +100.0 +% +$ +1,601,762 +100.0 +% +Pressure Pumping (Technical Services) +$ +587,051 +41.5 +% +$ +771,542 +54.5 +% +$ +846,939 +59.9 +% +Downhole Tools (Technical Services) +386,085 +27.3 +397,341 +28.1 +374,081 +26.4 +Coiled Tubing (Technical Services) +135,175 +9.6 +152,484 +10.8 +140,889 +10.0 +Cementing (Technical Services) +110,730 +7.8 +64,481 +4.6 +21,178 +1.5 +Rental Tools (Support Services) +65,207 +4.6 +73,301 +5.2 +62,780 +4.4 +Other (both segments) +$ +130,751 +9.2 +% +158,325 +11.2 +% +$ +155,895 +11.0 +% +Technical Services Segment +Pressure Pumping : 41.5% of 2024 total revenues. Services are provided to customers throughout Texas and the mid-continent regions of the United States, with a concentration in the Permian basin. We primarily provide pressure pumping services to customers to enhance the initial production of hydrocarbons in unconventional horizontal well formations. These formations require high volumes of stimulation fluids using a great deal of pressure pumping horsepower to complete the well. Since unconventional wells transitioned from vertical to a long (often 10,000 to over 20,000 feet) horizontal lateral, they require tools and drilling mechanisms that are flexible and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services, such as coiled tubing services and downhole tools, as described in subsections below. +7 +Hydraulic Fracturing, often synonymous with pressure pumping, is performed to stimulate production of oil and natural gas by increasing the permeability of a shale formation. The fracturing process consists of pumping fluids and sand into a cased and perforated well at sufficient pressure to fracture the formation at desired locations and depths. When the pressure is released at the surface, the fluid returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow into the production tubing and to the surface. +RPC’s frac fleets are comprised of high pressure hydraulic pumps, powered by both diesel and dual-fuel engines, and ancillary equipment such as hoses, valves and blenders, and operational trailers to house personnel and computerized control systems. Pressure pumping equipment is typically truck or skid-mounted equipment for mobility. The Company ended 2024 with 10 horizontal fleets, of which 3 were Tier 4 DGB (dynamic gas blending, also referred to as dual-fuel as they can utilize both diesel and natural gas) and 3 were Tier 4 Diesel. Tier 4 is a set of regulations from the US Environmental Protection Agency (EPA) that aims to reduce harmful emissions from engines and generators. The Company intends to continue upgrading its equipment to Tier 4 DGB over time in response to the industry trending toward lower emission and more cost effective dual-fuel assets, but does not intend to increase its overall number of frac fleets. +Downhole Tools: 27.3% of 2024 total revenues. Services and proprietary downhole motors and other specialized tools, such as fishing devices, are provided to drilling and production operators to enable casing perforation and bridge plug drilling at the completion stage of an oil or gas well. Products are also used during workover operations. The services that Thru Tubing Solutions (TTS) provides are often proprietary solutions developed by the Company, for which the Company maintains an active intellectual property and patent program. Management believes Downhole Tools represents a differentiated service line with opportunities for technological innovation and new product development to drive growth. Examples of newly introduced products include a 3½ inch high performance downhole motor, as well as Unplug, a proprietary alternative solution to traditional bridge plugs using perforation pods to reduce inefficiencies and technical risks associated with traditional plugs. +Coiled Tubing: 9.6% of 2024 total revenues. Services involve the injection of a flexible steel pipe thousands of feet in length into a wellbore to conduct a variety of downhole tasks. Coiled tubing’s flexibility allows it to be steered through horizontal wellbores, while also being strong enough to convey tools or motors at the end of the tube. The hollow tube can convey fluid which powers a motor or may be needed to clean out a wellbore. Coiled tubing units are effective over great distances making them ideal for completion activities in the U.S. domestic market, where lateral lengths have been increasing. +Cementing: 7.8% of 2024 total revenues. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore. The pumping assets used in deploying the cement are the same/similar to the equipment used in hydraulic fracturing, making these operations complementary to our pressure pumping service line. The cement creates a barrier to protect the casing and prevent environmental contamination. In addition to completion uses, cementing can also be used to plug a well at the end of its life cycle. Effective July 1, 2023, the Company acquired Spinnaker, a leading provider of oilfield cementing services in the Permian and Mid-Continent basins. The Company’s cementing revenues increased during 2024 primarily due to the effect of owning Spinnaker for a full year. +Snubbing . Services involve using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment while maintaining pressure on the well to minimize operational disruptions. +Nitrogen . Both oilfield customers and industrial users outside of the oilfield use these services to, for example, clean drilling and production pipe or purge non-oilfield industrial pipelines. +Well Control . Services include responding to and controlling oil and gas well emergencies, including blowouts and well fires, as well as supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production so that drilling operations can resume as promptly as safety permits. +Wireline . Services involve unwinding and lowering a spooled wire into a well, conveying various types of tools or equipment. Slick or braided lines are non-conductive and primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric lines carry a conductor line into a well allowing the use of electrically-operated tools such as perforators and bridge plugs. Wireline services can also be an integral part of the plug and abandonment process near the end of the life cycle of a well. +Support Services Segment +Rental Tools: 4.6% of 2024 total revenues . The Company rents specialized equipment for use with onshore and offshore oil and gas well completion, drilling and workover activities. The Company offers a broad range of rental tools including drill pipe and associated handling tools, blowout preventers and a variety of tool assemblages that provide well control. The equipment needed is in +8 +large part determined by the geological features of the production zone and the size of the well. Given the potentially significant range of equipment needs, operators and drilling contractors often find it more economical to supplement their tool and tubular assets with rental items instead of owning a complete set of assets. +Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage. We provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe for major oil companies and pipe producers. +Well Control School . Provides industry and government accredited training for the oil and gas industry, delivering various formats including conventional classroom training and interactive online training. +Refer to note to the consolidated financial statements titled Business Segment and Entity Wide Disclosures for additional financial information on our business segments. +Customers +RPC’s principal customers consist of major and independent oil and natural gas producing companies and can range in size from small and independent E&Ps to large (often public) integrated E&Ps. Smaller customers, often referred to as “spot” or “semi-dedicated” are generally less consistent in terms of demand for services but can increase their activities significantly during upcycles. These customers also often rely on OFS companies to provide materials, logistical support and expertise. These customers are typically highly price-sensitive and generally less focused on new equipment and ESG-related trends. Large customers have scale and often contract with OFS companies for “dedicated” fleets and offer more consistent demand and visibility. Their scale also means they can build their own infrastructure for power and water, acquire and develop high quality acreage due to access to capital, and invest in new technologies (both equipment and IT). RPC’s pressure pumping business is oriented toward spot and semi-dedicated customers in the Permian basin, while other service lines, such as downhole tools, cementing, coiled tubing and rental tools service both large and small customers across several major U.S. oil and gas basins. +Sales are generated by RPC’s business unit specific sales forces and through referrals from existing customers. We monitor the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog. +One of our customers, a private E&P company, accounted for approximately 13% of the Company’s revenues in 2024; another private E&P company accounted for approximately 11% of the Company’s revenues in 2022. Amounts for customers that exceeded 10% of the Company’s revenues in 2024 and 2022 were primarily associated with the Company’s Technical Services segment. There were no other customers in 2022 or 2024, and no customers in 2023 exceeding 10% of revenues. In addition, there was one customer that was also primarily associated with the Company’s Technical Services segment that accounted for approximately 10% of accounts receivable as of December 31, 2023. +Suppliers +The Company’s suppliers mainly provide equipment and materials used across our service lines. We purchase hydraulic fracturing fleets, including pumps and ancillary components, trucks, sand, chemicals, and cement to support our pressure pumping and cementing service lines. We also procure flexible steel pipe used in coiled tubing. Generally speaking there are multiple suppliers for our key equipment and materials needs and we believe that these sources of supply are adequate to secure our demands at competitive prices. +9 +Industry Overview & Key Themes +RPC provides its services primarily to domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of America, the Rocky Mountain and the Appalachian regions. Demand for RPC’s services in the U.S. is volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. Over the years, the oil and gas industry’s cyclical nature has resulted in many OFS companies going bankrupt, ceasing operations, or being forced to get acquired. The Company believes its financial and operating discipline have resulted in longevity and financial success in an industry where downturns can have significant financial impacts on operator liquidity and economic sustainability. +Rig count. During 2024 the average U.S. rig count decreased 12.8% to 600 compared to the prior year. While oil and gas industry demand is influenced by many factors, the rig count is often used as a proxy for current and future industry activity. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles. The most recent significant recent downturn occurred following the onset of the COVID pandemic, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history at 250. Since that point, the industry began to rebound with strong U.S. economic activity, with the rig count reaching an average of 723 in 2022 and 688 in 2023, before trending even lower and averaging 600 during 2024. Over the past several years, there has been oil and gas price volatility sparked by uncertainties related to the Russian invasion of Ukraine, tensions in the Middle East related to Israel’s conflict in the Gaza Strip and continued uncertainty from OPEC+ regarding production levels. Furthermore, there is an increased likelihood that a potential rapid rise in the use of artificial intelligence would have significant energy consumption requirements and boost demand for power solutions many of which use oil and gas. Management believes these factors reinforce the attractiveness of the U.S. domestic oilfield due to its oil and natural gas reserves, political stability and downstream energy infrastructure. +Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completion trends in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, reported well completions was 11,659 in 2024, a decrease of approximately 9% compared to 2023. Fluctuations in the prices of commodities, particularly the price of oil, and activity levels as measured by well completions, significantly impact RPC’s financial results. Of note, while there is a sense of energy industry optimism regarding the new presidential administration, which is generally considered to be “pro-business” and supportive of the domestic energy industry, there is limited visibility on a number of regulatory or policy developments and the impact those may have on our business. +2024 +2023 +2022 +Average U.S. domestic rig count +600 +688 +723 +Average natural gas price (per thousand cubic feet (mcf)) +$ +2.19 +$ +2.54 +$ +6.44 +Average oil price (per barrel) +$ +76.60 +$ +77.55 +$ +94.89 +Source: Baker Hughes, Inc., U.S. Energy Information Administration) +10 +Efficiencies in pressure pumping. In the past decade, there have been significant improvements in the efficiency of OFS, with the end result being more oil and gas produced with less equipment. Several factors have contributed to asset efficiency, including the industry’s ability to accurately identify high yielding formations, drill faster and more effectively, complete wells more quickly, and extract the same amount of oil and gas with less rigs and service equipment. Pressure pumpers have also significantly increased pump hours per day, often to 20 to 22 of 24 hours, resulting in assets being “burned” faster and requiring quicker capital investment cycles. Furthermore, more wells are being drilled per pad, or site, each well is being drilled with longer laterals, now often extending several miles, and more stages are being completed within each lateral. All of these factors are increasing hydrocarbon output without creating a correlated increase in cost; however, cost efficiency savings have been disproportionately realized by the E&Ps rather than oilfield service companies. As a result of increased asset efficiency, the Company believes there is a general oversupply of OFS capacity, particularly in pressure pumping, which has created a high level of price competition as OFS companies seek to keep assets utilized. +Consolidation of E&Ps . The oil and gas industry is capital intensive and cyclical. As a result, operating and financial scale have significant benefits related to acquiring attractive land, investing in assets and infrastructure to efficiently extract hydrocarbons, leveraging scale across the value chain, and generating financial leverage to drive investor returns. The recent trend of consolidation among mid-to-large E&Ps has resulted in a more concentrated pool of larger, more powerful E&P companies. Also, as a result of E&P consolidation, there can be significant changes in an OFS company’s customer base, with customers often being acquired (risking loss of business) or making acquisitions (potential customer gains) across service lines. There is the potential for M&A activity to continue as well as become more frequent in the smaller E&P and OFS market. +Capital discipline by E&Ps. During the past cycle, E&P companies have taken a more disciplined approach to capital allocation of operating and free cash flow. They are maintaining steadier operations and not significantly accelerating or decelerating investment with commodity price cycles and providing a more significant and consistent return of capital to shareholders. This has taken the form of both dividends and share buybacks. This level of discipline is intended to boost overall investor returns, in part by limiting activity volatility and enabling more consistent free cash flow generation available to distribute. As a result, many large E&Ps are focused on developing and securing OFS partners who can meet their needs for scale and types of equipment across their large asset base. While the rig count has trended lower due to the efficiencies discussed above, capital discipline has reduced and should generally continue to reduce the volatility of the rig count over time. +Increased adoption of low-emission equipment. Pressure pumping requires emission-intensive equipment as it has historically been powered solely or primarily by diesel fuel. However, in recent years DGB and electric powered fleets have been increasingly adopted. Electric powered fleets use electric motors powered by lower-cost energy sources (e.g., natural gas converted on-site, compressed natural gas, or grid-supplied electricity) and offer reduced emissions compared to diesel fuel or DGB equipment. Electric assets are often desired by customers, especially large public companies, to achieve their ESG goals, while smaller independent E&Ps often place less value on ESG-related benefits. To date, RPC has not invested in electric fleets but is considering future investments in this area. +Low natural gas prices. In 2024 average natural gas prices decreased 13.8% compared to the prior year, despite strong performance in the second half of 2024. Flat consumption of natural gas in the United States has been met with increasing supply from high yielding gas shales and gas collected as byproduct from oil production. This abundant supply has resulted in low natural gas prices, thus reduced gas production activity. The Company believes the favorable long-term outlook for natural gas demand is sufficient for our customers to maintain natural gas-directed E&P activities. However, currently suppressed activity has resulted in OFS companies shifting assets out of gassy basins toward oil basins, resulting in more competition in the Company’s key service lines, particularly pressure pumping in the Permian basin. +Competition +RPC operates in highly competitive areas of the OFS industry. We offer our services and equipment in highly competitive markets, and the revenues and earnings generated are affected by changes in competitive prices for our services with supply and demand dynamics that can change rapidly. RPC competes with many large and small oilfield industry competitors, including the largest integrated OFS companies. The Company believes that the principal competitive factors in the market areas that it serves are price, product availability and quality of our equipment, service quality and reputation for safety and technical proficiency. +Following a period of strong demand and favorable pricing trends when the OFS industry rebounded off the COVID lows, pricing has become far more competitive. In recent years, improving completion services efficiency has served to increase effective capacity, and the Company believes current supply of most OFS exceeds demand. This has had the most significant impact on the Company’s pressure pumping service line, though all the Company’s Permian-focused operations have faced increased competition from assets shifting into the region from gassy basins where activity has been weak. By nature, OFS companies have high fixed costs and pricing competition to keep assets utilized is common. +11 +The oil and gas services industry includes dominant global competitors including, among others, Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Liberty Energy, Inc., Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., Nine Energy Services, Patterson-UTI Energy, Inc., ProFrac Holding Corp. and ProPetro Holding Corp., as well as numerous smaller, privately owned competitors. Increased demands for larger-scale and newer technology solutions, as well as business combinations among large oil and gas companies, are driving consolidation of our competitors in certain service lines. +Strategy +RPC’s primary objective is to create long-term shareholder value by delivering world-class OFS to our customers across all service lines, while exercising capital discipline and employing a conservative operational and financial approach. To achieve this objective, we plan to execute strategic investments, both organic and potential M&A, that we believe will increase our scale, diversify our product offering, expand our customer base and improve our profitability and cash flow. In assessing RPC’s strategy, financial condition and operating performance, management generally reviews results and trends related to revenues, asset utilization, pricing, cost structure, profitability, cash flows and the return on our invested capital. We also monitor industry-wide factors that impact customer activity levels, such as the prices of oil and natural gas, competitive activity, E&P activity and capital markets trends. +Our strategies can be broken down into 3 categories: operating, growth and capital allocation. +Operating strategy +● Drive a culture of highly engaged, empowered, and appropriately incentivized employees +● Provide safe, high quality, well-maintained, in-demand equipment and services to our customers through highly trained personnel and strong logistical support processes +● Maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels +● Optimize asset utilization to leverage direct and overhead costs with a focus on profitability and a bias to avoid burning our assets on low-return projects – i.e., idle fleets as appropriate +● Develop new products and offer specialized services to differentiate ourselves in the marketplace +Growth strategy +● Remain highly disciplined with respect to adding new incremental revenue-producing equipment +● Invest selectively in our key service lines to upgrade technologies and capabilities +● Acquire high-quality companies or assets that would increase our scale, diversify our key service lines, bolster our competencies, expand our customer base and deliver attractive financial returns; due to the fragmented nature of the oil and gas services industry, RPC believes a number of suitable acquisition opportunities exist +● Direct growth investments toward domestic (versus international) operations because of attractive activity levels, competitive positioning and lower geopolitical risks +Capital allocation strategy +● Maintain a conservative and low-cost capital structure, with an appropriate use of debt financing, to sustain operational strength and liquidity during industry downturns +● Balance the use of cash invested in the Company (both organic and potential M&A) and returned to stockholders with strong alignment of management and shareholder interests +● Continue paying regular quarterly dividends, though we do not currently intend to steadily grow the regular dividend, nor do we have a target payout ratio of net income or cash flow to dividends; given the capital intensity and cyclical nature of the business, we do not plan to return significant excess cash to investors through special dividends +12 +● Maintain a share buyback program to opportunistically repurchase stock in the open market in compliance with the federal securities laws and the applicable exchange listing requirements, if the Company believes our common stock represents an exceptional value +Human Capital +The table below shows the number of employees at December 31, 2024, and 2023: +At December 31, +2024 +2023 +Employees +2,597 +2,691 +The Company operates in a cyclical business where financial performance and headcount are influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas: +Workplace Inclusion - The company is committed to fostering a diverse and inclusive workforce, where employees collaborate toward a shared purpose. We uphold strong values, cultivate meaningful relationships, and maintain consistency in leadership and management. As part of our commitment to diversity, we actively recruit and hire recently discharged military personnel. The Board of Directors oversees these efforts through the Human Capital Management and Compensation Committee, which monitors compliance with applicable non-discrimination laws pertaining to race, gender, and other protected classes. The Committee regularly monitors these matters and provides updates to the Board as needed, with a minimum annual review. +Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintain a Code of Conduct to provide guidance for everyone associated with the Company, including its employees, officers, and directors (the Code). The Code prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. The Code is updated annually and certain employees at the supervisory level and above are required to review the Code each year. Any reported non-compliance is followed up on and resolved, as appropriate. In addition, the Company provides annual training for preventing, identifying, reporting, and ending any type of unlawful discrimination. We also have escalation policies in place to address various issues including employee discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, and counseling. +Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status. +RPC has always believed in the long-term value of education and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure and need, has invested more than $1.5 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees. +RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters are located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located. +Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. +RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents. +13 +Facilities/Equipment +RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Most of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. +RPC owns and leases regional and district facilities from which its OFS are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has four primary administrative buildings, two leased facilities, one in each of The Woodlands, Texas, and Midland, Texas, that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Newcastle, Oklahoma that includes certain administrative functions, operations, engineering, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see note to the consolidated financial statements titled Leases. +Governmental Regulation +RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. More stringent environmental standards compel the Company to buy more expensive equipment to meet those standards and also renders older equipment obsolete. +In addition, our customers are affected by laws and regulations relating to the exploration and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. +Intellectual Property +RPC uses several patented items in its operations which management believes are important, but are not indispensable, to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. +Availability of Filings +RPC makes available, free of charge, on its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day they are filed with the Securities and Exchange Commission. \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/item13.txt b/raw/filings/0000742278/2024/0001558370-25-001922/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..73a9643b4d4d2b674261510d978e10ad496cfbb4 --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions and Director Independence +Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders, in the sections titled, Certain Relationships and Related Party Transactions. Information regarding director independence will be included in the RPC Proxy Statement for its 2025 Annual Meeting of Stockholders in the section titled Director Independence and NYSE Requirements. This information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/item9a.txt b/raw/filings/0000742278/2024/0001558370-25-001922/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e5e95aa02277acd1a5844a8dcfe7076069dad784 --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures +Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. +As of the end of the period covered by this report, December 31, 2024 (the Evaluation Date), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. +Management’s Report on Internal Control over Financial Reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s Report on Internal Control over Financial Reporting is included on page 32 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2024, and issued a report thereon which is included on page 33 of this report. +Changes in internal control over financial reporting — During 2023, the Company completed its acquisition of all of the outstanding equity interests in Spinnaker Oilfield Services LLC (Spinnaker). Management had elected to exclude Spinnaker’s internal controls from its assessment of the Company’s internal control over financial reporting contained in its 10-K for the year ended December 31, 2023, based on the guidelines established by the Securities and Exchange Commission. As of July 1, 2024, Spinnaker was fully integrated into our reporting systems and all of our disclosure controls and procedures have incorporated Spinnaker effectively. There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2024 which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/rp_note.txt b/raw/filings/0000742278/2024/0001558370-25-001922/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..b907a537445fc99957d0f27c4146e506b51dbf1d --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/rp_note.txt @@ -0,0 +1,12 @@ +Note 17: Related Party Transactions +Marine Products Corporation +In conjunction with RPC’s spin-off of its powerboat manufacturing business, RPC and Marine Products entered into various agreements that define the companies’ relationship. Per the terms of their Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services were $ 1.1 million in 2024, $ 1.0 million in 2023, and $ 922 thousand in 2022. The Company’s receivable due from Marine Products for these services was $ 99 thousand as of December 31, 2024, and $ 120 thousand as of December 31, 2023. During 2023, the Company owed $ 524 thousand to Marine Products for using Marine Products’ assets in the Plan to settle its participant liabilities, which was fully settled in 2024. All of the Company’s directors are also directors of Marine Products, and the executive officers are employees of both the Company and Marine Products. +Other +The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of or affiliated with certain directors of RPC. The total amounts paid to these affiliated parties were $ 1.6 million in 2024, $ 1.8 million in 2023 and $ 1.8 million in 2022. All of the related party transactions are reviewed and approved by a subcommittee of the Nominating and Corporate Governance Committee consisting of independent members. +Prior to 2024, RPC received certain administrative services from Rollins, Inc. (a company that has a significant shareholder group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company). That significant shareholder group had a controlling interest in Rollins, Inc. prior to June 2023. The service agreement between Rollins, Inc. and the Company provided for the provision of services on a cost reimbursement basis; the agreement was terminated in November 2023. The services covered by these agreements included administration services for certain employee benefit programs and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $ 3 thousand in 2023 and $ 71 thousand in 2022. +A group that includes Gary W. Rollins, Pamela R. Rollins, Amy Rollins Kreisler and Timothy C. Rollins, each of whom is a director of the Company, and certain companies under their control, controls in excess of 50 % of the Company’s voting power. +57 +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +RPC, Inc. and Subsidiaries +Years ended December 31, 2024, 2023 and 2022 +RPC and Marine Products own 50 % each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $ 2,554,000 contribution by each company to 255 RC, LLC. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years . RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $ 230 thousand in 2024, $ 200 thousand in 2023 and $ 200 thousand in 2022 for the corporate aircraft. The Company had a payable to 255 RC, LLC of $ 2.0 million as of December 31, 2024, and $ 1.8 million as of December 31, 2023. The Company accounts for this investment using the equity method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December 31, 2024, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC and the undistributed earnings represented in retained earnings were approximately $ 675 thousand. \ No newline at end of file diff --git a/raw/filings/0000742278/2024/0001558370-25-001922/rpt_disclosure.txt b/raw/filings/0000742278/2024/0001558370-25-001922/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..783567d79520add8e4ec27ecfb348e6ad282e6b3 --- /dev/null +++ b/raw/filings/0000742278/2024/0001558370-25-001922/rpt_disclosure.txt @@ -0,0 +1,8 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +Pursuant to a Transition Support Services agreement, the Company provides certain administrative services to Marine Products on a cost reimbursement basis and the arrangement may be terminated upon six months’ notice. The services include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $1.1 million in 2025. +On February 5, 2026, Marine Products announced that it had entered into an Agreement and Plan of Merger with MasterCraft. The transaction is subject to shareholder and regulatory approvals and other closing conditions. If the Proposed Merger closes as planned, the Transition Support Services agreement is expected to be canceled on or about the closing date and a new Transition Support Services agreement is expected to be signed with Mastercraft. +RPC and Marine Products own 50% each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. Each of RPC and Marine Products is currently a party to an operating lease agreement with 255 RC, LLC for a period of five years. During 2025, RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of approximately $181 thousand for the corporate aircraft. +During 2025, we and our largest stockholder, LOR, Inc. (LOR), entered into a registration rights agreement (the Agreement), pursuant to which we have granted LOR and certain of its affiliates (collectively, the Selling Stockholders) and their permitted transferees the right to require, subject to certain conditions and limitations, us to register for resale all Company securities held by such stockholders, and certain customary piggy back registration rights with respect to registrations initiated by us. The Agreement also contains customary provisions relating to indemnification. The Agreement has a term of 15 years, and in addition to piggyback registration rights, allows the Selling Stockholders to make up to two demands for shelf takedowns per year, subject to a maximum of ten takedowns in total and a minimum requirement that at least $35 million of common stock, in the aggregate, be included in each takedown. The Selling Stockholders include Amy R. Kreisler, and Timothy C. Rollins, each of whom is a current director of the Company, as well as the other members of our controlling stockholder group. Pursuant to the Agreement, we have filed a shelf registration statement on Form S-3 with the SEC that expires on May 5, 2028. The Form S-3 shelf registration statement registers for the resale of up to 127,235,202 shares of our common stock, which represents a majority of the Company securities held by the Selling Stockholders. +Related party transactions, as defined in Regulation S-K, Item 404(a), must be reviewed and approved in advance by our Nominating and Corporate Governance Committee or, in the event that our Nominating and Corporate Governance Committee does not consist of all independent directors, by a Subcommittee (the Subcommittee) of the Nominating and Corporate Governance Committee consisting of all of the independent members thereof. As set forth in the Charter of our Nominating and Corporate Governance Committee, the Nominating and Corporate Governance Committee has the authority and responsibility to ensure that it approve all related party transactions, including material amendments that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Nominating and Corporate Governance Committee also has the authority to hire legal, accounting, financial or other advisors, as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. These same rights and responsibilities apply equally to the Subcommittee. The Related Party Transaction Policy states that in the event that a member of the Nominating and Corporate Governance Committee has a direct or indirect material interest in a related party transaction, then the authority and responsibilities of the Nominating and Corporate Governance Committee with respect to related person transactions shall be assumed by the Audit Committee. A +51 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/filing.txt b/raw/filings/0001116463/2014/0001193125-15-089338/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..38ec66f90054a2f9d40d2c72955b9c76171959e3 --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/filing.txt @@ -0,0 +1,5575 @@ +10-K +1 +d846888d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2014 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC. +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer +Identification No.) +220 East First Street +18015 +Bethlehem, Pennsylvania +(Address of Principal Executive Offices) +(Zip Code) +(610) 882-1820 +(Registrant’s Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ¨ No x +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange +Act. Yes ¨ No x +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities +Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes x No ¨ +Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data +File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). +Yes x No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be +contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form +10-K. x +Indicate by check mark whether the Registrant is a large accelerated +filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange +Act. +Large accelerated filer +¨ +Accelerated filer +x +Non-accelerated filer +¨ +Smaller reporting company +¨ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange +Act). Yes ¨ No x +State the aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which +the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2014): $473,975,954 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of March 9, 2015: 56,415,992 shares. +Documents Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this +Annual Report. +Table of Contents +Table of Contents +PART I +Page +ITEM 1. +Business +3 +ITEM 1A. +Risk Factors +26 +ITEM 1B. +Unresolved Staff Comments +51 +ITEM 2. +Properties +51 +ITEM 3. +Legal Proceedings +51 +ITEM 4. +Mine Safety Disclosures +51 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +52 +ITEM 6. +Selected Consolidated Financial Data +54 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +55 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +73 +ITEM 8. +Consolidated Financial Statements and Supplementary Data +74 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +74 +ITEM 9A. +Controls and Procedures +74 +ITEM 9B. +Other Information +75 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +76 +ITEM 11. +Executive Compensation +76 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +76 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +76 +ITEM 14. +Principal Accountant Fees and Services +76 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +77 +Table of Contents +This Report contains certain “forward-looking statements,” within the meaning of the Federal +securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business +transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include +words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors could cause actual performance or +results to be materially different from those expressed or implied in these statements. These factors include, but are not limited to: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to +manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and the timing and cost of obtaining, necessary regulatory approvals for new products or new indications or +applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the FDA or other regulators; changes in +relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; our ability to achieve financial and +performance objectives under the HCV collaboration with AbbVie; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; the impact of replacing distributors +and success of direct sales efforts; inventory levels at distributors and other customers; impact of replacing distributors; inventory levels at distributors and other customers; ability of DNA Genotek to achieve its financial and strategic +objectives and continue to increase its revenues; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; impact of negative economic +conditions, high unemployment and poor credit conditions; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products, +including the OraQuick ® In-Home HIV test; market acceptance of oral fluid testing or other products; changes in market acceptance of products based on product performance or other factors, +including changes in CDC or other testing guidelines, algorithms or other recommendations; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; +reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; history of losses and ability to achieve sustained profitability; ability +to utilize net operating loss carry forwards or other deferred tax assets; volatility of OraSure’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to +patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell +products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to attract and retain +qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw +materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A., entitled +“Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned +not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material +non-public information or other confidential commercial information. +1 +Table of Contents +Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy +against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References in this Annual Report to “we,” +“us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +2 +Table of Contents +PART I +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and sale of oral +fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. We also +manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. +These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, +and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the U.S. Food and Drug +Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale in the +over-the-counter (“OTC”) or consumer retail market in the United States. We also sell OTC cryosurgical products to consumers in North America, Europe, Central and South America, and Australia. +In vitro diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific +substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity +comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space. +Through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell kits that are used to collect, +stabilize, transport and store samples of genetic material for molecular testing in the consumer genetics, clinical genetic testing, academic research, pharmacogenomics, personalized medicine, and animal genetics markets. Our OraGene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We serve customers in many countries worldwide, +including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two +companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on +September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website +our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and filings. These +Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be incorporated by +reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +OraQuick ® HIV-1/2 +A rapid, point-of-care +qualitative test for +antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, +finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraQuick ® In-Home +HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and continine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and +cotinine. +Marketed +Oragene ® — DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® — DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® — RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ™ +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) clearance pending. +CE marked and registered as Class 1 Medical Device in the U.S. and Canada. +Registered in various other countries. +Marketed +OMNIgene ™ — DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene — +LIVESTOCK and +Oragene ® — ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of livestock DNA from nasal samples. +Animal research use only. +Marketed +HEMAgene ™ — BUFFY COAT +Reagent for stabilizing DNA from Buffy Coat (blood) for ambient temperate transport and/or storage. +Research use only product. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +PrepIT ™ — MAX +Reagent for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +OMNIgene ™ — Gut +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples +Research use only product. +Marketed +OMNIgene ™ — Sputum +Reagent for liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples +Research use only product. +Not Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +CE marked and registered in certain countries. +Marketed +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or +marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays—FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ™ +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA +Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ™ device to detect PCP, +opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Cryosurgical Systems—Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® tradename +primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems—OTC +Cryosurgical system for the removal of common and plantar warts, sold in various OTC markets. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names. +CE marked for skin tags. +Marketed +Marketed +Marketed +Not Marketed +In addition to the above products, we also sell certain immunoassay tests and reagents for insurance risk assessment, +substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., +both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a +pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is +inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain +other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral +fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately +complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform +moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have +obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is +registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. +7 +Table of Contents +We believe that the OraQuick ® device, because it is +approved for detecting antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid and plasma samples, provides a significant competitive advantage in the market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market and we have applied for CE mark authorization for this product. The In-Home test is performed in the same +manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year +customer call center to provide additional information and referral support for consumers. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making +it the first rapid and only HCV test approved by the FDA for use in the United States. We have also received a CLIA waiver for use of this product in the same specimen types. The OraQuick ® HCV +test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe and other foreign countries. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid qualitative test for the +detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added +and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation and is currently sold in certain U.S. markets. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests +for HIV-1 antibodies and other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a +serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies and is a +Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the +OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +8 +Table of Contents +A trained health care professional then conveys test results and provides appropriate counseling to the +individual who was tested. +We believe that oral fluid testing has several significant advantages over blood -based systems for infectious disease +testing, for both health care professionals and the individuals being tested. These advantages include eliminating the risk of needle-stick accidents, providing a non-invasive collection technique, requiring minimal training to administer, providing +rapid and efficient collection in almost any setting, and reducing the cost of administration by a trained health care professional. +Molecular +Collection Systems +Our wholly-owned subsidiary, DNAG, sells a number of products that provide all-in-one systems for the collection, stabilization, +transportation, and storage of DNA and/or RNA from human and animal biologic samples. DNAG’s lead product is sold under the Oragene ® name and is used to collect DNA from human saliva. +DNAG products are currently sold to thousands of academic and research customers in many countries worldwide. +DNAG products are available in several +different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection +of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is closed, the +reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended +periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly +in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient +temperatures and compatibility with fully-automated laboratory testing systems. +DNAG products historically have been sold primarily as Class I medical +devices for use by research and academic institutions. DNAG has received FDA 510(k) clearance for the Oragene ® — Dx product which enables the +Oragene ® — Dx product to be used with other FDA-cleared or exempt molecular diagnostic applications. A separate 510(k) clearance permits +self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular tests. An application for 510(k) clearance of DNAG’s ORAcollect ™ product is +currently pending with the FDA. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold by us under the name +Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® +collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, +amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the +Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other +drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for +specially- +9 +Table of Contents +prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate +scheduling costs and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection +device, which we are marketing under the tradename “Intercept i2 ™ ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by +current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ™ device is currently being sold as a +forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo +Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid nitrogen and other +methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, these gases are +delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating localized destruction +of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin lesions, and this product has +been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. In 2014, we began supplying this product on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS tradename, in Mexico and a +number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the +Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of +warts in the U.S. and for the treatment of both warts and skin tags in Canada. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the +specific needs of our customers. During 2014, we also began selling fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The result of the test +is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available laboratory +instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety +of third parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced +quickly, allowing for high-throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a +result, we may eventually stop selling our AUTO-LYTE ® tests. +10 +Table of Contents +We entered into the agreement with Thermo Fisher in 2013 after terminating a similar agreement with Roche +Diagnostics. Under our new agreement, Thermo Fisher has agreed to develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ™ device. +Under the first phase of this agreement, we are selling a NIDA-5 panel of assays supplied by Thermo Fisher. The parties expect to complete development of several additional assays and obtain FDA 510(k) clearance of the Intercept i2 ™ device for use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept +i2 ™ collector and Thermo Fisher assays into Europe and other foreign countries. +The assays from +Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to be issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that +follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe the offering of an Intercept i2 ™ device with a full menu of fully-automated high-throughput +oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral +fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the original specimen collected with the OraSure ® oral fluid collection device +to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +Q.E.D. ® Saliva +Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick +that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and +instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Infectious Disease +Testing +In 2014, we began efforts to develop and commercialize a rapid, point-of-care antigen test for the Ebola virus, using our OraQuick ® technology platform. We have achieved significant development and clinical milestones for this product and we are close to finalizing the design of a prototype device. Subject to receipt of +external funding as described below, we expect to place this test into more extensive field testing in Africa in the near future. +Despite the good +progress we have made on the development front, whether this product will ultimately contribute to our business depends on several factors. First, we are seeking funding for our development efforts from a variety of Federal agencies. The costs to +complete development and obtain the applicable regulatory approvals for this product are significant. Second, as we complete our clinical development and prepare for field testing, we are also in discussions with various government agencies +regarding product procurement. Our goal is to obtain substantial and sustainable product purchase commitments, along with the external development funding. Third, assuming the field testing of this product is successful we plan to seek an Emergency +Use Authorization from the FDA and other longer-term regulatory approvals from the FDA and other regulatory bodies as required to commercialize this product. +11 +Table of Contents +Although we have made progress in our development efforts and we have received some positive feedback on funding +from several agencies, it is difficult to predict whether we will be successful in completing our product development, obtaining the required regulatory approvals or achieving our funding goals. If we are unable to reach one or more of these +objectives, we will likely discontinue our work on this project. +Molecular Collection Systems +The following new product initiatives are underway at DNAG: +• +HEMAgene ™ — BUFFY COAT is a reagent for stabilizing buffy coat, a derivative of whole blood, for ambient +temperature transport and storage. An initial version of this product is being marketed to academic researchers that use buffy coat for DNA or RNA analysis. +• +PrepIT ™ MAX for tuberculosis (“TB”) is a reagent for extraction of DNA from TB bacteria. This product is being offered for early-stage testing by TB +researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +• +OMNIgene ™ — SPUTUM is a reagent for the liquefying, decontaminating, transporting and preserving of TB bacteria +in sputum samples. OMNIgene ™ — SPUTUM is expected to improve laboratory and operational workflows, compared to current approaches, and +improve overall test results. This product is being offered to TB laboratories for evaluation. +• +OMNIgene ™ — GUT is a system for the collection, stabilization, transportation and storage of microbial DNA in +stool samples. This product is being offered to academic researchers for early-stage testing in gut microbiome studies. +These products +represent potential, long-term market opportunities that we are still developing or are in the early stages of commercializing. Much of our activities for these products are currently centered around ensuring that early versions are being provided +to key opinion leaders or early adopters in the relevant markets. We expect these products will enable researchers and other customers to improve their results through better and lower cost sample collection, stabilization and preservation. +Research and Development +In 2014, our research +and development activities focused primarily on development of our next generation Intercept i2 ™ collection device, assessing initial feasibility of a new rapid point-of-care Ebola test using +our OraQuick ® platform, and clinical and technical support for our existing products. From time to time, we have contracted with third parties to conduct research and development activities +and we may do so in the future. +Research and development expenses were $12.1 million in 2014, $10.9 million in 2013 and $12.4 million in 2012. These +expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our +marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order +to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to +customers in the United States were $82.3 million, $77.2 million and $67.5 million in 2014, 2013 and 2012, respectively. Consolidated net revenues attributable to international customers amounted to $24.2 million, $21.7 million and $20.3 million, or +23%, 22% and 23% of our total revenues, in 2014, 2013 and 2012, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our consolidated financial statements +included elsewhere in this Annual Report. +12 +Table of Contents +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to customers in the public +health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the +military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV testing. We also +sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by pharmacies. We have +engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we distribute our OraQuick ® HIV test in Europe and +certain other foreign countries. +We market the OraSure ® oral fluid collection device for HIV-1 +testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged +OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the +international public health market. +Our OraQuick ® HCV test is sold primarily to the same markets +where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in Europe and other countries through +distributors. Under an agreement with AbbVie, we are co-promoting our OraQuick ® HCV test in certain U.S. markets, including general practitioners and certain specialty physicians, the +professional trucking industry and retail pharmacies and clinics. Under this arrangement, AbbVie has agreed to detail our OraQuick ® HCV test in the physician markets and we pay AbbVie a fee +for these detailing services. In addition, we have implemented a broad-based program for training physicians on our OraQuick ® HCV test and we have developed and implemented a patient care +database and limited co-payment reimbursement program under this agreement. +We have distribution rights to an FDA 510(k) cleared rapid flu A&B test, +which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. hospital and +public health markets. +Infectious Disease Testing—OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the +product include CVS, Walgreens, Rite Aid, Wal-Mart and Kroger. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of +young, sexually active adults, with greater purchase intent found in high-risk sub groups, such as men who have sex with men, African Americans and Latino Americans. In 2014, we changed our promotional strategy by implementing a more cost-effective +promotional approach focused on retail outlets and moved away from more expensive broad-based consumer advertising. +To support individuals that purchase +and use our test, we have established a toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about +HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +Molecular Collection Systems +DNAG primarily sells its +products directly to its customers, primarily through its own internal sales force. In some countries distributors are used, particularly in the Asia-Pacific region. Over half of DNAG’s employees work in the areas of sales, marketing, business +development or product management. The significant majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in +identifying and evaluating new market and business opportunities. +13 +Table of Contents +Historically, most of DNAG’s revenues have been derived from product sales into the academic and research +markets. However, sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and now account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from +repeat customers, in both markets. DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. A molecular collection product focused on the infectious disease research +market is also sold by DNAG. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation +markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and +internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid +laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products +consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service +programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ™ collection device with a +NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug +treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 ™ device for use with the NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays +in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept i2 ™ +device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United +States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety +sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal +Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have also engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . In 2014, we began selling a private label version of our professional Histofreezer ® product for resale by one of our U.S. distributors. +Internationally, we sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +14 +Table of Contents +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand +through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. For several +years, we have sold OTC cryosurgical products for the removal of both warts and skin tags under private label arrangements with retailers in Canada. In 2014, we began selling a private label version of our OTC product to a large U.S. retailer. +Insurance Risk Assessment +We currently market the +OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: +HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk +assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot +confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. In general, many +(but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers using the device +for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used +OraSure ® to replace some of their blood and urine-based testing. More recently, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer +required and instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several +different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The OraQuick ® rapid HIV testing +products, the cryosurgical systems products, and our OraGene ® product line accounted for total revenues of $38.9 million, $15.5 million and $23.8 million, respectively, in 2014, $44.8 million, +$14.5 million and $20.4 million, respectively, in 2013 and $37.9 million, $14.9 million and $14.3 million, respectively in 2012. +We had no individual +customers who accounted for more than 10% of our total revenues in 2014, 2013 or 2012. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, manufacture and sale of +diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices +that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues consist primarily of product sold into +the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. OSUR also derives revenues +15 +Table of Contents +from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG revenues consist of +product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine and animal genetics markets. For more information about our revenues from external customers, income and total assets, +please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the consolidated financial statements, +included elsewhere in this Annual Report. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, +OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraSure ® Intercept ® and Intercept i2 ™ collection devices, Western blot HIV-1 confirmatory test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device, in +order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual +period. We believe that other firms would be able to manufacture the OraQuick ® test on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable +or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in +the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 +confirmatory test only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. +However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our +costs and disrupt our ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly +specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to +sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug +assays sold with our new Intercept i2 ™ collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product sold in the U.S. is assembled by U.S. vendors and the Histofreezer ® product sold internationally was previously assembled in the Netherlands by Koninklijke, Utermöhlen, N.V. (“Utermöhlen”), the company from which we acquired the product line +in 1998. The supply agreement with Utermöhlen has expired and we have successfully transferred our supply arrangement for international versions of this product to a vendor located in Germany. The cryosurgical wart removal products distributed +in OTC markets are assembled by vendors located in the United States. We believe that additional suppliers of all of our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event +that our current suppliers would be unable or unwilling to continue manufacturing these products. +16 +Table of Contents +DNAG has engaged two contract manufacturers to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2014, we had 320 full-time employees (including 89 employees at our subsidiary, DNAG). Of this total, there were 110 in +sales, marketing and client services; 31 in research and development; 130 in operations, manufacturing, quality control, information systems, purchasing and shipping; 18 in quality assurance and regulatory affairs; and 31 in administration and +finance. This compares to 293 employees as of December 31, 2013. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic industry is a +multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources. +Important competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is +based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests +and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test +industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the +development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, +automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new +testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more +effective than those we develop +17 +Table of Contents +or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the +number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and +Intercept i2 ™ devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV +testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA waiver for a rapid +oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in +the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors in the domestic infectious disease testing +market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can +result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the +U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. +Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in +international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other +international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test +approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third +parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes +against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the +Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of +lower price competitive devices can result in lost sales and degradation in pricing and profit margin. +In the substance abuse testing market, our +Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to +intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the United States. +These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® drug test +system (including our MICRO-PLATE assays) and are expected to compete against our new Intercept i2 ™ collection device and related fully-automated high-throughput oral fluid assays. +18 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the +forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on radioimmunoassay test methods to +provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run on automated equipment, are not +radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and heterogeneous tests manufactured by many +companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially during the past +several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically paid for our products. Many of our customers no longer +purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced +tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially lower in quality and provide fewer benefits than our +Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including +family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. Our OTC cryosurgical products compete against +other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our +research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product +introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents +generally have a maximum term of 20 years from the date an application is filed. +We have eight United States patents and numerous foreign patents for the +OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to +test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from November 2015 to December 2026. We have also applied for additional patents, +in both the United States and certain foreign countries, on such products and technology. +We have five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending in the United States and internationally. Four of the U.S. patents expire from March to +July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held by other parties. We also have obtained a license to certain HCV patents which we use to manufacture and sell +a rapid HCV test on the OraQuick ® technology +19 +Table of Contents +platform. We obtained these licenses through the payment of certain upfront fees and an agreement to pay ongoing royalties. We believe these fees and royalties are comparable to those generally +paid by other companies under similar arrangements. +We may need to obtain licenses or other rights under, or enter into distribution or other business +arrangements in connection with, certain other intellectual property patents in order to manufacture and sell the OraQuick ADVANCE ® HIV test or other tests that use the same or similar +technology platform. See Section 1A, entitled “Risk Factors,” for a further discussion of these issues. +We hold, through our subsidiary, +DNAG, eleven United States patents and numerous foreign patents issued for compositions, methods and apparatus for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and +tissues. These patents expire from July 2019 through February 2034. +We have two United States patent and numerous foreign patents issued for apparatuses +and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire +from September 2025 to December 2030. We have also licensed another patent relating to apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or +consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to +third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of +services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as +currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ™ , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ™ , OMNIgene ™ , PrepIT ™ , HEMAgene ™ , and AUTO-LYTE ® trademarks. We also own many of these marks and +others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South +America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection +does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture +or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after +its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the +secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, +along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product testing, authorizations to +market, labeling, promotion, +20 +Table of Contents +manufacturing and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale +of our products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of action by the FDA before they can be marketed in the United States. After approval or clearance by the +FDA, we must continue to comply with other FDA requirements applicable to marketed products. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our +ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated +in the United States as medical devices. +There are two mechanisms by which regulated medical devices can be placed on the market in the United States. +Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must provide a premarket notification that it intends to begin marketing the +product, and show that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety +and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding substantial equivalence. An applicant must submit a 510(k) application at +least 90 days before marketing of the affected product commences. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed device or because it +is required by statute and the FDA’s regulations to have an approved PMA), the FDA must approve a PMA before marketing can begin. PMAs must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and +effectiveness. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies. Preparing a PMA is a detailed and time-consuming process. Once a PMA has been submitted, the +FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data and facility inspections +before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or +the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several +years. In addition, if the FDA discovers that an applicant has submitted false or misleading information, the FDA may refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in +receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, +financial condition and results of operations. +If there are any modifications made to our marketed devices, a premarket notification or PMA may be +required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, +certain types of modifications to the device’s indications for use, manufacturing process, manufacturing facility, critical components, labeling and design. +21 +Table of Contents +A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA +application. These trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed a non-significant risk study, which is +eligible for an exemption from the IDE requirements. The IDE application must be supported by appropriate data, such as laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate +institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that +the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to +the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed +consent be obtained from each subject. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the +product in the United States. +Some of our products are used for research only or other non-medical purposes. Our molecular collection products are sold +to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, +although other state and federal regulatory requirements may apply. +Every company that manufactures medical devices distributed in the United States must +comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the manufacturing process, including design, manufacture, testing, release, packaging, distribution, +documentation and purchasing as well as complaint handling, corrective and preventative actions and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production and quality to +ensure full technical compliance. +We believe that our facilities and procedures are in material compliance with the FDA’s QSR regulations, but the +regulations are subject to change, and we cannot be sure that FDA investigators will agree with our compliance with the QSR requirements. Companies are also subject to other post-market and general requirements, including product listing and +establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of +certain adverse reactions. Medical device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a +death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance +with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has +observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial +suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter primarily focused on +DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s products and +focused in particular on the design planning and design history +22 +Table of Contents +file for DNAG’s 510(k)-cleared Oragene ® — Dx collection device. In addition, the +warning letter requested additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ™ collection device. The letter further noted that DNAG +does not currently have in place an approved PMA or 510(k) clearance for its ORAcollect ™ device. +DNAG has submitted a formal response and is actively engaged and working with the FDA to address the issues referenced in the warning letter. In addition, +DNAG has submitted to the FDA an application for 510(k) clearance of its ORAcollect ™ device. While the warning letter still remains pending, DNAG intends to continue to sell and market all of +its products. We expect no material impact to product sales or our consolidated financial performance for the forseeable future as a result of the issues raised by the warning letter. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that does laboratory testing on specimens derived from humans from +providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and +Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the +design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. A CLIA waiver allows +certain customers to use the waived products that may not have been able to use them without complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in the United States. We are presently working with legislators or regulators in certain of +these states in an effort to modify or remove any restrictions affecting our ability to sell products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) +and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorney generals. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or +approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham +Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that +we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC +enforcement actions often result in consent decrees that constrain future actions. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from +the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA or European regulating bodies, as applicable. In particular, international sales of medical devices manufactured in the United +States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +23 +Table of Contents +Foreign countries often require, among other things, an FDA certificate for products for export, also called a +Certificate for Foreign Government. To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing +facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve +the issues to the FDA’s satisfaction. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval from +international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances +may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, +established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our +quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic +Directive (“IVDD”) must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements +allows us to affix the CE mark to our products, without which they may not be placed on the market in the EU. +We have received authorization to use the +CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed +this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements +in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to +induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental +healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as +civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +24 +Table of Contents +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or +Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil +monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, restrictions +on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting +fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial +arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, +including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent +years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state +legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of gifts or other payments to healthcare professionals and providers. +For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching +hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we +have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care +Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The +Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product +training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. +Foreign +Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals +from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or +authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official +capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the +“Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. +companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain +circumstances. +25 +Table of Contents +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local +laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are +subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, +cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high +concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We +believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely +eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes +included in Item 15 of this Annual Report. +ITEM 1A. +Risk Factors +You should carefully consider the risks and uncertainties described below, together +with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties +not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Regulatory Risks +The Need to Obtain +Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products are subject +to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. In addition, we or our +distributors are often required to obtain approval or registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. +The process of obtaining required approvals or registrations can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities +and other costly, time-consuming procedures. These approvals and registrations can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will +not perform at a level needed to generate the clinical data required to obtain approval or registration. The submission of an application to the FDA or other regulatory authority does not guarantee that an approval or registration to market or +import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval or registration, may include significant restrictions or limitations as part of any approval or clearance it grants and may +delay or refuse to grant approval or registration, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential requirements of +the IVDD. We have obtained the CE mark for several of our existing products. We +26 +Table of Contents +also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there can be no assurance +that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more of our products +could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +Failure to Comply With FDA or Other +Regulatory Requirements May Require Us to Suspend Production of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and +distributors, including manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping. We and our suppliers and distributors are subject to routine inspection by the FDA and other agencies to +determine compliance with QSR and Medical Device Reporting requirements in the United States and other applicable regulations worldwide, including but not limited to ISO regulations. We believe that our facilities and procedures are in material +compliance with the QSR requirements, but we cannot be sure that the FDA investigators will agree with our compliance with the QSR requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor +the performance of approved products or place conditions on any product approvals that could restrict the commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and +promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product, including +withdrawal of the product from the market. +Failure to comply with the applicable requirements can result in, among other things, 483 notices, warning +letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of +marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to +be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +In the +ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, +we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our +reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. +Our Ability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, including the FDA’s QSR regulations, but the +regulations regarding the manufacture and sale of our products and the QSR requirements are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it +impractical or impossible for us to market our products for certain uses, in certain markets, or at all. In addition, the FDA and other regulatory authorities have the ability to change the requirements for obtaining product approval and/or impose +new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes +or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain product approvals. We cannot predict the effect, if any, that these +changes might have on our business, financial condition or results of operations. +27 +Table of Contents +Our Inability to Manufacture Products in Accordance With Applicable Specifications, Performance Standards or +Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed +specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the +materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production +methods by our vendors, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the +expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or +customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our ability to sell products in those +states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard +control, disposal of hazardous substances and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws and +regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures +associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure To Comply With The HIPAA Privacy, Security and Breach Notification Regulations May Increase Our Costs. +The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security regulations, including the expanded requirements under +the Health Information Technology for Economic and Clinical Health Act (“HITECH”), establish comprehensive federal standards with respect to the use and disclosure of protected health information by certain entities and set standards to +protect the confidentiality, integrity and security of protected health information. The regulations establish a complex regulatory framework on a variety of subjects, including the circumstances under which use and disclosure of protected health +information are permitted or required without a specific authorization by the patient; a patient’s right to access, amend and receive an accounting of certain disclosures of protected health information; the content of notices of privacy +practices for protected health information; administrative, technical and physical safeguards required of entities that use or receive protected health information; and the protection of computing systems maintaining electronic protected health +information. +We have implemented policies and procedures to comply with the HIPAA privacy and security laws and regulations, where applicable to our +business. The privacy regulations establish a uniform federal standard but do not supersede state laws that may be more stringent. Therefore, the Company is required to comply with both federal privacy and security regulations and varying state +privacy and security laws. In addition, for health care data transfers from other countries relating to citizens of those countries, the Company must comply with the +28 +Table of Contents +laws of those other countries. The federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than +payment, treatment or health care operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. HIPAA, as amended by HITECH, provides for significant +fines and other penalties for wrongful use or disclosure of protected health information in violation of the privacy and security regulations, including potential civil and criminal fines and penalties. Due to the enactment of HITECH, it is not +possible to predict what the extent of the impact on business will be; however, if we do not comply with existing or new laws and regulations related to protecting the privacy and security of health information we could be subject to monetary fines, +civil penalties or criminal sanctions. In addition, other federal and state laws that protect the privacy and security of patient information may be subject to enforcement and interpretations by various governmental authorities and courts resulting +in complex compliance issues. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of confidential health information or other private personal information. +Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive. +Many laws and regulations impose obligations on public companies, which have increased the scope, complexity and cost of corporate governance, reporting and +disclosure practices. Examples include the Sarbanes-Oxley Act of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s requirements for public companies to provide financial +statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”), and the International Financial Reporting Standards conversion requirements. Our implementation of certain aspects of these laws and +regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually evaluate and monitor developments with respect to new and +proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and regulations are also subject to varying interpretations, in many cases due to their lack of specificity, +and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing +revisions to disclosure and governance practices. Although we are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against +us, which may adversely affect our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical +laboratories. In the past, the FDA has claimed regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests +developed in-house by a laboratory where the laboratory makes a determination about its ability to perform the test and whether the test yields clinically relevant information. A significant portion of the total volume of genetic or molecular +testing is performed with LDTs. +In mid-2014, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and +has issued proposed guidance on the regulation of LDTs for public comment. Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. One of DNAG’s largest customers received a warning +letter regarding its use of LDTs and, as a result, has reduced its service offerings while it works to resolve the issues defined in the warning letter. This reduction in service significantly reduced the volume of product purchased by this customer +from DNAG compared to historical levels. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce +demand for DNAG’s products and adversely impact our revenues. +29 +Table of Contents +Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could Affect +Our Molecular Collection Systems Business. +The adoption of genetic testing is occurring within the broader context of a myriad of decisions related to +genetic patenting and genotyping. Issues associated with regulatory requirements, health insurance, data access and privacy, intellectual property protection, national and international legislative initiatives and other variables impact the +widespread adoption of genetic testing or specific segments or tests within the genetic testing market. These developments could impact sales of our molecular collection systems products. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims +laws, laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements we may enter into with physicians, hospitals, laboratories and other potential +purchasers of medical devices, laws requiring the reporting of certain transactions between us and healthcare professionals and HIPAA, as amended by HITECH, which governs the conduct of certain electronic healthcare transactions and protects +security and privacy of protected health information. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as +Medicare and Medicaid. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face +enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial +interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +Risks Relating to Our Industry, Business and Strategy +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Diagnostic Products. +The diagnostics industry is focused on the testing of biological specimens in a laboratory or at the point of care and is highly competitive and rapidly +changing. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products enter the market, our products may become obsolete or a competitor’s products may be more effective +or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products that would render our technologies and products obsolete or otherwise +commercially unattractive, or introduce or commercialize such products, before we can do so. If we fail to maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss +of revenues. These developments could have a material adverse effect on our business, financial condition and results of operations. +We also face +competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of +revenues or a lower gross margin contribution from the sale of our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to +customers has increased. In addition, group purchasing +30 +Table of Contents +organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. +Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization +Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful Diagnostic Products. +In order to remain +competitive, we must regularly commit substantial resources to research and development and the commercialization of new or enhanced products. The research and development process generally takes a significant amount of time from product inception +to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have +invested substantial time and money. +During 2014, 2013 and 2012, we incurred $12.1 million, $10.9 million, and $12.4 million, respectively, in research +and development expenses. We expect to continue to incur significant costs related to our research and development activities. +Successful products +require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. In addition, regulatory approval must be obtained before most products +may be sold. Additional development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or +condition approval. In addition, even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product. Moreover, we may spend a significant amount of money on advertising and fail to +develop a market for the product. Accordingly, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to +purchase our products or may purchase and use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flow and business. +If We Fail to Achieve Performance Objectives Under Our HCV Agreement With AbbVie, Our Financial Results and Business Prospects Could Be Adversely +Affected . +We have entered into an agreement with AbbVie for the co-promotion of our +OraQuick ® HCV test into certain markets in the U.S. Under the agreement, we have granted exclusive co-promotion rights to AbbVie for the +OraQuick ® HCV test in these markets and we will provide certain services in support of HCV testing. In exchange for these exclusive rights and the services to be provided to AbbVie, we are +eligible to receive up to $75.0 million in aggregate payments over the term of the agreement, which runs through December 31, 2019. If certain performance milestones are achieved, we will also be eligible to receive additional annual incentive +fees ranging from $3.5 million to $55.5 million per year over the life of the agreement, beginning in 2015. The agreement contains certain termination, indemnification and other provisions typical of agreements of its type. +It is difficult to predict exactly when, or if, we will be able to achieve one or more of the performance milestones under this agreement. In addition, under +certain circumstances, either party may terminate the agreement before its expiration and such a termination could occur as early as December 31, 2016. If either of these events occurs, the amount of exclusivity payments and incentive fees we +receive under the HCV agreement with AbbVie could be reduced and our financial results and business prospects could be adversely affected. +Failure to +Successfully Develop and Commercialize a Rapid Point–of-Care Ebola Test Could Adversely Affect Our Results of Operations and Business Prospects. +In late 2014, we commenced a program for the development and commercialization of a rapid, point-of-care Ebola antigen test using our OraQuick ® technology platform. Although we have achieved significant +31 +Table of Contents +development and clinical milestones, there is no assurance that we will be successful in our development efforts or that a developed test will perform at a level necessary to receive the +regulatory approvals required for its use. In addition, it is uncertain whether we will be successful in commercializing this product. As described elsewhere in this Annual Report, we are seeking external funding for our development program along +with substantial and sustainable purchase commitments for our Ebola test. Failure to successfully complete development, obtain the required regulatory approvals or receive adequate development funding and purchase commitments would likely result in +termination of this project. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our +financial and strategic objectives, including our efforts to increase sales of our products, including the OraQuick ® HCV test or the +OraQuick ® In-Home HIV test, achieve the performance milestones under our HCV agreement with AbbVie, or continue growing our molecular collection systems business. In addition, the funds for +research, clinical development and other projects have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at +that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our +total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and +develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and +Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive +officers, management and sales, marketing, operations and scientific staff. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical +products and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location and the prospects for advancement within our organization. We generally do not +enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary +personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic partners in a timely fashion, or to +support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other +research institutions may limit our ability to do so on acceptable terms. +Acquisitions or Investments May Not Generate the Expected Benefits and Could +Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +We may enter into strategic +acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +The benefits expected to be derived from an acquisition may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or +markets, general economic conditions and increased competition; +32 +Table of Contents +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered +liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully +assimilate differences in foreign business practices or overcome language or cultural barriers. +The occurrence of one or more of the above +or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or +otherwise achieve our financial and strategic objectives. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost +Constraints. +The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely +impacted if end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or +private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, healthcare providers such as +hospitals and physicians who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating +cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce +healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not +be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand +for our products or our ability to sell our products on a profitable basis. In addition, consolidation among healthcare providers or other participants in the healthcare industry is occurring and has resulted, and may continue to result, in fewer, +more powerful healthcare groups with increased purchasing power and the ability to drive down the prices paid for our products. +Changes in Healthcare +Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state +level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. +33 +Table of Contents +These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under +government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may +occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives and may continue to reduce +funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of any healthcare reform legislation and its resulting impact on us are impossible to predict. If significant reforms are made to the healthcare +system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +The Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many medical devices, which includes domestic sales of +certain of our products. This new tax became effective in January 2013. It is unclear whether and to what extent other unanticipated developments resulting from the Affordable Care Act, such as an increase in the number of people with health +insurance, will provide us with additional revenue to help offset this tax. If such additional revenue does not materialize or our efforts to offset the excise tax through spending cuts, price increases or other actions are unsuccessful, the +increased tax burden will adversely affect our financial performance. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention (“CDC”) issue diagnostic testing guidelines +or recommendations, which can affect the usage of our HIV and HCV testing products. For example, OraQuick ® HIV sales decreased 7% from 2013 to 2014, in part due to customer migration to +automated fourth generation HIV immunoassays performed in a laboratory, as recommended under new testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV +or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to +which our OraQuick ® rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing +products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could +in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely +Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® +HIV-1/2 test and our OraQuick ® HCV test into the public health market which consists of state, county and other governmental public health agencies, community based organizations, service +organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that +use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such agencies. +Our subsidiary, DNAG, sells many of its products to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories +and private foundations. Many of DNAG’s research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic +conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Any reduction or delay in government funding could cause our customers to delay, reduce or forego +purchases of our products. +34 +Table of Contents +In August 2011, President Obama signed into law the Budget Control Act of 2011, which was designed to reduce +federal spending over the next 10 years by $2.5 trillion. Under that law, a select committee of Congress was tasked with identifying and recommending $1.2 trillion in spending cuts by late November 2011. Because the committee did not agree on +spending cuts within that time frame, certain automatic cuts to discretionary, national defense and Medicare spending became effective on March 1, 2013. As a result, there have been reductions in payments to Medicare providers and in genetic +and other research funding. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction initiatives may be proposed by Congress. Although their full impact is uncertain, the +spending cuts implemented under this law have adversely affected and are expected to continue to adversely affect our customers’ ability to purchase our products. This reduced funding may also increase pressure to lower the prices we charge for +our products. In addition, other legislative or regulatory changes may be adopted which could adversely affect our ability to sell our current products or successfully develop and commercialize new products. +Increases in Demand for Our Products Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That +Demand. +If we experience significant or unexpected increases in the demand for our products, we and our suppliers may not be able to meet that demand +without expending additional capital resources. These capital resources could involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be +unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we +are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. +If we or +our suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our sales could be adversely affected. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated +yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have +a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw +materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with +certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is +also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for +this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the industry. This, in +turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our Operations and Any Material +Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on +enterprise resource planning and other complex information technology systems across our operations and on the internet, including for management of inventory, purchase orders, invoices, shipping, interactions with our third-party logistics +provider, revenue and expense accounting, online business, consumer +35 +Table of Contents +call support, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer +inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. In addition, we rely on information technology systems for the +development and implementation of a patient care database that we are providing as part of our services under the HCV agreement with AbbVie. This database contains patient specific healthcare information and must be maintained and operated in +accordance with stringent privacy and security requirements. +The failure of any of the foregoing systems to operate effectively, problems with +transitioning to upgraded or replacement systems, a breach in security of these systems through a cyber attack or otherwise, or disruptions in the operation of the internet, could cause delays in product sales, reduced efficiency of our operations +and violation of privacy laws and regulations. Significant expenditures could be required to remediate any such problem. Security breaches of employee information or other confidential or proprietary data could also adversely impact our reputation, +and could result in litigation against us or the imposition of liability and penalties. +Risks Relating to Collaborators +The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological +antigens, nitrocellulose and certain other components required to make our OraQuick ADVANCE ® HIV-1/2 test, OraQuick ® In-Home HIV +test and OraQuick ® HCV test are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated +high-throughput drug assays sold with our Intercept i2 ™ device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse +assays are obtained from third party suppliers. +In addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of +its products, including its Oragene ® line of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is +obtained from a sole source supplier. +If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if +they make changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it +may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes +to our products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole +supply sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely +prevent us from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on +our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +36 +Table of Contents +Relying on distributors or others to market and sell our products could harm our business for various reasons, +including: +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms or at all. +Although we +will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on +satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and +Commercializing Some of Our Diagnostic Products. +Although we may elect to pursue some product opportunities independently, opportunities that require +a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for +development and commercialization of products may entail entering into arrangements with distributors or other corporate partners, universities, research laboratories, licensees and others. Relying on collaborative relationships could be risky to +our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic partners, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +An important recent arrangement is our HCV co-promotion agreement with AbbVie. We expect that this agreement will help increase sales of our OraQuick ® HCV test and provide us with additional compensation related to the increased use of our test. However, whether this sales growth is achieved or the additional +37 +Table of Contents +compensation is received will depend, in part, on AbbVie’s fulfillment of its obligations under this agreement, including its obligation to detail our OraQuick ® HCV test into the physician and specialty physician office markets and the success of those detailing efforts. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there +is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to +accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Actions of Third-Party Inventory Management and Logistics Providers Could Adversely Affect Our Ability to Supply Products to Our Customers. +We use third-party logistics providers to store and manage our finished goods inventory and ship finished product to our customers. We have selected highly +reputable providers with extensive experience in the logistics field for these services. However, in the event any of our providers lose or damage our products, experience a casualty or catastrophic event at a warehouse or otherwise fail to provide +safe storage and timely handling and delivery of our products, we could incur additional costs, experience difficulty in supplying our products to our customers or suffer damage to our reputation in the industry. These events could, in turn, reduce +our revenues and adversely affect our results of operations. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +The diagnostics industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property +rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies both in the United States and in other +countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenue and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may +not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary +technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatus relating to the use or manufacture of those +products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For +example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act, including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system +and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to +enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us interests in inventions and original expressions and +any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing +patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, +employees, consultants and others who +38 +Table of Contents +participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be +able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may +decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may +independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our +proprietary technologies. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions +they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of +our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. +We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical +information derived from our collaboration with them. +To facilitate development and commercialization of a proprietary technology base, we may need to +obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product +development and commercialization efforts may be delayed or precluded. +We May Become Involved in Intellectual Property Disputes, Which Could Increase +our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies. +From time to time, we may seek to enforce our patents or +other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We or our +customers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property rights is prevalent +and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a +significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we +incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s +proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +Our involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a +plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial resources; +39 +Table of Contents +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive +damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop or acquire; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products. +We may indemnify some customers and strategic partners under our agreements with such parties if our products or activities have actually or allegedly +infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or customers, and we may have little or no ability to +determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is +asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign +court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent +office as well. An adverse decision in any proceeding regarding intellectual property rights could result in the loss or limitation of our rights to a patent, an invention or trademark. +The Sales Potential for Our OraQuick ® Products Could be Affected by Our Ability to Obtain Certain +Licenses and by Future Litigation. +Our OraQuick ® test platform is a lateral flow assay that +tests for specific antibodies or other substances. The term “lateral flow” generally refers to a test strip through which a sample flows and which provides a test result on a portion of the strip downstream from where the sample is +applied. There are numerous patents in the United States and other countries which claim lateral flow assay methods and devices. There are also patents that cover the type of analyte or antibody (i.e., HIV-1, HIV-2, HCV, Ebola, etc.) which our +OraQuick ® test is designed to detect. Some of these patents may broadly cover aspects of our OraQuick ® test and are in force in the +United States and other countries. We may not be able to make or sell the OraQuick ® test in the United States or other countries where these patents are in force. +We have obtained licenses under several lateral flow patents, and patents covering assays directed at specific analytes, which we believe are sufficient to +permit the manufacturing and sale of our OraQuick ® products as currently contemplated. However, licenses under additional patents may be required and it is possible that a third party could +seek to enforce one or more patents against us. +If we are unable to successfully defend against or resolve patent infringement litigation or it is +determined that a license is required and it is not possible to negotiate or otherwise obtain a license agreement on reasonable terms under a necessary patent, our ability to manufacture and sell +OraQuick ® products and develop and commercialize new applications using the same technology could be limited and we may incur increased costs or damages. In such case, we may be able to modify +an OraQuick ® product to avoid the claim of infringement or the need for a license. However, this alternative could preclude or limit our ability to sell the OraQuick ® product in the United States and other markets, which would adversely affect our results of operations, cash flow and business. +40 +Table of Contents +Risks Relating to Products, Marketing and Sales +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products. +Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick ® HCV test, our OraQuick ® In-Home HIV test, and other new products or technologies that may be developed or acquired. To achieve market +acceptance, we and/or our distributors will likely be required to undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these products. In +addition, governmental funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products. +There +may be limited evidence on which to evaluate the market reaction to products that may be developed and our marketing efforts for new products may not be successful. It is also possible that governmental funding may be limited for new products, such +as our OraQuick ® HCV test or the new sample collection and stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant +market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. +If Acceptance and Adoption of Oral Fluid Testing +and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid +testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant +progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid +products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +Our Customers May Resist Adoption of Rapid Point-of-Care Diagnostic Testing. +Sales of our rapid point-of-care diagnostic products, such as our OraQuick ADVANCE ® HIV-1/2, +OraQuick ® HCV and OraQuick ® In-Home HIV tests, are an important part of our business. Rapid point-of-care tests are beneficial because, +among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central laboratories and can help ensure that test results are delivered to the individuals being +tested. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians +and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of +rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to +compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may +resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a +negative effect on our future sales growth. +We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection +Products. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is particularly evident +with respect to our OraQuick ADVANCE ® HIV-1/2 test. In addition, the +41 +Table of Contents +Oragene ® product line sold by our subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits +and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may have a competitive advantage because of their greater financial, technical, research and other +resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we have. If our competitors’ products take market share from our products through more effective +marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own +sample collection devices and use those devices in place of our products in order to reduce costs. +Various Factors May Affect Our Ability to +Successfully Transition the OraQuick ® In-Home HIV Test To Profitability. +During 2014, we +changed our promotional strategy and reduced our advertising costs in order to transition our OraQuick ® In-Home HIV test to become a profitable contributor to our business. Whether this +ultimately will be successful will also depend on a number of other factors, including achieving increased awareness and adoption of the product among the targeted consumer base, our ability to generate a sufficient level of sales with less +investment in advertising and promotion, initiating and maintaining relationships with suppliers and retailers, reducing the use of security devices and other barriers to purchase in retail stores, obtaining and maintaining sufficient inventory +of the product, the performance of our toll-free customer support center and our comprehensive consumer website relating to the product, and our ability to successfully market the product at the projected selling price. There can be no assurance +that we will be successful in these endeavors. In addition, retailers generally have broad product return rights which may be exercised if sufficiently high sales to consumers are not achieved. Transition of this product to profitability will also +depend on whether any unanticipated adverse effects result from use of the product, or unfavorable publicity develops in respect of the product, as well as the emergence of new or existing products as competition, which are proven to be more +clinically or cost-effective. +Sales of Our OraSure QuickFlu ® Test May be Affected by Factors +Beyond Our Control. +We sell a rapid flu test under the tradename OraSure QuickFlu ® , primarily +in the U.S. hospital and public health markets. A number of factors that are beyond our control could affect sales of this product, including: +• +Variability in the timing of the onset, length and severity of the flu season, which typically occurs from November of one year to May of the following year; +• +Competition from other rapid flu tests in the markets we serve; +• +Deficiencies in the manufacture, design or performance of the product or failure by the manufacturer to meet applicable quality and regulatory standards; +• +The inability of our supplier to provide sufficient quantities of the product; +• +Changes in the types or strains of influenza during a particular flu season; and +• +Lower than expected market penetration of the OraSure QuickFlu ® test. +Our Inability to Carry Out Certain of Our Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain Our Business. +We have implemented in the past, and we intend to implement in the future, an aggressive sales and marketing plan to expand sales of our products. +Specifically, we will continue to expand the impact of our direct field sales force, use third-party distributors and manufacturers’ sales representatives, and implement other sales and marketing programs. If we are unable to successfully +implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our business could suffer. +42 +Table of Contents +Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and +Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more +difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require +many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in +past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of +HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend +considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type +or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Regardless of merit or eventual +outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling cryosurgical products in the consumer or OTC +market in the United States and certain countries and we may expand OTC sales of these products into other countries. We also sell the OraQuick ® In-Home HIV test in the United States OTC +market, and we are considering the expansion of this product internationally. We believe the sale of products in the OTC market increases our potential exposure to product liability and other claims. +The Insurance We Purchase to Cover Our Potential Business Risks May be Inadequate. +Although we believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, we cannot be sure +that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so at acceptable costs. +We Could Suffer Monetary Damages, Incur Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal +Proceedings. +We have been and in the future may become involved in various legal proceedings arising out of our businesses. These may include +commercial disputes, negligence claims or various other lawsuits arising in the ordinary +43 +Table of Contents +course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include +claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or otherwise have a material adverse +effect on our sales, operations or financial performance. +Performance of Our Products May Affect Our Revenues, Stock Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, our products may +not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false +negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product performance or quality issue can be +difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the +expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to implement shipment holds or +product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our reputation, our continuing +ability to sell products and the prevailing market price of our Common Stock. +Our International Presence May Increase Our Risks and Expose Our +Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international +sales accounted for $24.2 million or 23% of consolidated net revenues in 2014, $21.7 million or 22% of consolidated net revenues in 2013, and $20.3 million or 23% of consolidated net revenues in 2012. In addition, our molecular collection systems +business, which accounted for $23.8 million or 22% of consolidated net revenues in 2014, is operated in Canada. +A number of factors could adversely +affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements (including compliance with applicable customs regulations) and the need for reimbursement approvals; +• +Trade protection measures, trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to obtain or maintain regulatory approvals or registrations for our products; +44 +Table of Contents +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Limitation of or an increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Our exposure to liability under the Foreign Corrupt Practices Act and various other laws, rules and/or regulations applicable to us as a result of our international sales; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our +OraQuick ® HIV-1/2 tests, and all of DNAG’s products are produced in Canada. The Histofreezer ® cryosurgical product sold in +international markets is currently manufactured by a third party supplier located in Germany. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political +conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant +additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Continued Economic Volatility and Disruption Could Adversely Affect Our Results of Operations, Cash Flow and Financial Condition or Those of Our Customers +and Suppliers. +Recent volatile economic conditions may occur again or continue in the future. These conditions have adversely affected and could +continue to adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions +or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue +45 +Table of Contents +to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to +purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and +shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of the economic recovery. +We Have a +History of Losses and May Not Be Able to Achieve Sustained Profitability. +We have experienced annual net losses since 2008. In addition, as of +December 31, 2014, the Company had an accumulated deficit of $178.3 million. Even though in the past we achieved profitability, there can be no assurance that we will be able to achieve or sustain profitability in the future. +Our ability to achieve and sustain profitability in the future will be dependent upon a number of factors including, without limitation, the following: +• +Creating market acceptance for and selling increasing volumes of our OraQuick ADVANCE ® HIV-1/2 test, +OraQuick ® HCV test and other products in the United States and internationally; +• +Our ability to increase use of our OraQuick ® HCV test and earn performance incentive fees under our HCV agreement with AbbVie; +• +The success and revenue growth of our molecular collection systems business; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• +Failure to achieve our targets for growth in revenues; +• +Changes in distributor buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted against us. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the +expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short +of expectations because of lower than estimated customer demand or other factors, including continued volatility and disruption in economic conditions, +46 +Table of Contents +increasing competition, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also +contribute to the variability of our financial results. +Customers in the markets we serve often submit a high percentage of purchase orders in the third +month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. This can make it difficult to accurately forecast whether we will +achieve our quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to +our gross margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the +expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +Our Estimates or Judgments +Relating to Critical Accounting Policies Are Based on Assumptions That Can Change or Prove to be Incorrect. +Our discussion and analysis of financial +condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally +accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our +financial statements, including those related to: +• +Revenue recognition; +• +Potential impairment of long-lived and intangible assets including goodwill; +• +Customer sales returns and allowances; +• +Allowance for uncollectible accounts receivable; +• +Reserve for inventory write-downs; +• +Stock-based compensation; +• +Income taxes; and +• +Contingencies. +We base our estimates on historical experience and on various other assumptions that we +believe to be reasonable under the circumstances, as provided in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and +liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results +to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. +Changes in Foreign Currency Exchange +Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international +sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign +currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic +conditions in those markets. +47 +Table of Contents +In addition, the revenues and operating results of our subsidiary, DNAG, are recorded in Canadian Dollars and +certain of its international sales are denominated in local currencies, including the Euro, British Pound and Australian Dollar. In 2014, DNAG reported total revenues of U.S. $23.8 million. Our expectation is that the DNAG business will continue to +grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect DNAG’s +revenues and expenses and the translation of DNAG’s financial results into U.S. Dollars. Unfavorable currency exchange rate fluctuations could negatively affect our consolidated financial statements including our balance sheet, revenues and +results of operations. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. +If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Changes in Tax Laws or Their Application Could Adversely Affect Our Results of Operations. +Changes in tax laws or their application could increase our costs and adversely affect our results of operations. Such changes could affect applicable tax +rates, utilization of tax loss carryforwards, and treatment of inter-company debt and interest payments. +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the +following: +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products; +• +The costs and timing of the expansion of our manufacturing capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; +• +Competing technological and market developments; and +• +The scope and timing of strategic acquisitions. +If additional financing is needed, we may seek to raise funds +through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks or Natural Disasters May Adversely Affect Our Business. +Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely +affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase +and use our products and our suppliers’ ability to provide raw materials and finished products. +48 +Table of Contents +Although we have business interruption insurance, our facilities, including some pieces of manufacturing +equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities and +computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer +demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. +Risks Relating to Our Common Stock +Our +Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future +and could experience substantial declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +Future announcements concerning us and our products, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HCV test and molecular collection systems products, and OraQuick ® In-Home HIV test; +• +The successful execution of our strategic arrangements, including our HCV agreement with AbbVie; +• +Clinical results with respect to our products or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products; +• +Legislative developments and industry or competitive trends; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +The relatively low trading volume for our Common Stock; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters. +49 +Table of Contents +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected +the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the +issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and a diversion of our management’s attention and resources, each of which could have a material adverse effect on our revenue and +earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by +Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We +are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of +their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members +of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a +negative effect on the prevailing market price of our Common Stock. +Investor Confidence and Share Value May be Adversely Impacted if We and/or Our +Independent Registered Public Accounting Firm Conclude That Our Internal Control Over Financial Reporting is Not Effective. +As directed by +Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal +control over financial reporting. In addition, our independent registered public accounting firm must report on the effectiveness of these internal controls. +We expect that our internal controls will continue to evolve as our business activities change. Although we seek to diligently and vigorously review our +internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance +that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate +the internal controls of any such business. +If, during any year, our independent registered public accounting firm is not satisfied with our internal +control over financial reporting or the level at which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we +do, then it may issue a report that is qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor +confidence in the reliability of our financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock. +50 +Table of Contents +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will +Benefit Only if it Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of +our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our +Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of +Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws +contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in +control of us. These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +Future Sales of +Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future +sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could +impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for +future sale will have on the trading price of our Common Stock. +ITEM 1B. +Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary corporate office and +manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for manufacturing activities. +Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis. In addition, our subsidiary, DNAG, leases a 23,500 square foot facility in Ottawa, Canada, which is used as its primary +corporate office and houses sales and marketing, research and development, and regulatory and quality operations. +We believe that the facilities +described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings +From time to time, we are involved in certain legal actions arising in the ordinary +course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +51 +Table of Contents +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading +on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol OSUR. High and low sales prices reported by NASDAQ during the periods indicated are shown below. +Year ended December 31 +2014 +2013 +High +Low +High +Low +First Quarter +$ +8.60 +$ +5.34 +$ +7.52 +$ +5.25 +Second Quarter +$ +9.00 +$ +5.78 +$ +5.45 +$ +3.75 +Third Quarter +$ +8.94 +$ +7.21 +$ +6.46 +$ +3.86 +Fourth Quarter +$ +10.93 +$ +6.93 +$ +7.25 +$ +5.64 +On March 5, 2015, there were 436 holders of record and approximately 12,000 holders in street name of our Common Stock, +and the closing price of our Common Stock was $7.11 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any +future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +During the three months ended December 31, 2014, in connection with the vesting of restricted shares, we did not retire any shares to satisfy minimum tax +withholding obligations, pursuant to our Stock Award Plan. In addition, no shares were repurchased under our $25.0 million share repurchase program during the same period. +Performance Graph +The performance graph set forth +below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. +This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general +incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common +Stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the period from December 31, 2009 through December 31, 2014. The graph assumes that $100 was invested on December 31, 2009 in the Company’s Common Stock and +in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +52 +Table of Contents +The NASDAQ Composite Index was chosen because it is a broad index of companies whose equity securities are traded +on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns +for any other past or future period. +12/09 +12/10 +12/11 +12/12 +12/13 +12/14 +OraSure Technologies, Inc. +100.00 +113.19 +179.33 +141.34 +123.82 +199.61 +NASDAQ Composite +100.00 +117.61 +118.70 +139.00 +196.83 +223.74 +NASDAQ Biotechnology +100.00 +106.73 +122.40 +166.72 +286.55 +379.71 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12. “Securities Ownership of +Certain Beneficial Owners and Management and Related Stockholder Matters.” +53 +Table of Contents +ITEM 6. +Selected Consolidated Financial Data +The following table sets forth selected consolidated financial +data of the Company. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 15 and the information set forth in Item 7, “Management’s Discussion and Analysis +of Financial Condition and Results of Operations.” +Selected Consolidated Financial Data +(In thousands, except per share data) +Years ended December 31, +2014 +2013 +2012 +2011 (5) +2010 +Operating Results: +Net revenues +$ +106,464 +$ +98,940 +(2) +$ +87,820 +$ +81,881 +$ +75,015 +Costs and expenses +111,266 +(1) +111,102 +(3) +104,090 +91,278 +78,369 +Operating loss +(4,802 +) +(12,162 +) +(16,270 +) +(9,397 +) +(3,354 +) +Other income (expense), net +531 +200 +(242 +) +(313 +) +(143 +) +Income tax expense (benefit) +343 +(772 +) +(1,397 +) +(869 +) +— +Net loss +(4,614 +) +(11,190 +) +(15,115 +) +(8,841 +) +(3,497 +) +Basic and diluted loss per share +$ +(0.08 +) +$ +(0.20 +) +$ +(0.29 +) +$ +(0.19 +) +$ +(0.08 +) +Shares used in computing basic and diluted loss per share +55,949 +55,555 +51,457 +46,908 +46,187 +Cash Flow: +Cash flows provided by (used in) operating activities +$ +7,526 +(1) +$ +8,385 +(3) +$ +(5,373 +) +$ +(2,994 +) +$ +3,887 +December 31, +2014 +2013 +2012 (4) +2011 (5) +2010 +Financial Position: +Cash, cash equivalents, and short-term investments +$ +97,867 +$ +93,191 +$ +87,888 +$ +23,878 +$ +75,738 +Working capital +104,752 +100,590 +103,483 +30,860 +77,808 +Total assets +189,633 +184,245 +191,439 +127,861 +122,520 +Accumulated deficit +(178,345 +) +(173,731 +) +(162,541 +) +(147,426 +) +(138,585 +) +Stockholders’ equity +158,701 +161,146 +170,315 +100,250 +102,843 +(1) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a reduction of operating expenses in the current period. +(2) +Includes a non-recurring net favorable $2.5 million adjustment to account for a change in the Company’s revenue recognition policy related to its OraQuick ® +In-Home HIV tests. +(3) +Includes an $8.3 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a reduction of operating expenses in the current period. +(4) +We received net proceeds of $70.2 million from a stock offering of 6,100,000 common shares completed on July 11, 2012. +(5) +Includes the results of DNA Genotek, Inc. from the acquisition date of August 17, 2011, as well as $2.6 million of transaction costs associated with the acquisition. +54 +Table of Contents +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation +Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” +and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue +reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the +Section entitled “Critical Accounting Policies and Estimates,” set forth below. +Overview +We develop, manufacture, market and sell diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic +products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point-of-care and tests that are processed in a +laboratory. We sell the only rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter (“OTC”) market. We also manufacture and sell oral fluid collection devices used to collect, stabilize and store +samples of genetic material for molecular testing in the consumer genetic, clinical genetic testing, academic research, pharmacogenomics, personalized medicine, and animal genetics markets. Lastly, we manufacture and sell medical devices used for +the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, research +and academic institutions, distributors, government agencies, physicians’ offices, and commercial and industrial entities. In addition, our OTC HIV and cryosurgical products are available at retail pharmacies and mass merchandisers, and our OTC +HIV product is also sold to consumers over the internet. +Current Consolidated Financial Results +During the year ended December 31, 2014, our consolidated net revenues were $106.5 million compared to $98.9 million for the year ended December 31, +2013. Net product revenues during the year ended December 31, 2014 increased 1% when compared to 2013, primarily as a result of higher sales of our molecular collection systems, OraQuick ® +HCV and cryosurgical systems products. These increases were partially offset by lower sales of our OraQuick ® professional HIV product line and our OraQuick ® In-Home HIV test. OraQuick ® In-Home HIV test revenues in 2013 included a favorable non-recurring $2.5 million net revenue adjustment to +account for a change in the revenue recognition policy associated with this product. Licensing and product development revenues for 2014 were $7.6 million compared to $623,000 for 2013. Licensing and product development revenues in 2014 represent +the recognition of payments from AbbVie for exclusive promotion rights and certain services we provided under our HCV agreement (see further discussion below). Licensing and product development revenues in 2013 represent royalties related to sales +of Merck’s OTC cryosurgical wart removal product pursuant to a license and settlement agreement that expired in August 2013. +Our consolidated net +loss for the year ended December 31, 2013 was $4.6 million, or $0.08 per share, compared to a net loss of $11.2 million, or $0.20 per share, for the year ended December 31, 2013. Our consolidated net loss for the current period reflects +lower advertising and promotional expenses associated with our OraQuick ® In-Home HIV test. These costs were $8.5 million in 2014, as compared to $18.8 million in 2013. This decrease in +advertising and promotion expenses was partially offset by increased expenses under our HCV agreement with AbbVie, higher research and development costs, and higher legal, staffing and consulting costs. In addition, our current period loss includes +a $5.5 million gain (recorded as a reduction to operating expenses) for a final +55 +Table of Contents +settlement payment received for the termination of our assay agreement with Roche Diagnostics. This compares to an $8.3 million gain recorded in 2013 for the initial settlement payment received +pursuant to the same termination agreement. +Cash provided by operating activities for the year ended December 31, 2014 was $7.5 million, compared to +$8.4 million for the year ended December 31, 2013. As of December 31, 2014, we had $97.9 million in cash and short term investments compared to $93.2 million at December 31, 2013. +2014 Developments +HCV Co-Promotion Initiatives +On June 10, 2014, we entered into an agreement with AbbVie to co-promote our +OraQuick ® HCV test in the United States. The product is used to test individuals at-risk for the hepatitis C virus. We are responsible for manufacturing and selling the product into all +markets covered by the agreement. +Pursuant to the agreement, we have granted exclusive co-promotion rights for the OraQuick ® HCV test in certain markets to AbbVie and will provide certain additional services in support of HCV testing. In exchange for these exclusive rights and other services which we will provide to +AbbVie, we are eligible to receive up to $75.0 million in aggregate payments over the term of the agreement, which runs through December 31, 2019. We plan to recognize the payments ratably on a monthly basis over the life of the agreement. The +first $15.0 million payment was received in July 2014 and as of December 31, 2014, we recognized $7.6 million in revenues. In addition, if certain performance-based milestones are achieved, we will be eligible to receive additional +payments annually, ranging from $3.5 to $55.5 million over the life of the agreement, beginning in 2015. The agreement also contains certain termination, indemnification and other provisions typical of agreements of this type. Payments received +under this agreement will be recorded as licensing and product development revenue in our statements of operations. +During the second half of 2014, we +began three initiatives under the Co-Promotion Agreement, each with the intent of increasing HCV awareness and making our OraQuick ® HCV test and AbbVie’s patient support program widely +available to patients. The first initiative focuses on primary care and specialty physicians. In August 2014, AbbVie began detailing our OraQuick ® HCV test to physicians and we commenced a +comprehensive product training program for these customers. As a result of these efforts, hundreds of physician offices have indicated an interest in our product. We have also developed a patient care database and limited co-insurance reimbursement +program for use in connection with this and the other initiatives under the agreement. +The second initiative targets employers or employer groups with +employees that are at high risk for HCV. Our initial focus has been on commercial long-haul truck drivers. We intend to continue promoting the use of our test through health and wellness providers who serve professional truckers. +A third initiative is to focus on national retail pharmacies and retail clinics. We and AbbVie have initiated discussions with several major retail pharmacies +about increasing awareness and making our OraQuick ® HCV test and AbbVie’s patient support program available through retail outlets. +Although we expect the AbbVie agreement to benefit our OraQuick ® HCV business, it is difficult to +predict when, or if, we will be able to achieve our objectives under the agreement, including receipt of one or more performance fees. If we fail to do so, or if the agreement is terminated early, the level of compensation we receive would be +reduced and our financial results and business prospects could be adversely affected. +Launch of the Next Generation Intercept ® Collection Device +We have completed development of a our second generation Intercept i2 ™ oral specimen collection device. In July 2014, we commercially launched the new device into the U.S. criminal justice and forensic toxicology markets and into certain international markets. A +generic version of this device is also sold, primarily to laboratories for validation studies. +56 +Table of Contents +Drugs-of-Abuse Assay Agreement +We continue to make progress under our agreement with Thermo Fisher to develop and supply homogenous fully-automated oral fluid drugs of abuse assays to be +used with our new Intercept i2 ™ collection device. In the fourth quarter of 2014, six high-throughput, fully-automated oral fluid assays were launched into the U.S criminal justice and +forensic toxicology markets, consisting of a NIDA-5 panel for detection of amphetamines, methamphetamines, cocaine, opiates, PCP and THC, or marijuana. Six additional assays are expected to launch in 2015. +As a result of this progress, in late June 2014 we issued our final purchase order for fully-automated assays developed under our terminated agreement with +Roche Diagnostics (“Roche”). Pursuant to the terms of the termination agreement with Roche, we received $5.5 million as a result of the submission of our final purchase order. This payment was recorded as a reduction of operating expense +in our consolidated statement of operations. +Rapid Ebola Test +In 2014, we began efforts to develop and commercialize a rapid, point-of-care antigen test for the Ebola virus, using our OraQuick ® technology platform. We have achieved significant development and clinical milestones for this product and we are close to finalizing the design of a prototype device. Subject to receipt of +external funding as described below, we expect to place this test into more extensive field testing in Africa in the near future. +Despite the good +progress we have made on the development front, whether this product will ultimately contribute to our business depends on several factors. First, we are seeking funding for our development efforts from a variety of Federal agencies. The costs to +complete development and obtain the applicable regulatory approvals for this product are not insignificant. Second, as we complete our clinical development and prepare for field testing, we are also in discussions with various government agencies +regarding product procurement. Our goal is to obtain substantial and sustainable product purchase commitments, along with the external development funding. Third, assuming the field testing of this product is successful we plan to seek an Emergency +Use Authorization from the FDA and other longer-term regulatory approvals from the FDA and other regulatory bodies as required to commercialize this product. +Although we have made progress in our development efforts and we have received some positive feedback on funding from several agencies, it is difficult to +predict whether we will be successful in completing our product development, obtaining the required regulatory approvals or achieving our funding goals. If we are unable to reach one or more of these objectives, we will likely discontinue our work +on this project. +Governmental Funding Outlook +Many +of our customers rely on public funding provided by federal, state and local governments. This funding has been and may continue to be reduced or deferred as a result of political and economic conditions and shifting priorities for its use. These +circumstances may adversely impact our customers, which, in turn, could adversely affect their ability to purchase our products. Legislative, budgetary or regulatory changes may also be adopted which could adversely affect our ability to sell our +current products or successfully develop and commercialize new products. +Business Segments +We operate our business within two reportable segments: our “OSUR” business, which consists of the development, manufacture and sale of diagnostic +products, specimen collection devices, and medical devices and our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices that are used to +collect, stabilize, and store samples of genetic material for molecular testing. OSUR revenues are derived primarily from products sold into the United +57 +Table of Contents +States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, and commercial and industrial entities. Revenues from OSUR’s OTC products result from sales to retail pharmacies and mass merchandisers and to consumers over the internet. DNAG revenues result primarily from products sold into the +commercial market, which consists of companies and other entities engaged in consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, and animal genetic testing, as well as products sold into the academic research market +which consists of research laboratories, universities and hospitals. +Results of Operations +YEAR ENDED DECEMBER 31, 2014 COMPARED TO DECEMBER 31, 2013 +CONSOLIDATED NET REVENUES +The table below +shows the amount of total net product revenues generated by each of our business segments and net revenues from licensing and product development activities (dollars in thousands). +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +2014 +2013 +2014 +2013 +OSUR +$ +75,116 +$ +77,936 +(4 +)% +71 +% +78 +% +DNAG +23,778 +20,381 +17 +22 +21 +Net product revenues +98,894 +98,317 +1 +93 +99 +Licensing and product development +7,570 +623 +NM +* +7 +1 +Net revenues +$ +106,464 +$ +98,940 +8 +% +100 +% +100 +% +* +Calculation is not considered meaningful. +Consolidated net product revenues increased 1% to $98.9 million in +2014 from $98.3 million in 2013, primarily as a result of higher sales of our molecular collection systems, OraQuick ® HCV and cryosurgical systems products. These increases were partially +offset by lower sales of our OraQuick ® In-Home HIV test and our professional OraQuick ® HIV, substance abuse, and insurance risk +assessment products. Licensing and product development revenues were $7.6 million in 2014 and represent the recognition of revenues from AbbVie for exclusive co-promotion rights and certain services provided under our HCV agreement. Licensing and +product development revenues were $623,000 in 2013 and represent royalties received on sales of Merck’s OTC cryosurgical wart removal product pursuant to a license and settlement agreement that expired in August 2013. +Consolidated net revenues derived from products sold to customers outside the U.S. were $24.2 million and $21.7 million, or 23% and 22% of consolidated net +revenues during the years ended December 31, 2014 and 2013, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total +net revenues. +58 +Table of Contents +Net Revenues by Segment +OSUR Segment +The table below shows +the amount of total net revenues generated by our OSUR segment in each of our principal markets and by licensing and product development activities (dollars in thousands). +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +Market +2014 +2013 +2014 +2013 +Infectious disease testing +$ +47,515 +$ +50,961 +(7 +)% +58 +% +65 +% +Substance abuse testing +8,437 +8,571 +(2 +) +10 +11 +Cryosurgical systems +15,505 +14,468 +7 +19 +18 +Insurance risk assessment +3,659 +3,936 +(7 +) +4 +5 +Net product revenues +75,116 +77,936 +(4 +)% +91 +99 +% +Licensing and product development +7,570 +623 +NM +* +9 +1 +Net revenues +$ +82,686 +$ +78,559 +5 +% +100 +% +100 +% +* +Calculation is not considered meaningful. +Infectious Disease Testing Market +Sales to the infectious disease testing market decreased 7% to $47.5 million in 2014 from $51.0 million in 2013, primarily due to lower sales of our OraQuick ® HIV professional product and OraQuick ® In-Home HIV test, partially offset by higher sales of our OraQuick ® HCV product. +The table below shows a breakdown of our total net OraQuick ® revenues (dollars in thousands) during 2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% Change +Domestic HIV +$ +29,933 +$ +32,301 +(7 +)% +International HIV +2,483 +3,365 +(26 +) +Domestic HIV OTC +6,493 +9,106 +(29 +) +Net HIV revenues +38,909 +44,772 +(13 +) +Domestic HCV +4,220 +2,847 +48 +International HCV +3,048 +2,268 +34 +Net HCV revenues +7,268 +5,115 +42 +Net OraQuick ® revenues +$ +46,177 +$ +49,887 +(7 +)% +Domestic OraQuick ® HIV sales decreased 7% to $29.9 million in 2014 +from $32.3 million in 2013. This decrease was primarily the result of customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under new testing guidelines issued by the CDC, and some price +competition. We anticipate that future sales of our professional HIV product will continue to be negatively affected as a result of the CDC’s guidelines, and by changes in government funding and continued price competition. International sales +of our OraQuick ® HIV test during 2014 decreased 26% to $2.5 million from $3.4 million in 2013 largely due to lower order volume related to testing initiatives in Africa and the inconsistent +purchasing patterns of certain Latin American distributors. +59 +Table of Contents +During 2014, we recorded $6.5 million in net revenues from sales of our OraQuick ® In-Home HIV test. In 2013, we recorded $9.1 million in net revenues from sales of our OraQuick ® In-Home HIV test, including $2.5 million +of previously deferred gross revenue recognized in December 2013 when we changed our revenue recognition policy. Since the product launch in late 2012, revenues had been recognized upon consummation of a purchase by consumers either in a store or +over the internet. In December 2013, as a result of our growing experience with this product and improved ability to estimate potential product returns, we began recognizing revenues upon shipment of the product to retailers or distributors. Based +on available retail point-of-sale data, consumer purchases increased 5% in 2014 as compared to 2013. +Sales of our OraQuick ® In-Home HIV test in 2014 and 2013 included approximately $392,000 and $701,000, respectively, of direct sales to public health customers. We anticipate that some public health entities may choose +to use a portion of their funding to purchase our OTC product in lieu of professional rapid HIV testing products. +Domestic OraQuick ® HCV sales increased 48% to $4.2 million in 2014 from $2.8 million in 2013, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV +testing programs. International OraQuick ® HCV sales increased 34% to $3.0 million in 2014 from $2.3 million in 2013, primarily as a result of the inclusion in 2014 of a full year of purchases +by a multi-national humanitarian organization, which first purchased the product in the latter half of 2013. Also contributing to the increase in international sales was higher sales into certain Asian markets. +We believe our OraQuick ® HCV product represents an opportunity for future sales growth, given the +recent FDA approvals of several new drug therapies for treating HCV. We also expect that sales of our HCV product will be positively impacted as we implement awareness and testing programs under our agreement with AbbVie. However, demand for our HCV +product, particularly in the public health marketplace, is somewhat tempered by the limited availability of government funding allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid HCV testing. +Sales to physicians can also be adversely affected by the level of reimbursement available from insurance providers and competition from laboratory-based HCV tests. These and other factors, including the intensely competitive market for new HCV +therapies, could limit the success of our co-promotion and testing programs under our agreement with AbbVie. +International orders for both our HIV and +HCV products can be sporadic in nature and are often predicated upon the availability of governmental funding, the impact of competition and other factors. As such, there is no assurance that such sales will continue at the same levels in future +periods. +Substance Abuse Testing Market +Net +substance abuse testing revenues decreased 2% to $8.4 million in 2014 from $8.6 million in 2013, primarily as a result of slightly higher sales of our Intercept ® drug testing system offset by +lower sales of our Q.E.D. ® rapid point-of-care saliva alcohol test. The table below shows a breakdown of our total net Intercept ® +revenues (dollars in thousands) generated in each market during 2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% Change +Domestic +$ +6,101 +$ +5,693 +7 +% +International +149 +500 +(70 +) +Net Intercept ® revenues +$ +6,250 +$ +6,193 +1 +% +Domestic Intercept ® sales in 2014 increased to $6.1 million compared +to $5.7 million in 2013, primarily due to market growth resulting from increased interest in oral fluid testing by customers who previously used alternative specimen types for drug testing and improved domestic employment conditions. International +Intercept ® sales decreased 70% to $149,000 in 2014 from $500,000 in 2013 largely due to the absence of purchases by a UK distributor who began selling its own competing oral specimen +collection device in 2012. Sales to this distributor were $316,000 in 2013. +60 +Table of Contents +Cryosurgical Systems Market +Sales of our cryosurgical systems products (which includes both the physicians’ office and OTC markets) increased 7% to $15.5 million in 2014 from $14.5 +million in 2013. +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) generated in each market during +2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% Change +Domestic professional +$ +6,750 +$ +6,020 +12 +% +International professional +693 +1,441 +(52 +) +Domestic over-the-counter +108 +— +100 +International over-the-counter +7,954 +7,007 +14 +Net cryosurgical systems revenues +$ +15,505 +$ +14,468 +7 +% +Sales of our Histofreezer ® product in the domestic professional +market increased 12% to $6.8 million in 2014, compared to $6.0 million in 2013. This increase is largely due to higher sales by one of our distributors to teaching hospitals, physician offices, and the military. This increase also reflects below +normal sales in early 2013, resulting from higher distributor purchases in the fourth quarter of 2012 in advance of a price increase implemented in January 2013. The current year increase in net revenues was negatively impacted by the merger of our +two largest distributors, who began selling a private label cryosurgical product in direct competition with our Histofreezer ® product in 2014. +During 2014, international sales of Histofreezer ® decreased to $693,000, compared to $1.4 million in +the same period of the prior year. Our long-term supply agreement for the Histofreezer ® product with a contract manufacturer terminated in late 2013, and that former supplier has since begun +promoting a competing product similar to Histofreezer ® . In order to remain competitive with this new product, we have decreased the per unit sales price of our Histofreezer ® product in certain international markets. In addition, we experienced delivery problems and inventory shortages as we transitioned to a new manufacturer of our international Histofreezer ® product line. While the delivery problems and inventory shortage were corrected in the fourth quarter of 2014, we expect the competing product from our former contract manufacturer will adversely +affect revenues generated from our cryosurgical systems business. +In the fourth quarter of 2014, we launched our wart removal product in the U.S. retail +market through private labeling with a large pharmacy chain. Sales related to this product were $108,000. +Sales of our international OTC cryosurgical +products during 2014 increased 14% to $8.0 million compared to $7.0 million in 2013, largely due to higher sales to our European distributor, Reckitt Benckiser, partially offset by lower sales to our Latin American distributor, Genomma. +Sales to Reckitt Benckiser increased to $4.8 million, compared to $3.6 million during 2013, primarily due to the launch of our product into new geographic +territories and new market segments in Europe. Sales to Genomma, our Latin American distributor, decreased to $3.0 million, compared to $3.3 million in 2013, reflecting lower sales into Brazil, partially offset by an increase in sales into Mexico. +Insurance Risk Assessment Market +Sales to the +insurance risk assessment market decreased 7% to $3.7 million in 2014 from $3.9 million in 2013, as a result of reduced demand in the domestic life insurance market, resulting from the adoption by some underwriters of a “Simplified Issues” +policy, pursuant to which testing for risk factors is replaced by having applicants respond to a questionnaire about their behaviors. +61 +Table of Contents +Licensing and Product Development +Licensing and product development revenues were $7.6 million in 2014 and represent the ratable recognition of revenues received for exclusive promotion rights +and certain other services provided under our HCV agreement with AbbVie. Licensing and product development revenues in 2013 were $623,000 and represent royalties paid on domestic outsales of Merck’s OTC cryosurgical wart removal product, +pursuant to a license and settlement agreement which expired in August 2013. +DNAG Segment +Molecular Collection Systems +Net molecular collection +systems revenues, which primarily represent sales of our Oragene ® product line, increased 17% to $23.8 million in 2014 from $20.4 million in 2013. Sales of Oragene ® in the commercial market increased approximately 9% in 2014, primarily as a result of overall market growth and increased use of our +Oragene ® product in pharmacogenomics testing. Sales of Oragene ® in the academic market increased 35% largely due to orders placed by +two new international customers as well as higher sales to one of the Company’s larger existing academic customers. Sales to DNAG’s largest commercial customer, 23andMe, decreased approximately $3.4 million in 2014. Sales to DNAG’s +other customers grew 48% in the current year and substantially offset the lower sales to 23andMe. +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 63% in 2014 compared to 59% in 2013. This increase was largely due to the $7.6 million of licensing and product +development revenues associated with our AbbVie agreement, as well as a more favorable product mix driven largely by increased DNAG sales to higher margin customers. +Consolidated operating loss decreased by $7.4 million to $4.8 million in 2014, compared $12.2 million in 2013. The lower operating loss was primarily due to +the higher licensing and product development revenues and lower HIV OTC sales and marketing expenses in 2014, partially offset by a $2.8 million reduction in contract termination payments received from Roche during 2014. +OPERATING INCOME (LOSS) BY SEGMENT +OSUR Segment +OSUR’s gross +margin was 60% in 2014 compared to 57% in 2013. OSUR’s 2014 margin was positively impacted by the higher licensing and product development revenues recorded during 2014. +Research and development expenses increased 13% to $9.4 million in 2014 from $8.4 million in 2013 largely due to increased lab supply costs partially offset +by lower clinical trial and staffing expenses. +Sales and marketing expenses decreased 16% to $33.1 million in 2014 from $39.5 million in 2013, primarily +as a result of lower advertising and promotional costs for our OraQuick ® In-Home HIV test which totaled $8.5 million in 2014, as compared to $18.8 million in 2013. This reduction in spending +was the result of our decision to focus our marketing and promotional efforts at the retail outlet level and transition away from broad-based consumer advertising in June 2014. Partially offsetting this decrease were higher sales and marketing costs +associated with our OraQuick ® HCV co-promotion agreement with AbbVie. +General and administrative +expenses increased 13% to $20.6 million in 2014 from $18.2 million in 2013 due to higher legal, staffing and consulting expenses. +62 +Table of Contents +All of the above, along with the $5.5 million contract termination payment from Roche, contributed to OSUR’s +operating loss of $8.3 million for 2014, which included non-cash charges of $3.3 million for depreciation and amortization and $5.3 million for stock-based compensation. +DNAG Segment +DNAG’s gross +margin was 73% in 2014 compared to 67% in 2013. This improvement was primarily attributable to an increased volume of higher margin sales experienced in 2014 when compared to 2013. +DNAG operating expenses rose to $13.7 million in 2014 from $13.0 million in 2013. Research and development expenses remained relatively flat at $2.6 million +in 2014 and 2013. Sales and marketing expenses increased 14% to $8.0 million in 2014 from $7.0 million in 2013 largely due to higher staffing and consulting costs. General and administrative expenses decreased 9% to $3.1 million in 2014 from $3.4 +million in 2013 largely due to lower legal fees. +All of the above contributed to DNAG’s operating income of $3.5 million for 2014, which included +non-cash charges of $3.1 million for depreciation and amortization and $432,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against OSUR’s total U.S. net deferred tax asset is appropriate as the +facts and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax benefit was recorded for OSUR’s pre-tax loss in 2014 or 2013. For the year ended December 31, 2014, we recorded Canadian income tax +expense of $343,000. For the year ended December 31, 2013, we recorded a Canadian income tax benefit of $772,000 which was associated with certain Canadian research and development and investment tax credits. The Canadian income tax benefit was +considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG. +YEAR +ENDED DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012 +CONSOLIDATED NET REVENUES +The table below shows the amount of total net product revenues generated by each of our business segments and net revenues generated by licensing and product +development activities (dollars in thousands). +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +2013 +2012 +2013 +2012 +OSUR +$ +77,936 +$ +71,495 +9 +% +78 +% +82 +% +DNAG +20,381 +14,258 +43 +21 +16 +Net product revenues +98,317 +85,753 +15 +99 +98 +Licensing and product development +623 +2,067 +(70 +) +1 +2 +Net revenues +$ +98,940 +$ +87,820 +13 +% +100 +% +100 +% +Consolidated net revenues increased 13% to $98.9 million in 2013 from $87.8 million in 2012. Net product revenues increased +15% during the year ended December 31, 2013 when compared to the year ended +63 +Table of Contents +December 31, 2012, primarily as a result of higher sales of our infectious disease testing and molecular collection systems products. These increases were partially offset by lower sales of +our substance abuse testing, insurance risk assessment and cryosurgical systems products. Licensing and product development revenues decreased in the current year compared to the prior year primarily as a result of the absence of a $1.0 million +milestone payment received in the first quarter of 2012 related to the achievement of certain regulatory and commercial objectives pursuant to the terms of our HCV agreement with Merck. No similar payment was received during 2013 because the +agreement with Merck was terminated in November 2012. +Consolidated net revenues derived from products sold to customers outside the U.S. were $21.7 +million and $20.3 million, or 22% and 23% of consolidated net revenues for the years ended December 31, 2013 and 2012, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating +foreign currency exchange rates was not material to our total net revenues. +Net Revenues by Segment +OSUR Segment +The table below shows +the amount of total net revenues generated by our OSUR segment in each of our principal markets and by licensing and product development activities (dollars in thousands). +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +Market +2013 +2012 +2013 +2012 +Infectious disease testing +$ +50,961 +$ +42,728 +19 +% +65 +% +58 +% +Substance abuse testing +8,571 +9,407 +(9 +) +11 +13 +Cryosurgical systems +14,468 +14,876 +(3 +) +18 +20 +Insurance risk assessment +3,936 +4,484 +(12 +) +5 +6 +Net product revenues +77,936 +71,495 +9 +% +99 +97 +% +Licensing and product development +623 +2,067 +(70 +) +1 +3 +Net revenues +$ +78,559 +$ +73,562 +7 +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market increased 19% to $51.0 million in 2013 from $42.7 million in 2012, primarily due to sales of our OraQuick ® In-Home HIV test and higher sales of our OraQuick ® HCV and HIV products in international markets. +The table below shows a breakdown of our total net OraQuick ® revenues (dollars in thousands) during +2013 and 2012. +Year Ended December 31, +Market +2013 +2012 +% Change +Domestic HIV +$ +32,301 +$ +34,265 +(6 +)% +International HIV +3,365 +3,061 +10 +Domestic OTC HIV +9,106 +546 +1,568 +Net HIV revenues +44,772 +37,872 +18 +Domestic HCV +2,847 +2,805 +1 +International HCV +2,268 +1,059 +114 +Net HCV revenues +5,115 +3,864 +32 +Net OraQuick ® revenues +$ +49,887 +$ +41,736 +20 +% +64 +Table of Contents +Domestic OraQuick ® HIV sales decreased 6% to $32.3 +million in 2013 from $34.3 million in 2012. This decrease was primarily caused by competition from other rapid and automated laboratory-based HIV tests and reductions in government funding. International sales of our OraQuick ® HIV test increased 10% to $3.4 million in 2013 from $3.1 million in 2012 primarily as a result of higher sales in Mexico, Africa, and Europe. +In 2013, we recorded $9.1 million in net revenues from sales of our OraQuick ® In-Home HIV test, +including $2.5 million of previously deferred revenue recognized in December 2013 when we changed our revenue recognition policy for this product. Since the product launch in late 2012, revenues had been recognized upon consummation of a purchase by +consumers either in a store or over the internet. In December 2013, as a result of our growing experience with this product and improved ability to estimate potential product returns, we began recognizing revenues upon shipment of the product to +retailers or distributors. Sales during 2013 also included approximately $701,000 of direct sales to certain public health customers compared to $19,000 in 2012. +We began shipping our OraQuick ® In-Home HIV test to the retail outlets at the end of September 2012. +In 2012, we recorded $546,000 in net revenues from product sales to retail customers either in a store or over the internet. +Domestic OraQuick ® HCV sales remained flat at $2.8 million in 2013 and 2012. International sales of our OraQuick ® HCV test increased 114% to $2.3 million in +2013 from $1.1 million in 2012, primarily as a result of a first-time order from a multi-national humanitarian organization. +Substance +Abuse Testing Market +Net substance abuse testing revenues decreased 9% to $8.6 million in 2013 from $9.4 million in 2012, as a result of lower sales +of our Intercept ® drug testing system. The table below shows a breakdown of our total net Intercept ® revenues (dollars in thousands) +generated in each market during 2013 and 2012. +Year Ended December 31, +Market +2013 +2012 +% Change +Domestic +$ +5,693 +$ +6,335 +(10 +)% +International +500 +706 +(29 +) +Net Intercept ® revenues +$ +6,193 +$ +7,041 +(12 +)% +Domestic Intercept ® sales decreased 10% to $5.7 million in 2013 from +$6.3 million in 2012. In 2011, our largest laboratory distributor began selling its own competing oral specimen collection device and a panel of oral fluid drug assays suitable for use on fully-automated high-throughput homogenous processing +systems. As a result, by the end of 2012, this distributor had significantly reduced its purchases of our Intercept ® product line. +Intercept ® sales to this distributor were $316,000 for the year ended December 31, 2013 compared to $1.4 million for the year ended December 31, 2012. Intercept ® sales in 2013 were also negatively impacted by the consolidation of drug testing laboratories. +International Intercept ® sales decreased 29% to $500,000 in 2013 from $706,000 in 2012, as a result +of lower purchases by our UK laboratory distributor, which totaled $316,000 in 2013 compared to $610,000 in 2012. In 2012, this UK distributor began selling its own competing oral specimen collection device. +Cryosurgical Systems Market +Sales of our +cryosurgical systems products (which includes both the physicians’ office and OTC markets) decreased to $14.5 million in 2013 from $14.9 million in 2012. +65 +Table of Contents +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) generated +in each market during 2013 and 2012. +Year Ended December 31, +Market +2013 +2012 +% Change +Domestic professional +$ +6,020 +$ +7,159 +(16 +)% +International professional +1,441 +1,462 +(1 +) +International OTC +7,007 +6,255 +12 +Net cryosurgical systems revenues +$ +14,468 +$ +14,876 +(3 +)% +Sales of our Histofreezer ® product to physicians’ offices in the +United States decreased 16% to $6.0 million in 2013, compared to $7.2 million in 2012. This decrease was the result of higher distributor purchases made in the fourth quarter of 2012 in anticipation of price increases implemented in early January +2013, a decline in sales to the military during 2013 as a result of the U.S. withdrawal of troops overseas and lower sales to our Canadian distributor. International sales of Histofreezer ® +remained relatively flat at $1.4 million in 2013 and $1.5 million in 2012. +Sales of our OTC cryosurgical products during 2013 increased 12% to $7.0 +million from $6.3 million in 2012. This increase was largely the result of higher sales to both our Latin American distributor, Genomma, and our European distributor, Reckitt Benckiser. In 2013, Genomma purchased $3.3 million compared to $2.7 +million during 2012, largely due to increased sales into Brazil. Sales to Reckitt Benckiser rose to $3.6 million in 2013 from $3.3 million in 2012 as a result of higher sales in new geographic territories, partially offset by lower sales to existing +markets resulting from a reallocation of advertising resources by the distributor. +Insurance Risk Assessment Market +Sales to the insurance risk assessment market decreased 12% to $3.9 million in 2013 from $4.5 million in 2012, as a result of reduced demand in the domestic +life insurance market, as well as the adoption by some underwriters of a “Simplified Issues” policy, pursuant to which lab-based testing is replaced by having applicants respond to a questionnaire about their behaviors. +Licensing and Product Development +Licensing and product development revenues for 2013 decreased 70% primarily as a result of the absence of a $1.0 million milestone payment received in the +first quarter of 2012 related to the achievement of certain regulatory and commercial objectives pursuant to the terms of our HCV agreement with Merck. No similar payment was received during 2013 because the agreement with Merck was terminated in +November 2012. +Also contributing to the decline in product development revenues in 2013 was a decrease in royalties received on domestic outsales of +Merck’s OTC cryosurgical wart removal product. Pursuant to a license and settlement agreement executed in January 2008, the receipt of royalties stopped in August 2013 when certain of our cryosurgical patents expired. +DNAG Segment +Molecular Collection Systems +Net +molecular collection systems revenues, which primarily represent sales of our Oragene ® product line, increased 43% to $20.4 million in 2013 from $14.3 million in 2012. Sales of Oragene ® in the commercial market increased in 2013 primarily due to a substantial increase in orders received from an existing customer, partially offset by lower sales in the academic research market in +2013 when compared to 2012 due to continued constrained research funding, particularly in North America. +66 +Table of Contents +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 59% in 2013 compared to 63% in 2012. This decrease was largely due to higher royalty expenses, an unfavorable change in product +mix, and the absence of the $1.0 million HCV milestone payment which was received in 2012. These negative effects on gross margin were partially offset by an improvement in overhead absorption during 2013 when compared to the prior year period. +Consolidated operating loss decreased $4.1 million to $12.2 million in 2013, compared to $16.3 million in 2012. Our 2013 operating loss reflects the $8.3 +million settlement payment received for the termination of our assay agreement with Roche Diagnostics partially offset by higher sales and marketing expenses associated with the promotion of our +OraQuick ® In-Home HIV test. +OPERATING LOSS BY SEGMENT +OSUR Segment +OSUR’s gross +margin was 57% in 2013 compared to 62% in 2012. OSUR’s 2013 margin was negatively impacted by higher lateral flow patent royalties on sales of our OraQuick ® HIV products, an unfavorable +change in product mix, and the absence of the $1.0 million HCV milestone payment received from Merck in the first quarter of 2012. The negative impact of these items was partially offset by an improvement in overhead absorption. +Research and development expenses declined 13% to $8.4 million in 2013 from $9.7 million in 2012, largely due to lower staffing costs and decreased spending +on lab supplies. +Sales and marketing expenses increased 29% to $39.5 million in 2013 from $30.5 million in 2012. This increase was primarily the result +of higher spending associated with advertising and promotional activities for our OraQuick ® In-Home HIV test. During 2013, we launched three large promotional campaigns including one in +association with Earvin “Magic” Johnson, a multi-city promotional campaign to encourage consumers to get tested for HIV, and another focused on increasing brand awareness among men who have sex with men and African American consumers. We +also increased our use of radio, television, print and digital advertising. Advertising and promotional costs for our OraQuick ® In-Home HIV test were $18.8 million in 2013, compared to $9.9 +million in 2012. +General and administrative expenses decreased 4% to $18.2 million in 2013 from $19.0 million in 2012 due to lower legal and consulting +expenses, partially offset by higher staffing costs. +All the above contributed to OSUR’s operating loss of $12.8 million, which included non-cash +charges of $3.2 million for depreciation and amortization expense and $5.3 million for stock-based compensation expense. +DNAG +Segment +DNAG’s gross margin was 67% in 2013 compared to 68% in 2012. This decrease was primarily the result of increased sales to a lower +margin commercial customer. +Research and development expenses decreased 7% to $2.6 million in 2013 from $2.8 million in 2012 due largely to lower +staffing costs and amortization expense. Sales and marketing expenses increased 7% to $7.0 million in 2013 from $6.6 million in 2012 largely due to higher staffing costs and higher sales commission expenses. General and administrative expenses +remained relatively flat at $3.4 million in 2013 as compared to $3.3 million in 2012. +All of the above contributed to operating income of $687,000 for +DNAG in 2013, which also included non-cash charges of $3.3 million for depreciation and amortization expense and $238,000 for stock-based compensation expense. +67 +Table of Contents +CONSOLIDATED INCOME TAXES +As of December 31, 2013, we believed the full valuation allowance established in 2008 against OSUR’s total U.S. net deferred tax asset was +appropriate as the facts and circumstances necessitating the allowance had not changed. As a result, no U.S. income tax benefit was recorded for OraSure’s pre-tax loss in 2013 and 2012. A Canadian income tax benefit of $772,000 and $1.4 million +was recorded in 2013 and 2012, respectively, which was associated with certain Canadian research and development and investment tax credits and the DNAG loss before income taxes in 2012. +Liquidity and Capital Resources +December 31, +2014 +2013 +(In thousands) +Cash +$ +92,867 +$ +93,191 +Short-term investments +5,000 +— +Working capital +104,752 +100,590 +Our cash and short-term investment balances increased to $97.9 million at December 31, 2014 from $93.2 million at +December 31, 2013. Our working capital increased to $104.8 million at December 31, 2014 from $100.6 million at December 31, 2013. +During +2014, we generated $7.5 million in cash from our operating activities. Our net loss of $4.6 million was offset by non-cash stock-based compensation expense of $5.7 million, depreciation and amortization expense of $6.3 million, an unrealized foreign +currency gain of $305,000, and deferred income tax expense of $294,000. An increase in deferred revenue of $6.9 million also contributed to the cash generated during the year. The deferred revenue increase is related to the receipt of $15.0 million +from AbbVie in July 2014, reduced by the amount ratably recognized in revenue during the year. Also contributing to the increase in cash was an increase in accounts payable of $2.2 million largely associated with expenses related to the AbbVie +agreement, and a decrease in prepaid expenses and other current assets of $475,000. These increases in cash were partially offset by a $4.4 million increase in inventory associated with our +OraQuick ® HCV product, a $3.4 million increase in accounts receivable resulting from the increase and timing of sales at DNAG, and a $1.7 million decrease in accrued expenses largely +associated with a decrease in our royalty obligations. +We used a net amount of $8.0 million in investing activities during 2014 to purchase $9.4 million +in short-term investments and $3.0 million to acquire property and equipment. These payments were offset by proceeds received from the maturities of short-term investments of $4.4 million. During the year ended December 31, 2015, we expect to +invest approximately $4.0 million in capital expenditures, primarily to purchase additional manufacturing equipment, upgrade certain older equipment and make improvements to our facilities. +Net cash provided by financing activities was $476,000 in 2014, which resulted from $1.1 million in proceeds received from the exercise of stock options +partially offset by the use of $639,000 for the repurchase of common stock related to the vesting of restricted shares. +Our current cash balance is +expected to be sufficient to fund our current operating and capital needs through at least the next twelve months. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the +scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and +potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales +and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. +68 +Table of Contents +Contractual Obligations and Commercial Commitments +The following sets forth our approximate aggregate obligations as of December 31, 2014 (in thousands) for future payments under contracts and other +contingent commitments, for the year 2015 and beyond: +Payments due by December 31, +Contractual Obligations +Total +2015 +2016 +2017 +2018 +Operating leases 1 +$ +386 +$ +380 +$ +6 +$ +— +$ +— +Employment contracts 2 +3,421 +2,324 +1,097 +— +— +Purchase obligations 3 +8,729 +8,729 +— +— +— +Minimum commitments under contracts 4 +1,792 +500 +500 +500 +292 +Total contractual obligations +$ +14,328 +$ +11,933 +$ +1,603 +$ +500 +$ +292 +1 +Represents payments required under our operating leases. See Note 11 of the Notes to the consolidated financial statements included herein. +2 +Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 11 of the Notes to the consolidated financial statements included herein. +3 +Represents payments required by non-cancellable purchase orders related to inventory, capital expenditures and other goods or services. See Note 11 of the Notes to the consolidated financial statements included herein. +4 +Represents payments required pursuant to certain licensing agreements executed by the Company. These agreements are cancellable within a specified number of days after communication by the Company of its intent to +terminate. See Note 11 of the Notes to the consolidated financial statements included herein. +Off-Balance Sheet Arrangements . We do +not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended. +Critical Accounting Policies and Estimates +This +Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of +America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial +statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our judgments and estimates, including those related to bad debts, customer sales returns, inventories, intangible assets, +income taxes, revenue recognition, contingencies and litigation. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the +basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual +Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties +that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . We recognize product revenues when there is +persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. Other than for our OraQuick ® In-Home HIV test, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent +and immaterial. Accordingly, we expense warranty returns as incurred. +69 +Table of Contents +We began selling our OraQuick ® In-Home HIV test in the +third quarter of 2012. From launch through November 2013, our revenue recognition practices with respect to the OraQuick ® In-Home HIV test were different than those customarily used in the +consumer package goods industry. Under U.S. generally accepted accounting principles, product revenue cannot be recognized unless the amount of future returns can be reasonably estimated. Because our OraQuick ® In-Home HIV test was a new product for which we did not have a historical record of returns, we did not believe we could reasonably determine a return rate. As a result, initially we did not +recognize revenue when we shipped to the retail trade. For these product shipments, we invoiced the retailer or distributor, recorded deferred revenue at gross invoice sales price, and classified the cost basis of the product held by the retailer or +distributor as a component of inventory. We then recognized revenue upon the consummation of a sale to the consumer either in a store or over the internet. With the passage of time, however, we concluded that we have sufficient data and visibility +into our distribution channel to develop a reasonable estimate of the level of expected returns. As such, commencing in December 2013, we recognized previously deferred revenue and its related cost of goods sold, and began to recognize revenue for +this product upon shipment to the retailers or distributors. +Our net revenues recorded on sales of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. All of these +allowances are estimates established by management, based on currently available information and are adjusted to reflect known changes in the factors that impact those estimates. These allowances are recorded as a reduction of gross revenue when +recognized in our statements of operations. +Royalty income from the grant of license rights is recognized during the period in which the revenue is +earned and the amount is determinable from the licensee and is recorded as licensing and product development revenue in our statements of operations. +We +record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie Bahamas Ltd., a wholly-owned subsidiary of AbbVie +Inc. (“AbbVie”), to co-promote our OraQuick ® HCV test in the United States. The product is used to test individuals at-risk for the hepatitis C virus (“HCV”). We are +responsible for manufacturing and selling the product into all markets covered by this agreement. +Pursuant to the co-promotion agreement, we have granted +exclusive co-promotion rights for the OraQuick ® HCV Rapid test in certain markets to AbbVie and we have agreed to develop, implement, administer and maintain a patient care database for the +exclusive use of AbbVie. This patient care database will be used to compile patient information regarding new individuals who have tested positive for HCV using our OraQuick ® HCV Rapid test. +We have also jointly agreed with AbbVie to co-promote our OraQuick ® HCV Rapid test in certain market segments, namely: healthcare providers such as primary care physicians, +gastroenterologists, hepatologists and infectious disease specialists; employers and employee groups experiencing a high HCV prevalence rate, such as the long-haul trucking industry; and national retail pharmacies and retail clinics that perform +routine healthcare screening services. +In exchange for these exclusive rights and other services, we are eligible to receive up to $75 million in +payments over the term of the agreement which expires on December 31, 2019. We will recognize revenues from these periodic payments ratably, over the life of the agreement. In addition, if certain performance-based milestones are achieved, we +could be eligible to receive additional milestone payments. These payments would be based upon the aggregate number of new patients enrolled in the patient care database, in a given calendar year, after exceeding a baseline threshold, and could +range from $3.5 million to $55.5 million annually over the life of the agreement. The first performance-based milestone period ends on December 31, 2015. The agreement also +70 +Table of Contents +contains certain termination, indemnification and other provisions, typical of agreements of this type. Payments received under this agreement will be recorded as licensing and product +development revenue in our statements of operations. +Customer Sales Returns and Allowances. We do not grant return rights to our customers for any +product, except for our OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross +OraQuick ® In-Home HIV product revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail +factors, and is reviewed regularly to ensure that it reflects potential product returns. As of December 31, 2014 and 2013, the reserve for sales returns and allowances was $437,000 and $279,000, respectively. If actual product returns differ +materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product +returns vary significantly from our estimates, our operating and financial results could be materially affected. +Allowance for Uncollectible Accounts +Receivable . Accounts receivable are reduced by an estimated allowance for amounts that may become uncollectible in the future. On an ongoing basis, we perform credit evaluations of our customers and adjust credit limits based upon the +customer’s payment history and creditworthiness, as determined by a review of their current credit information. We also continuously monitor collections and payments from our customers. +Based upon historical experience and any specific customer collection issues that are identified, we use our judgment to establish and evaluate the adequacy +of our allowance for estimated credit losses, which was $533,000 as of December 31, 2014. While credit losses have been within our expectations and the allowance provided, these losses can vary from period to period. Furthermore, there is no +assurance that we will experience credit losses at the same rates as we have in the past. The current economic environment could adversely affect the operations, cash flows and financial condition of our customers. These circumstances may adversely +impact the liquidity or financial position of our customers and could have a material impact on the collectability of our accounts receivable and future operating results. +Deferred Revenue . We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of +December 31, 2014 and 2013 includes customer prepayments of $613,000 and $1.1 million, respectively. Deferred revenue as of December 31, 2014 also includes $7.4 million from AbbVie, which represents the $15.0 million payment received in +July 2014 under the terms of our HCV agreement, less amounts recognized ratably in revenue. +Inventories . Our inventories are valued at the lower +of cost or market, determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying +value of our inventories to determine the need for reserves for excess and obsolete inventories based primarily on the estimated forecast of product sales. When, in the opinion of management, factors indicate that impairment has occurred, either a +reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. During 2014, we wrote-off inventory which had a cost of $1.8 million. In 2013 and 2012, we +wrote-off inventory which had a cost of $1.3 million in each year. These write-offs were a result of quality, scrap and product expiration issues. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any +significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Stock-Based Compensation . We recognize the fair value of equity-based awards as compensation expense in our statement of operations. The fair value of +our stock option awards is estimated using a Black-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated life of each award. +The fair value of the options, after +71 +Table of Contents +considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option. The fair value of our restricted shares is +based on the market value of the shares at the date of grant and is recognized on a straight-line basis over the related vesting period of the award. +Long-Lived and Intangible Assets . Our long-lived assets are comprised of property and equipment, intangible assets and goodwill. Together, these assets +had a net book value of $57.2 million, or 30% of our total assets, as of December 31, 2014. Property and equipment and intangible assets are depreciated or amortized on a straight-line basis over their estimated useful lives, which we determine +based upon our estimate of the period of time over which each asset will generate revenues. An impairment of long-lived or intangible assets could occur whenever events or changes in circumstances indicate that the net book value of our assets may +not be recoverable. Events which could trigger asset impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of an asset or in our overall business +strategy, significant negative industry or economic trends, and shortening of product life-cycles or changes in technology. If we believe impairment of an asset has occurred, we measure the amount of such impairment by comparing the net book value +of the affected assets to the fair value of these assets, which is generally determined based upon the present value of the expected cash flows associated with the use of these assets. If the net book value exceeds the fair value of the impaired +assets, we would incur an impairment expense equal to this difference. +We currently believe the future cash flows to be received from all remaining +long-lived and intangible assets as of December 31, 2014 will exceed their book value. We did not recognize any impairment losses for the years ended December 31, 2014 or 2013. Any unanticipated significant impairment in the future, +however, could have a material adverse impact to our balance sheet and future operating results. +Goodwill . Goodwill represents the excess +of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for +impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is +more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. +The first step of the two-step quantitative impairment test involves comparing the fair value of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting +unit’s fair value, we perform the second step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit’s +goodwill and intangible assets with their respective carrying values. +We performed our annual impairment assessment as of July 31, 2014 utilizing a +qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying amount. We believe we have made reasonable estimates and assumptions to calculate the fair value of our +reporting unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed +annually in the fiscal third quarter, or sooner if a triggering event occurs. +Deferred Tax Assets and Liabilities . At December 31, +2014, we had federal Net Operating Loss (“NOL”) carryforwards of $80.7 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences was $40.7 million at December 31, +2014. In assessing the realizability of net deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent +upon the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected +future taxable income and tax planning strategies in making this assessment. +72 +Table of Contents +We currently have a full valuation allowance recorded against our total U.S. net deferred tax asset as we had +determined in 2008 that it was more likely than not that we would not realize the benefits associated with our net deferred tax asset in the immediate future. Each year, we continued to reevaluate our valuation allowance position and believe that it +is more likely than not that our U.S. deferred income tax asset will not be realized in the immediate future. As such, we maintain a full valuation allowance against our net deferred tax assets as of December 31, 2014 and 2013 associated with +the operations subject to income tax in the U.S. +Our ability to use our federal NOL carryforwards to offset future federal income tax obligations could +be limited by changes in the ownership of our stock. Internal Revenue Code (“IRC”) Section 382 contains provisions that limit the amount of federal NOL carryforwards that can be used in any given year in the event of specified +occurrences, including significant ownership changes. During 2005, the Company completed an analysis, with the assistance of independent tax specialists, to determine if any IRC Section 382 ownership changes had occurred that would limit the +amount of NOLs that could be utilized to offset future taxable income. As a result of this analysis, the Company concluded that prior period ownership changes may impose a limitation on the amount of NOLs that can be utilized in a given year. The +Company does not believe, however, that this limitation will impair our future ability to utilize NOLs to offset our future taxable income. The Company continues to review ownership changes on an annual basis and we do not believe we have had a +subsequent ownership change that would impact the NOLs. +In connection with the DNAG acquisition in August 2011, a deferred tax liability was recorded to +reflect the tax effects of basis differences of intangible assets and inventories for financial reporting and Canadian income tax purposes. For the year ended December 31, 2014, we recorded Canadian income tax expense of $343,000. For the years +ended December 31, 2103 and 2012, we recorded a Canadian income tax benefit of $772,000 and $1.4 million, respectively, associated with certain Canadian research and development and investment tax credits and DNAG’s loss before income +taxes in 2012. The income tax benefit associated with DNAG was considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG. +Contingencies . In the ordinary course of business, we have entered into various contractual relationships with strategic corporate partners, customers, +distributors, research laboratories and universities, licensors, licensees, suppliers, vendors and other parties. As such, we could be subject to litigation, claims or assessments arising from any or all of these relationships. We record a loss +contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss +can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires that we use our best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our +accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for in our +financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +We do not hold any amounts of derivative +financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of +December 31, 2014, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. We have operations in Canada and Europe, which are subject to foreign currency fluctuations. As currency +rates change, translation of revenues and expenses for these operations from foreign currencies to U.S. dollars affects year-to-year comparability of operating results. Sales denominated in a foreign currency were 7.0% of our total consolidated net +revenues for the year ended December 31, 2014. We expect our international business will continue to grow and our exposure to fluctuations in foreign currency exchange rates may increase. +73 +Table of Contents +ITEM 8. +Consolidated Financial Statements and Supplementary Data. +Information with respect to this Item is +contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the +effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2014. Based on that evaluation, the Company’s management, +including such officers, concluded that as of December 31, 2014 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we +file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and +is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) +Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and +maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, +including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework +in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal +control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting +principles as of December 31, 2014. +The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited +by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +Because of its inherent limitations, +internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, +or that the degree of compliance with the policies or procedures may deteriorate. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2014 that have materially affected, or +are reasonably likely to materially affect, our internal control over financial reporting. +74 +Table of Contents +(d) Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, +Inc.: +We have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria +established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective +internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our +responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. +We conducted our audit in +accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial +reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating +effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, +2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of +OraSure Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the years in the three-year period +ended December 31, 2014, and our report dated March 12, 2015 expressed an unqualified opinion on those consolidated financial statements. +/s/ +KPMG LLP +Philadelphia, Pennsylvania +March 12, 2015 +ITEM 9B. +Other Information. +Not applicable. +75 +Table of Contents +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2015 Annual Meeting of Stockholders (the “Proxy +Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by this Item is +incorporated by reference to the information under the captions, “Proposal No. 1. Election of Directors,” “Corporate Governance—Governance Guidelines and Code of Conduct,” “Corporate Governance—Committees +of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in the Proxy Statement. +Our +Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other +officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any +amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. +Executive Compensation. +The information required by this Item is incorporated by reference to the +information under the captions, “Compensation Committee Matters,” “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and Potential Payments Upon Termination or Change in +Control,” and “Director Compensation,” in the Proxy Statement. +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The +information required by this Item with respect to the securities ownership of certain beneficial owners and management, and equity compensation plan information, is incorporated by reference to the information under the captions, “Stock +Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” in the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by +this Item is incorporated by reference to the information under the captions, “Transactions with Related Persons” and “Corporate Governance—Director Independence,” in the Proxy Statement. +ITEM 14. +Principal Accountant Fees and Services. +The information required by this Item is incorporated by +reference to the information under the caption, “Audit Committee Matters,” in the Proxy Statement. +76 +Table of Contents +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial +Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated +financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . See Index to Exhibits following the consolidated financial statements in this Annual Report. +77 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on +its behalf by the undersigned, thereunto duly authorized, on March 12, 2015. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Douglas A. Michels +Douglas A. Michels +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 12, 2015, +by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Douglas A. Michels +Douglas A. Michels +President, Chief Executive Officer and Director +(Principal Executive Officer) +/s/ Ronald H. Spair +Ronald H. Spair +Chief Operating Officer, Chief Financial Officer and Director +(Principal Financial Officer) +/s/ Mark L. Kuna +Mark L. Kuna +Senior Vice President, Finance and Controller +(Principal Accounting Officer) +*MICHAEL CELANO +Michael Celano +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*CHARLES W. PATRICK +Charles W. Patrick +Director +*ROGER L. PRINGLE +Roger L. Pringle +Director +*STEPHEN S. TANG +Stephen S. Tang +Director +*DOUGLAS G. WATSON +Douglas G. Watson +Director +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +78 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations +F-4 +Consolidated Statements of Comprehensive Loss +F-5 +Consolidated Statements of Stockholders’ Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to the Consolidated Financial Statements +F-8 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders +OraSure Technologies, +Inc.: +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, +and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the +responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we +plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial +statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for +our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of +OraSure Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. +generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United +States), OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring +Organizations of the Treadway Commission (COSO), and our report dated March 12, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 12, 2015 +F-2 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, +2014 +2013 +ASSETS +CURRENT ASSETS: +Cash +$ +92,867 +$ +93,191 +Short-term investments +5,000 +— +Accounts receivable, net of allowance for doubtful accounts of $533 and $299 +16,138 +12,957 +Inventories +15,763 +11,444 +Prepaid expenses +1,140 +1,712 +Deferred income taxes +— +71 +Other current assets +306 +200 +Total current assets +131,214 +119,575 +PROPERTY AND EQUIPMENT, net +17,934 +17,933 +INTANGIBLE ASSETS, net +17,505 +22,226 +GOODWILL +21,734 +23,782 +OTHER ASSETS +1,246 +729 +$ +189,633 +$ +184,245 +LIABILITIES AND STOCKHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +7,148 +$ +4,834 +Deferred revenue +8,043 +1,119 +Deferred income taxes +139 +— +Accrued expenses +11,132 +13,032 +Total current liabilities +26,462 +18,985 +OTHER LIABILITIES +1,234 +677 +DEFERRED INCOME TAXES +3,236 +3,437 +COMMITMENTS AND CONTINGENCIES (Note 11) +STOCKHOLDERS’ EQUITY +Preferred stock, par value $.000001, 25,000 shares authorized, none issued +— +— +Common stock, par value $.000001, 120,000 shares authorized, 56,187 and 55,632 shares issued and outstanding +— +— +Additional paid-in capital +344,894 +338,674 +Accumulated other comprehensive loss +(7,848 +) +(3,797 +) +Accumulated deficit +(178,345 +) +(173,731 +) +Total stockholders’ equity +158,701 +161,146 +$ +189,633 +$ +184,245 +See accompanying notes to the consolidated financial statements. +F-3 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2014 +2013 +2012 +NET REVENUES: +Product +$ +98,894 +$ +98,317 +$ +85,753 +Licensing and product development +7,570 +623 +2,067 +106,464 +98,940 +87,820 +COST OF PRODUCTS SOLD +39,840 +40,351 +32,249 +Gross profit +66,624 +58,589 +55,571 +OPERATING EXPENSES: +Research and development +12,058 +10,932 +12,445 +Sales and marketing +41,118 +46,465 +37,087 +General and administrative +23,750 +21,654 +22,309 +Gain on contract termination settlement +(5,500 +) +(8,300 +) +— +71,426 +70,751 +71,841 +Operating loss +(4,802 +) +(12,162 +) +(16,270 +) +INTEREST EXPENSE +— +— +(172 +) +OTHER INCOME (EXPENSE) +531 +200 +(70 +) +Loss before income taxes +(4,271 +) +(11,962 +) +(16,512 +) +INCOME TAX EXPENSE (BENEFIT) +343 +(772 +) +(1,397 +) +NET LOSS +$ +(4,614 +) +$ +(11,190 +) +$ +(15,115 +) +LOSS PER SHARE: +BASIC +$ +(0.08 +) +$ +(0.20 +) +$ +(0.29 +) +DILUTED +$ +(0.08 +) +$ +(0.20 +) +$ +(0.29 +) +SHARES USED IN COMPUTING LOSS PER SHARE: +BASIC +55,949 +55,555 +51,457 +DILUTED +55,949 +55,555 +51,457 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS +(in thousands) +For the years ended December 31, +2014 +2013 +2012 +NET LOSS +$ +(4,614 +) +$ +(11,190 +) +$ +(15,115 +) +OTHER COMPREHENSIVE INCOME (LOSS) +Currency translation adjustments +(4,051 +) +(3,131 +) +1,298 +Other comprehensive income (loss) +(4,051 +) +(3,131 +) +1,298 +COMPREHENSIVE LOSS +$ +(8,665 +) +$ +(14,321 +) +$ +(13,817 +) +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2014, 2013 and 2012 +(in thousands) +Common Stock +Additional +Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Accumulated +Deficit +Shares +Amount +Total +Balance at January 1, 2012 +47,393 +$ +— +$ +249,640 +$ +(1,964 +) +$ +(147,426 +) +$ +100,250 +Common stock issued upon exercise of options +1,476 +— +10,040 +— +— +10,040 +Vesting of restricted stock +454 +— +— +— +— +— +Issuance of common stock for public equity offering +6,100 +— +70,246 +— +— +70,246 +Purchase and retirement of treasury shares +(142 +) +— +(1,560 +) +— +— +(1,560 +) +Compensation cost for restricted stock +— +— +2,894 +— +— +2,894 +Compensation cost for stock option grants +— +— +2,262 +— +— +2,262 +Net loss +— +— +— +(15,115 +) +(15,115 +) +Currency translation adjustments +— +— +— +1,298 +— +1,298 +Balance at December 31, 2012 +55,281 +— +333,522 +(666 +) +(162,541 +) +170,315 +Common stock issued upon exercise of options +80 +— +409 +— +— +409 +Vesting of restricted stock +395 +— +— +— +— +— +Purchase and retirement of treasury shares +(124 +) +— +(829 +) +— +— +(829 +) +Compensation cost for restricted stock +— +— +2,878 +— +— +2,878 +Compensation cost for stock option grants +— +— +2,694 +— +— +2,694 +Net loss +— +— +— +(11,190 +) +(11,190 +) +Currency translation adjustments +— +— +— +(3,131 +) +— +(3,131 +) +Balance at December 31, 2013 +55,632 +— +338,674 +(3,797 +) +(173,731 +) +161,146 +Common stock issued upon exercise of options +249 +— +1,115 +— +— +1,115 +Vesting of restricted stock +428 +— +— +— +— +— +Purchase and retirement of treasury shares +(122 +) +— +(639 +) +— +— +(639 +) +Compensation cost for restricted stock +— +— +2,663 +— +— +2,663 +Compensation cost for stock option grants +— +— +3,081 +— +— +3,081 +Net loss +— +— +— +— +(4,614 +) +(4,614 +) +Currency translation adjustments +— +— +— +(4,051 +) +— +(4,051 +) +Balance at December 31, 2014 +56,187 +$ +— +$ +344,894 +$ +(7,848 +) +$ +(178,345 +) +$ +158,701 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31 +2014 +2013 +2012 +OPERATING ACTIVITIES: +Net loss +$ +(4,614 +) +$ +(11,190 +) +$ +(15,115 +) +Adjustments to reconcile net loss to net cash provided by (used in) operating activities: +Stock-based compensation +5,744 +5,572 +5,197 +Depreciation and amortization +6,307 +6,552 +7,250 +Unrealized foreign currency (gain) loss +(305 +) +49 +(55 +) +Deferred income taxes +294 +(772 +) +(1,397 +) +Inventory purchase accounting step-up adjustment +— +— +16 +Changes in assets and liabilities +Accounts receivable +(3,381 +) +4,337 +(220 +) +Inventories +(4,401 +) +1,268 +(3,139 +) +Prepaid expenses and other assets +475 +51 +(99 +) +Accounts payable +2,194 +1,510 +(791 +) +Deferred revenue +6,943 +(4,365 +) +4,178 +Accrued expenses and other liabilities +(1,730 +) +5,373 +(1,198 +) +Net cash provided by (used in) operating activities +7,526 +8,385 +(5,373 +) +INVESTING ACTIVITIES: +Purchases of short-term investments +(9,407 +) +— +— +Proceeds from maturities of short-term investments +4,432 +— +— +Purchases of property and equipment +(3,005 +) +(2,462 +) +(2,019 +) +Net cash used in investing activities +(7,980 +) +(2,462 +) +(2,019 +) +FINANCING ACTIVITIES: +Repayments of long-term debt +— +— +(7,292 +) +Proceeds from the issuance of common stock, net of expenses +— +— +70,246 +Proceeds from exercise of stock options +1,115 +409 +10,040 +Repurchase of common stock +(639 +) +(829 +) +(1,560 +) +Net cash provided by (used in) financing activities +476 +(420 +) +71,434 +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +(346 +) +(200 +) +(32 +) +NET INCREASE (DECREASE) IN CASH +(324 +) +5,303 +64,010 +CASH, BEGINNING OF PERIOD +93,191 +87,888 +23,878 +CASH, END OF PERIOD +$ +92,867 +$ +93,191 +$ +87,888 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. +THE COMPANY: +We develop, manufacture, market and sell diagnostic products and specimen collection devices using our proprietary +technologies, as well as other diagnostic products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the +point-of-care, tests that are processed in a laboratory, and a rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter (“OTC”) market. We also manufacture and sell oral fluid collection devices +used to collect, stabilize and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic testing, academic research, pharmacogenomics, personalized medicine, and animal genetics markets. Lastly, we manufacture +and sell medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, +public health organizations, research and academic institutions, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our OTC HIV and cryosurgical products are available at retail pharmacies and mass +merchandisers, and our OTC HIV product is also sold to consumers over the internet. +2. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, +DNA Genotek, Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, +unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of +America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported +amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to contingencies and +accruals, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which +management believes to be reasonable under the circumstances, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity and foreign currency +markets, reductions in government funding, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results +could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +On July 30, 2012, we repaid the balance of our long-term debt so we paid no interest during 2013 and 2014. In 2012, we paid interest of +$199. +F-8 +Table of Contents +In 2014 and 2013, we paid state income taxes of $31 and $27, respectively. In 2012, we paid +foreign and state income taxes of $22. +In 2014, 2013 and 2012, we recorded through the consolidated statements of operations an increase +in our allowance for doubtful accounts of $253, $18 and $115, respectively. +As of December 31, 2014, we had accruals for purchases +of property and equipment of $217. We had no accruals for purchases of property and equipment as of December 31, 2013 or 2012. +Short-Term Investments +We consider all short-term investments to be available-for-sale securities. These securities are comprised of guaranteed investment +certificates with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component +of accumulated other comprehensive loss. +Our available-for-sale securities as of December 31, 2014 consisted of guaranteed +investment certificates with amortized cost and fair value of $5,000. As of December 31, 2013, we had no available-for-sale securities. +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated +allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories +are stated at the lower of cost or market determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on +hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based primarily on the estimated forecast of product sales. When factors indicate that impairment has occurred, either a reserve +is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we +also reserve for unidentified scrap or spoilage under a fixed-formula methodology. +Property and Equipment +Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. +Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture +and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold or otherwise disposed of, the related property amounts are relieved from the accounts, and any gain or +loss is recorded in the consolidated statement of operations. +Intangible Assets +Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights +consist of costs associated with the acquisition of patents, licenses and product distribution rights. The customer list, acquired technology and tradenames were all part of our acquisition of DNAG in August 2011. Intangible assets are amortized +using the straight-line method over their estimated useful lives of one to fifteen years. +F-9 +Table of Contents +Goodwill +Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets +acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted +accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would +not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair values of the applicable +reporting units with their aggregate carrying values, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the test to determine the amount of the impairment loss, +if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit’s goodwill and intangible assets with the respective carrying values. +We performed our annual impairment assessment as of July 31, 2014 utilizing a qualitative evaluation and concluded that it was more +likely than not that the fair value of our DNAG reporting unit is greater than its carrying amount. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not +consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a +triggering event occurs. As of December 31, 2014, we believe no indicators of impairment exist. +Impairment of Long-Lived Assets +We assess the recoverability of the affected long-lived assets, which include property and equipment and intangible assets, by +determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of +such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. +Revenue Recognition +We +recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or +rebates. Other than for our OraQuick ® In-Home HIV test, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising +from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We began selling our +OraQuick ® In-Home HIV test in the third quarter of 2012. From launch through November 2013, our revenue practices with respect to the +OraQuick ® In-Home HIV test were different than those customarily used in the consumer package goods industry. Under U.S. generally accepted accounting principles, product revenue cannot be +recognized unless the amount of future returns can be reasonably estimated. Because our OraQuick ® In-Home HIV test was a new product for which we did not have a historical record of returns, +we did not believe we could reasonably determine a return rate. As a result we initially did not recognize revenue when we shipped to the retail trade. For these product shipments, we invoiced the retailer or distributor, recorded deferred revenue +at the gross invoice sales price, and classified the cost basis of the product held by the retailer or distributor as a component of inventory. We then recognized revenue upon the consummation of a sale to the retail customer either in a store or +over the internet. With the passage of time, however, we concluded that we had sufficient data and visibility into our distribution channel to develop a +F-10 +Table of Contents +reasonable estimate of the level of expected returns. As such, commencing in December 2013, we recognized previously deferred revenue and its related cost of goods sold, and began to recognize +revenue for this product upon shipment to the retailers or distributors. +Our net revenues recorded on sales of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. All of these +allowances are estimates established by management, based upon currently available information, and are adjusted to reflect known changes in the factors that impact those estimates. These allowances are recorded as a reduction of gross revenue when +recognized in our statement of operations. +Royalty income from the grant of license rights is recognized during the period in which the +revenue is earned and the amount is determinable from the licensee. It is recorded as licensing and product development revenue in our statements of operations. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes +assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we +entered into a Master Program Services and Co-Promotion Agreement with AbbVie Bahamas Ltd., a wholly-owned subsidiary of AbbVie Inc. (“AbbVie”), to co-promote our OraQuick ® HCV test +in the United States. The product is used to test individuals at-risk for the hepatitis C virus (“HCV”). We are responsible for manufacturing and selling the product into all markets covered by this agreement. +Pursuant to the Co-Promotion Agreement, we have granted exclusive co-promotion rights for the OraQuick ® HCV test in certain markets to AbbVie and we have agreed to develop, implement, administer and maintain a patient care database for the exclusive use of AbbVie. This patient care database will be +used to compile patient information regarding new individuals who have tested positive for HCV using our OraQuick ® HCV test. We have also jointly agreed with AbbVie to co-promote our OraQuick ® HCV test in certain market segments, namely: healthcare providers such as primary care physicians, gastroenterologists, hepatologists and infectious disease specialists; employers and employee +groups experiencing a high HCV prevalence rate, such as the long-haul trucking industry; and national retail pharmacies and retail clinics that perform routine healthcare screening services. +In exchange for these exclusive rights and other services, we are eligible to receive up to $75,000 in aggregate payments over the term of the +agreement, which runs through December 31, 2019. We plan to recognize the payments ratably on a monthly basis over the life of the agreement. In addition, if certain performance-based milestones are achieved, we will be eligible to receive +additional milestone payments. These payments would be based upon the aggregate number of new patients enrolled in the patient care database, in a given calendar year, after exceeding a baseline threshold, and could range from $3,500 to $55,500 +annually over the life of the agreement. The first performance-based milestone period ends on December 31, 2015. The agreement also contains certain termination, indemnification and other provisions, typical of agreements of this type. Payments +received under this agreement will be recorded as licensing and product development revenue in our statements of operations. +Customer +Sales Returns and Allowances +We do not grant product return rights to our customers for any product, except for our OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick ® In-Home HIV product +revenues in our consolidated statement of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. +As of December 31, 2014 and 2013, the reserve for sales returns and allowances was $437 and $279, respectively. If actual product returns differ materially from our reserve amount, +F-11 +Table of Contents +or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual +level of product returns vary significantly from our estimates, our operating and financial results could be materially affected. +Deferred Revenue +We +record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2014 and 2013 includes customer prepayments of $613 and $1,119, respectively. Deferred revenue as of +December 31, 2014 also includes $7,430 from AbbVie, which represents the $15,000 payment received in July 2014 under the terms of our HCV co-promotion agreement, less amounts recognized ratably in revenue. +Customer and Vendor Concentrations +We had no significant concentrations (greater than 10%) in accounts receivable as of December 31, 2014 and 2013. We had no significant +concentrations (greater than 10%) in revenues for the years ended December 31, 2014, 2013, or 2012. +We currently purchase certain +products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our +products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as +well as our financial condition and results of operations. +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, +facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2014, 2013, and 2012, we incurred $6,910, $17,142, and $6,310, respectively, in +advertising expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock +option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. To satisfy the exercise of options or to issue restricted stock, we issue new shares rather than purchase +shares on the open market. +Income Taxes +We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized +for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, and operating loss and credit carryforwards. +Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit +carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +F-12 +Table of Contents +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after +considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the +net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, +and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are +included in income in the period in which the change occurs. +Loss Per Share +Basic and diluted loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during +the period. Diluted loss per share is generally computed assuming the exercise or vesting of all dilutive securities such as common stock options and unvested restricted stock. Common stock options and unvested restricted stock totaling 6,447, +5,924, and 5,314 shares were outstanding as of December 31, 2014, 2013 and 2012, respectively. As a result of our net losses for the years ended December 31, 2014, 2013 and 2012, these shares were excluded from the respective period’s +computation of diluted loss per share, as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive loss by their nature and disclose the accumulated balance of other comprehensive loss separately from +accumulated deficit and additional paid-in capital in the stockholders’ equity section of our balance sheet. +Our accumulated other +comprehensive loss for 2014, 2013, and 2012 consisted of foreign currency translation adjustments. +We have defined the Canadian dollar as +the functional currency of our Canadian subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. The $(4,051), $(3,131) and $1,298 currency translation adjustments +recorded in 2014, 2013 and 2012, respectively, are largely the result of the translation of our Canadian operation’s financial statements into U.S. dollars. +Fair Value of Financial Instruments +As of December 31, 2014 and 2013, the carrying values of cash, short-term investments, accounts receivable, accounts payable and accrued +expenses approximate their respective fair values based on their short-term nature. +Fair value +measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: +Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +F-13 +Table of Contents +Level 2: +Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: +Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the +plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The +assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 2014 and 2013 was $1,234 and $677, respectively, and was calculated using the quoted market price of the assets as of those +dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying +consolidated balance sheets. +Recent Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with +customers, ASU 2014-09 Revenue from Contracts with Customers . The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in +a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The standard will be effective for the first interim +period within annual reporting periods beginning after December 15, 2016, with no early adoption permitted. We are still evaluating the effects, if any, which adoption of this guidance will have on our consolidated financial statements +3. +INVENTORIES: +December 31, +2014 +2013 +Raw materials +$ +8,539 +$ +6,700 +Work in process +898 +833 +Finished goods +6,326 +3,911 +$ +15,763 +$ +11,444 +4. +PROPERTY AND EQUIPMENT: +December 31, +2014 +2013 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +18,168 +16,977 +Machinery and equipment +20,768 +19,199 +Computer equipment and software +7,238 +6,443 +Furniture and fixtures +1,765 +1,731 +Construction in progress +293 +855 +49,350 +46,323 +Less accumulated depreciation +(31,416 +) +(28,390 +) +$ +17,934 +$ +17,933 +F-14 +Table of Contents +Depreciation expense was $3,123, $3,026, and $3,347 for 2014, 2013, and 2012, respectively. +5. +GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2014 +2013 +Balance as of January 1 +$ +23,782 +$ +25,445 +Decrease related to foreign currency translation +(2,048 +) +(1,663 +) +Balance as of December 31 +$ +21,734 +$ +23,782 +Intangible assets consist of the following: +December 31, 2014 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +10,779 +$ +(3,508 +) +$ +7,271 +Patents and product rights +3-10 +10,449 +(7,957 +) +2,492 +Acquired technology +7 +8,372 +(3,833 +) +4,539 +Tradename +15 +4,132 +(929 +) +3,203 +$ +33,732 +$ +(16,227 +) +$ +17,505 +December 31, 2013 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +11,795 +$ +(2,701 +) +$ +9,094 +Patents and product rights +3-10 +10,449 +(7,466 +) +2,983 +Acquired technology +7 +9,162 +(2,952 +) +6,210 +Tradename +15 +4,521 +(715 +) +3,806 +Non-compete agreements +1-3 +787 +(654 +) +133 +$ +36,714 +$ +(14,488 +) +$ +22,226 +Patents and products rights are made up of the following: +December 31, +2014 +2013 +HIV-related +$ +1,900 +$ +1,900 +HCV-related +4,500 +4,500 +Lateral flow-related +1,500 +1,500 +Cryosurgery-related +2,549 +2,549 +10,449 +10,449 +Less accumulated amortization +(7,957 +) +(7,466 +) +$ +2,492 +$ +2,983 +Amortization expense for 2014, 2013, and 2012 was $3,184, $3,526, and $3,903, respectively. +F-15 +Table of Contents +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as +follows: +2015 +$ +3,016 +2016 +3,016 +2017 +3,016 +2018 +3,012 +2019 +1,826 +Beyond +3,619 +6. +ACCRUED EXPENSES: +December 31, +2014 +2013 +Payroll and related benefits +$ +6,620 +$ +5,827 +Royalties +2,285 +4,374 +Professional fees +480 +749 +Other +1,747 +2,082 +$ +11,132 +$ +13,032 +7. +INCOME TAXES: +Income (loss) before income tax expense (benefit) consists of the following: +Years Ended December 31, +2014 +2013 +2012 +United States +$ +(8,282 +) +$ +(12,833 +) +$ +(13,515 +) +Canada +4,011 +871 +(2,997 +) +$ +(4,271 +) +$ +(11,962 +) +$ +(16,512 +) +The components of the income tax expense (benefit) are as follows: +Years Ended December 31, +2014 +2013 +2012 +Current +Federal +$ +— +$ +— +$ +— +State +— +— +— +Canada +49 +— +— +49 +— +— +Deferred +Federal +(2,248 +) +(4,280 +) +(4,370 +) +State +(827 +) +(323 +) +(272 +) +Canada +294 +(772 +) +(1,397 +) +(2,781 +) +(5,375 +) +(6,039 +) +Increase in valuation allowance +3,075 +4,603 +4,642 +294 +(772 +) +(1,397 +) +Total income tax expense (benefit) +$ +343 +$ +(772 +) +$ +(1,397 +) +F-16 +Table of Contents +For the year ended December 31, 2014, we recorded foreign tax expense of $343. For the years +ended December 31, 2013 and 2012, we recorded foreign tax benefits of $772 and $1,397, respectively, associated with certain Canadian research and development and investment tax credits and DNAG’s loss before income taxes in 2012. The +income tax benefit associated with DNAG was considered realizable based upon the estimated scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG. The deferred tax benefit for the year ended +December 31, 2012 was negatively impacted by a $428 adjustment to DNAG’s deferred tax liability recorded in the second quarter of 2012 to reflect a change in the enacted Canadian provincial tax rates. +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each of the years ended +December 31, 2014, 2013, and 2012 is as follows: +2014 +2013 +2012 +Statutory U.S. federal income tax rate +(34.0 +)% +(34.0 +)% +(34.0 +)% +State income taxes, net of federal benefit +(6.4 +) +(1.6 +) +(1.2 +) +Canadian income taxes +8.0 +(6.5 +) +(8.5 +) +Nondeductible expenses and other +4.0 +(0.4 +) +1.0 +U.S. research and development credits +(0.7 +) +— +(0.3 +) +Change in valuation allowance, federal and state +37.1 +36.0 +34.5 +Effective tax rate +8.0 +% +(6.5 +)% +(8.5 +)% +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and +liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2014 and 2013 are as follows: +2014 +2013 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +28,547 +$ +25,751 +Inventories +1,758 +1,531 +Capitalized research and development costs +4,528 +5,276 +Accruals and reserves currently not deductible +2,528 +2,048 +Acquired intangible assets +(3,978 +) +(5,099 +) +Depreciation and amortization +(485 +) +114 +Stock-based compensation +5,369 +4,704 +Investment tax credit carryforward +597 +1,230 +Research and development tax credit carryforward +1,833 +2,076 +Net deferred tax asset +40,697 +37,631 +Valuation allowance +(44,072 +) +(40,997 +) +Net deferred tax liability +$ +(3,375 +) +$ +(3,366 +) +In assessing the realizability of our net deferred tax asset, we consider all relevant positive and negative +evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of +sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. net deferred tax asset, and management believes the full valuation allowance is still appropriate as of +December 31, 2014 and 2013 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal or state income tax benefit was recorded for the years ended December 31, 2014, 2013, or 2012. +F-17 +Table of Contents +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2018 - 2019 +$ +16,377 +2020 - 2024 +16,398 +2025 - 2031 +14,476 +2032 - 2034 +33,416 +$ +80,667 +The Tax Reform Act of 1986 contains provisions that limit the annual amount of NOLs available to be used in +any given year in the event of a significant change in ownership. On September 29, 2000, two separate companies, STC Technologies, Inc. and Epitope, Inc., merged to form OraSure. A significant change in ownership, as defined by Section 382 +of the Internal Revenue Code, occurred in connection with this merger. As such, the utilization of NOLs generated prior to September 29, 2000 is limited to approximately $13,700 per year. We do not believe that this limitation will have a +material adverse impact on the utilization of our Federal NOL carryforwards in future years. +As of December 31, 2014, our gross +unrecognized tax benefits totaled $2,073 and based upon the valuation allowance for our U.S. operations, the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax +benefits as a component of income tax expense. Interest and penalties were immaterial in 2014, 2013 and 2012. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, +as well as by several state jurisdictions for the years ended December 31, 2001 through 2014. +A reconciliation of the beginning and +ending amount of unrecognized tax benefits is as follows: +2014 +2013 +2012 +Balance as of January 1 +$ +2,051 +$ +2,011 +$ +2,015 +Additions for tax positions of prior periods +25 +40 +67 +Reductions for tax positions of prior periods +(3 +) +— +(71 +) +Balance as of December 31 +$ +2,073 +$ +2,051 +$ +2,011 +8. +STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended and restated (the “Stock Plan”). The +Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock +appreciation rights, restricted awards, performance awards and other stock-based awards. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite +service period of the award. To satisfy the exercise of options or to issue restricted stock, we issue new shares rather than purchase shares on the open market. +Under the terms of the Stock Plan, nonqualified options may be granted to eligible employees, including our officers at a price not less than +75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally +have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years, with one quarter of the options vesting one year after grant and the remainder +vesting on a monthly basis over the next three years. +F-18 +Table of Contents +As of December 31, 2014, 4,770 shares were available for future grants under the Stock Plan. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the +following weighted-average assumptions: +Years Ended December 31, +2014 +2013 +2012 +Black-Scholes Option Valuation Assumptions +Risk-free interest rate (1) +2.13 +% +1.47 +% +0.99 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +50 +% +51 +% +52 +% +Expected life of stock options (in years) (2) +7 +7 +6 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options +granted during the years ended December 31, 2014, 2013 and 2012 was $3.03, $3.58 and $5.38, respectively. +Compensation expense +recognized in the financial statements related to stock options was as follows: +Years Ended December 31, +2014 +2013 +2012 +Total compensation cost during the year +$ +3,081 +$ +2,694 +$ +2,262 +Amounts capitalized into inventory during the year +(148 +) +(128 +) +(90 +) +Amounts recognized in cost of products sold for amounts previously capitalized +128 +99 +58 +Amounts charged against income +$ +3,061 +$ +2,665 +$ +2,230 +The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013, and +2012 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $901, $125, and $6,961, respectively. +F-19 +Table of Contents +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value +Outstanding on January 1, 2012 +5,416 +$ +6.89 +Granted +783 +11.18 +Exercised +(1,476 +) +6.80 +Expired +(12 +) +6.07 +Forfeited +(67 +) +7.49 +Outstanding on December 31, 2012 +4,644 +7.64 +Granted +984 +6.94 +Exercised +(80 +) +5.07 +Expired +(82 +) +7.59 +Forfeited +(195 +) +7.87 +Outstanding on December 31, 2013 +5,271 +7.54 +Granted +1,202 +5.77 +Exercised +(249 +) +5.09 +Expired +(388 +) +8.38 +Forfeited +(96 +) +7.43 +Outstanding on December 31, 2014 +5,740 +$ +7.22 +6.3 +$ +18,084 +Vested or expected to vest as of December 31, 2014 +5,679 +$ +7.23 +6.3 +$ +17,826 +Exercisable on December 31, 2014 +3,844 +$ +7.52 +5.2 +$ +11,028 +As of December 31, 2014, there was $5,412 of unrecognized compensation expense related to unvested option +awards that is expected to be recognized over a weighted-average period of 2.6 years. +Net cash proceeds from the exercise of stock +options were $1,115, $409 and $10,040 for the years ended December 31, 2014, 2013, and 2012, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for +these periods. +The following table summarizes information about stock options outstanding as of December 31, 2014: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$2.55 - $5.19 +726 +7.8 +$ +4.49 +726 +$ +4.49 +$5.60 +92 +0.1 +5.60 +92 +5.60 +$5.71 +1,136 +9.1 +5.71 +— +— +$5.72 - $6.37 +217 +7.2 +5.96 +146 +5.96 +$6.63 +670 +5.9 +6.63 +643 +6.63 +$6.67 - $6.99 +29 +9.0 +6.93 +1 +6.67 +$7.05 +758 +8.0 +7.05 +355 +7.05 +$7.33 - $8.28 +847 +3.4 +8.02 +804 +8.05 +$8.33 - $10.89 +597 +1.5 +9.35 +593 +9.34 +$10.99 - $12.14 +668 +6.9 +11.29 +484 +11.29 +5,740 +6.3 +$ +7.22 +3,844 +$ +7.52 +The Stock Plan also permits us to grant restricted shares of our common stock to eligible employees, including +officers, and our outside directors. Generally, these shares are nontransferable until vested and are +F-20 +Table of Contents +subject to vesting requirements and/or forfeiture, as determined by the Compensation Committee of our Board of Directors. The market value of these shares at the date of grant is recognized on a +straight-line basis over the period during which the restrictions lapse. Compensation cost of $2,663, $2,878 and $2,894 related to restricted shares was recognized during the years ended December 31, 2014, 2013, and 2012, respectively. +The following table summarizes restricted stock award activity under the Stock Plan: +Shares +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2012 +879 +$ +5.91 +Granted +259 +11.31 +Vested +(454 +) +5.56 +Forfeited +(14 +) +7.77 +Issued and unvested, December 31, 2012 +670 +8.19 +Granted +438 +6.30 +Vested +(395 +) +7.81 +Forfeited +(60 +) +8.27 +Issued and unvested, December 31, 2013 +653 +7.15 +Granted +506 +5.82 +Vested +(428 +) +6.65 +Forfeited +(24 +) +7.38 +Issued and unvested, December 31, 2014 +707 +$ +6.50 +Issued and expected to vest, December 31, 2014 +707 +$ +6.50 +As of December 31, 2014, there was $2,505 of unrecognized compensation expense related to unvested +restricted stock awards that is expected to be recognized over a weighted average period of 1.7 years. +In connection with the vesting of +restricted shares and exercise of stock options during the years ended December 31, 2014, 2013 and 2012, we purchased and immediately retired 122, 124 and 142 shares with aggregate values of $639, $829 and $1,560, respectively, in satisfaction +of minimum tax withholding and exercise obligations. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 +of our outstanding common shares. No shares were purchased and retired in 2014, 2013 or 2012. +Public Equity Offering +On July 11, 2012, we completed a public offering of 6,100 common shares, at a price of $12.30 per share, raising $75,030 before expenses +of the offering. In connection with the offering, we paid $4,502 in underwriting discounts and commissions and incurred $282 in additional offering expenses. +9. +TERMINATION SETTLEMENT: +On November 21, 2013, we terminated our assay collaboration agreement with Roche Diagnostics (“Roche”). Pursuant to this +termination agreement, Roche paid us $8,300 which was recorded as a reduction of operating expense on our consolidated statement of operations for the quarter ended December 31, 2013. Roche agreed to provide certain transitional product support +services to us and to supply certain of the assays developed under the collaboration on a transitional basis for up to five years following the termination. We had the right to stop the supply of assays prior to the end of this five-year period and +to receive an additional payment from Roche of up to $5.5 million depending on how early in that five-year period the supply obligation was ended. During the second quarter of 2014, we issued our +F-21 +Table of Contents +final purchase order for fully-automated assays previously developed under the terminated collaboration and as such, have recorded $5,500 as a reduction of operating expense in our consolidated +statement of operations. +10. +BUSINESS SEGMENT INFORMATION: +We operate our business within two reportable segments: our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices and medical devices; and our molecular collection systems or “DNAG” business, which consists primarily of the manufacture, development and sale of oral fluid +collection devices that are used to collect, stabilize and store samples of genetic material for molecular testing. OSUR revenues are derived primarily from products sold in the United States and internationally to various clinical laboratories, +hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Revenues from OSUR’s OTC products primarily result from sales +to retail pharmacies and mass merchandisers and to consumers over the internet. OSUR also derives revenues from licensing and product development activities. DNAG revenues result primarily from products sold into the commercial market which consists +of companies and other entities engaged in consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, and animal and livestock genetic testing. DNAG products are also sold into the academic research market, which consists +of research laboratories, universities and hospitals. +We organized our operating segments according to the nature of the products +included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating +income (loss). We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues. +The following table summarizes segment information for the years ended December 31, 2014, 2013, and 2012: +Years Ended December 31, +2014 +2013 +2012 +Net revenues: +OSUR +$ +82,686 +$ +78,559 +$ +73,562 +DNAG +23,778 +20,381 +14,258 +Total +$ +106,464 +$ +98,940 +$ +87,820 +Operating income (loss): +OSUR +$ +(8,324 +) +$ +(12,849 +) +$ +(13,395 +) +DNAG +3,522 +687 +(2,875 +) +Total +$ +(4,802 +) +$ +(12,162 +) +$ +(16,270 +) +Depreciation and amortization: +OSUR +$ +3,254 +$ +3,225 +$ +3,530 +DNAG +3,053 +3,327 +3,720 +Total +$ +6,307 +$ +6,552 +$ +7,250 +Capital expenditures: +OSUR +$ +2,170 +$ +1,687 +$ +1,794 +DNAG +835 +775 +225 +Total +$ +3,005 +$ +2,462 +$ +2,019 +December 31, +2014 +2013 +Total assets: +OSUR +$ +136,542 +$ +130,848 +DNAG +53,091 +53,397 +Total +$ +189,633 +$ +184,245 +F-22 +Table of Contents +Our products are sold principally in the United States and Europe. +The following table represents total net revenues by geographic area, based on the location of the customer: +Years Ended December 31, +2014 +2013 +2012 +United States +$ +82,256 +$ +77,194 +$ +67,460 +Europe +13,913 +11,081 +10,131 +Other regions +10,295 +10,665 +10,229 +$ +106,464 +$ +98,940 +$ +87,820 +The following table represents total long-lived assets by geographic area: +December 31, +2014 +2013 +United States +$ +16,570 +$ +16,925 +Canada +1,353 +975 +Other regions +11 +33 +$ +17,934 +$ +17,933 +11. +COMMITMENTS AND CONTINGENCIES: +Sublicense Agreement +In June 2004, we entered into a sublicense agreement with a third party, pursuant to which we have been granted a limited, worldwide, +non-exclusive sublicense to certain HIV-2 patents held by such party. Under the terms of this sublicense agreement, we are obligated to pay royalties based on a percentage of our net sales of certain products, which incorporate the technology +covered by the licensed patents. Royalties are expensed as an element of cost of goods sold. Future minimum payments under this agreement are as follows: +2015 +$ +500 +2016 +500 +2017 +500 +2018 +292 +$ +1,792 +Royalties from our commercial sale of products covered by the sublicense can be credited against these minimum +royalty obligations. +Leases +We lease office space for our Canadian subsidiary and domestic warehouse facilities under operating lease agreements. Future payments required +under these non-cancelable leases are as follows: +2015 +$ +380 +2016 +6 +$ +386 +Rent expense for 2014, 2013 and 2012 was $648, $600, and $510, respectively. +F-23 +Table of Contents +Purchase Commitments +As of December 31, 2014, we had outstanding non-cancelable purchase commitments in the amount of $8,729 related to inventory, capital +expenditures, and other goods or services. +Employment Agreements +Under terms of employment agreements with certain executive officers, which extend through 2016, we are required to pay each individual a base +salary for continuing employment with us. The agreements require payments totaling $2,324 and $1,097 in 2015 and 2016, respectively. +Litigation +From +time-to-time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions are not expected to have, either individually or in the aggregate, a material adverse +effect on our future financial position or results of operations. +12. +RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the +“401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) +Plan also provides for us to match employee contributions up to $4 per year. We contributed to the 401(k) Plan, net of forfeitures, $565, $553, and $592 in 2014, 2013, and 2012, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible highly compensated employees of the +Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase +OraSure stock as an investment vehicle. As of December 31, 2014 and 2013, the value of the assets associated with this plan was $1,234 and $677, respectively, and is included in other assets in our consolidated balance sheet. Our obligation +related to the deferred compensation plan is included in other liabilities in our consolidated balance sheet. As of December 31, 2014 and 2013, our total obligation under this plan was $1,234 and $677, respectively. +Effective January 2, 2012, all regular full-time employees of DNAG are eligible to participate in the DNA Genotek Registered Retirement +Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match +employee contributions up to $2 per year. We contributed to the RRSP $136, $126, and $113 in 2014, 2013, and 2012, respectively. +F-24 +Table of Contents +13 . +QUARTERLY DATA (Unaudited): +The following tables summarize the quarterly results of operations for each of the quarters in 2014 and 2013. These +quarterly results are unaudited, but in the opinion of management, have been prepared on the same basis as our audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair +presentation of the information set forth herein. +2014 Results +Three months ended +March 31, +2014 +June 30, +2014 +September 30, +2014 +December 31, +2014 +Net revenues +$ +23,537 +$ +26,401 +$ +27,845 +$ +28,681 +Costs and expenses +29,155 +23,904 +(1) +26,963 +31,244 +Operating income (loss) +(5,618 +) +2,497 +882 +(2,563 +) +Other income (expense), net +118 +(142 +) +268 +287 +Income (loss) before income taxes +(5,500 +) +2,355 +1,150 +(2,276 +) +Income tax expense (benefit) +131 +(174 +) +10 +376 +Net income (loss) +$ +(5,631 +) +$ +2,529 +$ +1,140 +$ +(2,652 +) +Earnings (loss) per share +Basic +$ +(0.10 +) +$ +0.05 +$ +0.02 +$ +(0.05 +) +Diluted +$ +(0.10 +) +$ +0.04 +$ +0.02 +$ +(0.05 +) +(1) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay collaboration with Roche Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +2013 Results +Three months ended +March 31, +2013 +June 30, +2013 +September 30, +2013 +December 31, +2013 +Net revenues +$ +21,164 +$ +24,337 +$ +24,671 +$ +28,768 +(2) +Costs and expenses +31,753 +29,913 +26,731 +22,705 +(3) +Operating income (loss) +(10,589 +) +(5,576 +) +(2,060 +) +6,063 +Other income (expense), net +(47 +) +42 +41 +164 +Income (loss) before income taxes +(10,636 +) +(5,534 +) +(2,019 +) +6,227 +Income tax expense (benefit) +(410 +) +(249 +) +(127 +) +14 +Net income (loss) +$ +(10,226 +) +$ +(5,285 +) +$ +(1,892 +) +$ +6,213 +Earnings (loss) per share +Basic +$ +(0.18 +) +$ +(0.10 +) +$ +(0.03 +) +$ +0.11 +Diluted +$ +(0.18 +) +$ +(0.10 +) +$ +(0.03 +) +$ +0.11 +(2) +Includes a non-recurring net favorable $2.5 million adjustment to account for a change in the Company’s revenue recognition policy related to its OraQuick ® +In-Home HIV tests. +(3) +Includes an $8.3 million gain from the termination of the Company’s oral fluid assay collaboration with Roche Diagnostics, which was recorded as a reduction of operating expenses in the current period. +F-25 +Table of Contents +INDEX TO EXHIBITS +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., amended and restated as of August 18, 2008, are incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed August 22, 2008. +10.1 +Form of Indemnification Agreement (and list of parties to such agreement) is incorporated by reference to Exhibit 10.1 to Amendment No. 3 to the Company’s Registration Statement on Form +S-4 (No. 333-39210), filed August 30, 2000.* +10.2 +Employment Agreement, dated as of June 22, 2004, between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June +30, 2004.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 19, +2008.* +10.4 +Amendment No. 2 to Employment Agreement, dated as of December 15, 2010, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended +December 31, 2010.* +10.5 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Ronald H. Spair, is incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, +2004.* +10.6 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 19, +2008.* +10.7 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended +December 31, 2010.* +10.8 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form +10-Q for the quarter ended June 30, 2004.* +10.9 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, +2008.* +10.10 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended +December 31, 2010.* +10.11 +Employment Agreement, dated as of October 2, 2006, between Mark L. Kuna and OraSure Technologies, Inc., is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 5, +2006.* +10.12 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed December 19, +2008.* +Table of Contents +Exhibit +Number +Exhibit +10.13 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended +December 31, 2010.* +10.14 +Employment Agreement, dated as of January 3, 2011, between the Company and Anthony Zezzo II is incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, +2010.* +10.15 +Description of Non-Employee Director Compensation Policy, as amended as of November 14, 2011, is incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, +2011.* +10.16 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.17 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K +for the year ended December 31, 2000.* +10.18 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective as of February 12, 2013 is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, +2012.* +10.19 +Amendment No. 1 to the OraSure Technologies, Inc. Stock Award Plan, effective May 22, 2014 is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, +2014.* +10.20 +Form of Restricted Share Grant Agreement (Executive Officers) is incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.21 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.22 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.23 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.24 +Description of the OraSure Technologies, Inc. 2014 Management Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed May 15, 2014.* +10.25 +Description of Long-Term Incentive Plan, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed April 16, 2013.* +10.26 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.27 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.28 +Settlement and Restated Supply Agreement, dated as of November 18, 2013, between F. Hoffman-La Roche Ltd., Roche Diagnostics GmbH, Roche Diagnostics Operations, Inc. and OraSure Technologies, Inc. is incorporated by reference to +Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +Table of Contents +Exhibit +Number +Exhibit +10.29 +Master Program Services and Co-Promotion Agreement, dated as of June 10, 2014, between OraSure Technologies, Inc. and AbbVie Bahamas Ltd,. is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form +10-Q for the quarter ended June 30, 2014.† +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Douglas A. Michels required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 +Certification of Ronald H. Spair required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 +Certification of Douglas A. Michels required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. +32.2 +Certification of Ronald H. Spair required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase document +* +Management contract or compensatory plan or arrangement. +† +Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with and approved by the SEC. \ No newline at end of file diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/filing_metadata.csv b/raw/filings/0001116463/2014/0001193125-15-089338/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..6b71fd38193d388ae9fe549b02ecaabb7ae54a5c --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2015-03-12,2014-12-31,2015-03-12T20:38:00.000Z,0001193125-15-089338,d846888d10k.htm,10-K,7577127,1,0,https://www.sec.gov/Archives/edgar/data/1116463/000119312515089338/d846888d10k.htm,https://www.sec.gov/Archives/edgar/data/1116463/000119312515089338/,2014,2014,1 diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/item1.txt b/raw/filings/0001116463/2014/0001193125-15-089338/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e3b811d9e4b1f79bc0ecb12653ed60a68d2a1942 --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/item1.txt @@ -0,0 +1,773 @@ +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and sale of oral +fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. We also +manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. +These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, +and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the U.S. Food and Drug +Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale in the +over-the-counter (“OTC”) or consumer retail market in the United States. We also sell OTC cryosurgical products to consumers in North America, Europe, Central and South America, and Australia. +In vitro diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific +substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity +comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space. +Through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell kits that are used to collect, +stabilize, transport and store samples of genetic material for molecular testing in the consumer genetics, clinical genetic testing, academic research, pharmacogenomics, personalized medicine, and animal genetics markets. Our OraGene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We serve customers in many countries worldwide, +including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two +companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on +September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website +our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and filings. These +Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be incorporated by +reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +OraQuick ® HIV-1/2 +A rapid, point-of-care +qualitative test for +antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, +finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraQuick ® In-Home +HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and continine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and +cotinine. +Marketed +Oragene ® — DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® — DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® — RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ™ +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) clearance pending. +CE marked and registered as Class 1 Medical Device in the U.S. and Canada. +Registered in various other countries. +Marketed +OMNIgene ™ — DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene — +LIVESTOCK and +Oragene ® — ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of livestock DNA from nasal samples. +Animal research use only. +Marketed +HEMAgene ™ — BUFFY COAT +Reagent for stabilizing DNA from Buffy Coat (blood) for ambient temperate transport and/or storage. +Research use only product. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +PrepIT ™ — MAX +Reagent for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +OMNIgene ™ — Gut +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples +Research use only product. +Marketed +OMNIgene ™ — Sputum +Reagent for liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples +Research use only product. +Not Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +CE marked and registered in certain countries. +Marketed +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or +marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays—FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ™ +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA +Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ™ device to detect PCP, +opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Cryosurgical Systems—Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® tradename +primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems—OTC +Cryosurgical system for the removal of common and plantar warts, sold in various OTC markets. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names. +CE marked for skin tags. +Marketed +Marketed +Marketed +Not Marketed +In addition to the above products, we also sell certain immunoassay tests and reagents for insurance risk assessment, +substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., +both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a +pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is +inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain +other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral +fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately +complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform +moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have +obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is +registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. +7 +Table of Contents +We believe that the OraQuick ® device, because it is +approved for detecting antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid and plasma samples, provides a significant competitive advantage in the market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market and we have applied for CE mark authorization for this product. The In-Home test is performed in the same +manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year +customer call center to provide additional information and referral support for consumers. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making +it the first rapid and only HCV test approved by the FDA for use in the United States. We have also received a CLIA waiver for use of this product in the same specimen types. The OraQuick ® HCV +test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe and other foreign countries. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid qualitative test for the +detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added +and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation and is currently sold in certain U.S. markets. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests +for HIV-1 antibodies and other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a +serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies and is a +Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the +OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +8 +Table of Contents +A trained health care professional then conveys test results and provides appropriate counseling to the +individual who was tested. +We believe that oral fluid testing has several significant advantages over blood -based systems for infectious disease +testing, for both health care professionals and the individuals being tested. These advantages include eliminating the risk of needle-stick accidents, providing a non-invasive collection technique, requiring minimal training to administer, providing +rapid and efficient collection in almost any setting, and reducing the cost of administration by a trained health care professional. +Molecular +Collection Systems +Our wholly-owned subsidiary, DNAG, sells a number of products that provide all-in-one systems for the collection, stabilization, +transportation, and storage of DNA and/or RNA from human and animal biologic samples. DNAG’s lead product is sold under the Oragene ® name and is used to collect DNA from human saliva. +DNAG products are currently sold to thousands of academic and research customers in many countries worldwide. +DNAG products are available in several +different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection +of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is closed, the +reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended +periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly +in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient +temperatures and compatibility with fully-automated laboratory testing systems. +DNAG products historically have been sold primarily as Class I medical +devices for use by research and academic institutions. DNAG has received FDA 510(k) clearance for the Oragene ® — Dx product which enables the +Oragene ® — Dx product to be used with other FDA-cleared or exempt molecular diagnostic applications. A separate 510(k) clearance permits +self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular tests. An application for 510(k) clearance of DNAG’s ORAcollect ™ product is +currently pending with the FDA. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold by us under the name +Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® +collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, +amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the +Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other +drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for +specially- +9 +Table of Contents +prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate +scheduling costs and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection +device, which we are marketing under the tradename “Intercept i2 ™ ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by +current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ™ device is currently being sold as a +forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo +Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid nitrogen and other +methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, these gases are +delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating localized destruction +of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin lesions, and this product has +been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. In 2014, we began supplying this product on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS tradename, in Mexico and a +number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the +Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of +warts in the U.S. and for the treatment of both warts and skin tags in Canada. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the +specific needs of our customers. During 2014, we also began selling fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The result of the test +is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available laboratory +instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety +of third parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced +quickly, allowing for high-throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a +result, we may eventually stop selling our AUTO-LYTE ® tests. +10 +Table of Contents +We entered into the agreement with Thermo Fisher in 2013 after terminating a similar agreement with Roche +Diagnostics. Under our new agreement, Thermo Fisher has agreed to develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ™ device. +Under the first phase of this agreement, we are selling a NIDA-5 panel of assays supplied by Thermo Fisher. The parties expect to complete development of several additional assays and obtain FDA 510(k) clearance of the Intercept i2 ™ device for use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept +i2 ™ collector and Thermo Fisher assays into Europe and other foreign countries. +The assays from +Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to be issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that +follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe the offering of an Intercept i2 ™ device with a full menu of fully-automated high-throughput +oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral +fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the original specimen collected with the OraSure ® oral fluid collection device +to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +Q.E.D. ® Saliva +Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick +that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and +instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Infectious Disease +Testing +In 2014, we began efforts to develop and commercialize a rapid, point-of-care antigen test for the Ebola virus, using our OraQuick ® technology platform. We have achieved significant development and clinical milestones for this product and we are close to finalizing the design of a prototype device. Subject to receipt of +external funding as described below, we expect to place this test into more extensive field testing in Africa in the near future. +Despite the good +progress we have made on the development front, whether this product will ultimately contribute to our business depends on several factors. First, we are seeking funding for our development efforts from a variety of Federal agencies. The costs to +complete development and obtain the applicable regulatory approvals for this product are significant. Second, as we complete our clinical development and prepare for field testing, we are also in discussions with various government agencies +regarding product procurement. Our goal is to obtain substantial and sustainable product purchase commitments, along with the external development funding. Third, assuming the field testing of this product is successful we plan to seek an Emergency +Use Authorization from the FDA and other longer-term regulatory approvals from the FDA and other regulatory bodies as required to commercialize this product. +11 +Table of Contents +Although we have made progress in our development efforts and we have received some positive feedback on funding +from several agencies, it is difficult to predict whether we will be successful in completing our product development, obtaining the required regulatory approvals or achieving our funding goals. If we are unable to reach one or more of these +objectives, we will likely discontinue our work on this project. +Molecular Collection Systems +The following new product initiatives are underway at DNAG: +• +HEMAgene ™ — BUFFY COAT is a reagent for stabilizing buffy coat, a derivative of whole blood, for ambient +temperature transport and storage. An initial version of this product is being marketed to academic researchers that use buffy coat for DNA or RNA analysis. +• +PrepIT ™ MAX for tuberculosis (“TB”) is a reagent for extraction of DNA from TB bacteria. This product is being offered for early-stage testing by TB +researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +• +OMNIgene ™ — SPUTUM is a reagent for the liquefying, decontaminating, transporting and preserving of TB bacteria +in sputum samples. OMNIgene ™ — SPUTUM is expected to improve laboratory and operational workflows, compared to current approaches, and +improve overall test results. This product is being offered to TB laboratories for evaluation. +• +OMNIgene ™ — GUT is a system for the collection, stabilization, transportation and storage of microbial DNA in +stool samples. This product is being offered to academic researchers for early-stage testing in gut microbiome studies. +These products +represent potential, long-term market opportunities that we are still developing or are in the early stages of commercializing. Much of our activities for these products are currently centered around ensuring that early versions are being provided +to key opinion leaders or early adopters in the relevant markets. We expect these products will enable researchers and other customers to improve their results through better and lower cost sample collection, stabilization and preservation. +Research and Development +In 2014, our research +and development activities focused primarily on development of our next generation Intercept i2 ™ collection device, assessing initial feasibility of a new rapid point-of-care Ebola test using +our OraQuick ® platform, and clinical and technical support for our existing products. From time to time, we have contracted with third parties to conduct research and development activities +and we may do so in the future. +Research and development expenses were $12.1 million in 2014, $10.9 million in 2013 and $12.4 million in 2012. These +expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our +marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order +to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to +customers in the United States were $82.3 million, $77.2 million and $67.5 million in 2014, 2013 and 2012, respectively. Consolidated net revenues attributable to international customers amounted to $24.2 million, $21.7 million and $20.3 million, or +23%, 22% and 23% of our total revenues, in 2014, 2013 and 2012, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our consolidated financial statements +included elsewhere in this Annual Report. +12 +Table of Contents +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to customers in the public +health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the +military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV testing. We also +sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by pharmacies. We have +engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we distribute our OraQuick ® HIV test in Europe and +certain other foreign countries. +We market the OraSure ® oral fluid collection device for HIV-1 +testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged +OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the +international public health market. +Our OraQuick ® HCV test is sold primarily to the same markets +where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in Europe and other countries through +distributors. Under an agreement with AbbVie, we are co-promoting our OraQuick ® HCV test in certain U.S. markets, including general practitioners and certain specialty physicians, the +professional trucking industry and retail pharmacies and clinics. Under this arrangement, AbbVie has agreed to detail our OraQuick ® HCV test in the physician markets and we pay AbbVie a fee +for these detailing services. In addition, we have implemented a broad-based program for training physicians on our OraQuick ® HCV test and we have developed and implemented a patient care +database and limited co-payment reimbursement program under this agreement. +We have distribution rights to an FDA 510(k) cleared rapid flu A&B test, +which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. hospital and +public health markets. +Infectious Disease Testing—OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the +product include CVS, Walgreens, Rite Aid, Wal-Mart and Kroger. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of +young, sexually active adults, with greater purchase intent found in high-risk sub groups, such as men who have sex with men, African Americans and Latino Americans. In 2014, we changed our promotional strategy by implementing a more cost-effective +promotional approach focused on retail outlets and moved away from more expensive broad-based consumer advertising. +To support individuals that purchase +and use our test, we have established a toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about +HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +Molecular Collection Systems +DNAG primarily sells its +products directly to its customers, primarily through its own internal sales force. In some countries distributors are used, particularly in the Asia-Pacific region. Over half of DNAG’s employees work in the areas of sales, marketing, business +development or product management. The significant majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in +identifying and evaluating new market and business opportunities. +13 +Table of Contents +Historically, most of DNAG’s revenues have been derived from product sales into the academic and research +markets. However, sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and now account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from +repeat customers, in both markets. DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. A molecular collection product focused on the infectious disease research +market is also sold by DNAG. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation +markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and +internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid +laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products +consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service +programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ™ collection device with a +NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug +treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 ™ device for use with the NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays +in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept i2 ™ +device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United +States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety +sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal +Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have also engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . In 2014, we began selling a private label version of our professional Histofreezer ® product for resale by one of our U.S. distributors. +Internationally, we sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +14 +Table of Contents +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand +through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. For several +years, we have sold OTC cryosurgical products for the removal of both warts and skin tags under private label arrangements with retailers in Canada. In 2014, we began selling a private label version of our OTC product to a large U.S. retailer. +Insurance Risk Assessment +We currently market the +OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: +HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk +assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot +confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. In general, many +(but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers using the device +for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used +OraSure ® to replace some of their blood and urine-based testing. More recently, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer +required and instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several +different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The OraQuick ® rapid HIV testing +products, the cryosurgical systems products, and our OraGene ® product line accounted for total revenues of $38.9 million, $15.5 million and $23.8 million, respectively, in 2014, $44.8 million, +$14.5 million and $20.4 million, respectively, in 2013 and $37.9 million, $14.9 million and $14.3 million, respectively in 2012. +We had no individual +customers who accounted for more than 10% of our total revenues in 2014, 2013 or 2012. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, manufacture and sale of +diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices +that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues consist primarily of product sold into +the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. OSUR also derives revenues +15 +Table of Contents +from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG revenues consist of +product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine and animal genetics markets. For more information about our revenues from external customers, income and total assets, +please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the consolidated financial statements, +included elsewhere in this Annual Report. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, +OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraSure ® Intercept ® and Intercept i2 ™ collection devices, Western blot HIV-1 confirmatory test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device, in +order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual +period. We believe that other firms would be able to manufacture the OraQuick ® test on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable +or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in +the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 +confirmatory test only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. +However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our +costs and disrupt our ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly +specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to +sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug +assays sold with our new Intercept i2 ™ collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product sold in the U.S. is assembled by U.S. vendors and the Histofreezer ® product sold internationally was previously assembled in the Netherlands by Koninklijke, Utermöhlen, N.V. (“Utermöhlen”), the company from which we acquired the product line +in 1998. The supply agreement with Utermöhlen has expired and we have successfully transferred our supply arrangement for international versions of this product to a vendor located in Germany. The cryosurgical wart removal products distributed +in OTC markets are assembled by vendors located in the United States. We believe that additional suppliers of all of our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event +that our current suppliers would be unable or unwilling to continue manufacturing these products. +16 +Table of Contents +DNAG has engaged two contract manufacturers to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2014, we had 320 full-time employees (including 89 employees at our subsidiary, DNAG). Of this total, there were 110 in +sales, marketing and client services; 31 in research and development; 130 in operations, manufacturing, quality control, information systems, purchasing and shipping; 18 in quality assurance and regulatory affairs; and 31 in administration and +finance. This compares to 293 employees as of December 31, 2013. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic industry is a +multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources. +Important competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is +based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests +and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test +industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the +development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, +automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new +testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more +effective than those we develop +17 +Table of Contents +or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the +number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and +Intercept i2 ™ devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV +testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA waiver for a rapid +oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in +the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors in the domestic infectious disease testing +market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can +result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the +U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. +Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in +international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other +international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test +approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third +parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes +against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the +Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of +lower price competitive devices can result in lost sales and degradation in pricing and profit margin. +In the substance abuse testing market, our +Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to +intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the United States. +These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® drug test +system (including our MICRO-PLATE assays) and are expected to compete against our new Intercept i2 ™ collection device and related fully-automated high-throughput oral fluid assays. +18 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the +forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on radioimmunoassay test methods to +provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run on automated equipment, are not +radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and heterogeneous tests manufactured by many +companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially during the past +several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically paid for our products. Many of our customers no longer +purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced +tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially lower in quality and provide fewer benefits than our +Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including +family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. Our OTC cryosurgical products compete against +other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our +research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product +introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents +generally have a maximum term of 20 years from the date an application is filed. +We have eight United States patents and numerous foreign patents for the +OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to +test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from November 2015 to December 2026. We have also applied for additional patents, +in both the United States and certain foreign countries, on such products and technology. +We have five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending in the United States and internationally. Four of the U.S. patents expire from March to +July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held by other parties. We also have obtained a license to certain HCV patents which we use to manufacture and sell +a rapid HCV test on the OraQuick ® technology +19 +Table of Contents +platform. We obtained these licenses through the payment of certain upfront fees and an agreement to pay ongoing royalties. We believe these fees and royalties are comparable to those generally +paid by other companies under similar arrangements. +We may need to obtain licenses or other rights under, or enter into distribution or other business +arrangements in connection with, certain other intellectual property patents in order to manufacture and sell the OraQuick ADVANCE ® HIV test or other tests that use the same or similar +technology platform. See Section 1A, entitled “Risk Factors,” for a further discussion of these issues. +We hold, through our subsidiary, +DNAG, eleven United States patents and numerous foreign patents issued for compositions, methods and apparatus for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and +tissues. These patents expire from July 2019 through February 2034. +We have two United States patent and numerous foreign patents issued for apparatuses +and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire +from September 2025 to December 2030. We have also licensed another patent relating to apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or +consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to +third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of +services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as +currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ™ , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ™ , OMNIgene ™ , PrepIT ™ , HEMAgene ™ , and AUTO-LYTE ® trademarks. We also own many of these marks and +others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South +America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection +does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture +or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after +its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the +secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, +along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product testing, authorizations to +market, labeling, promotion, +20 +Table of Contents +manufacturing and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale +of our products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of action by the FDA before they can be marketed in the United States. After approval or clearance by the +FDA, we must continue to comply with other FDA requirements applicable to marketed products. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our +ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated +in the United States as medical devices. +There are two mechanisms by which regulated medical devices can be placed on the market in the United States. +Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must provide a premarket notification that it intends to begin marketing the +product, and show that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety +and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding substantial equivalence. An applicant must submit a 510(k) application at +least 90 days before marketing of the affected product commences. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed device or because it +is required by statute and the FDA’s regulations to have an approved PMA), the FDA must approve a PMA before marketing can begin. PMAs must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and +effectiveness. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies. Preparing a PMA is a detailed and time-consuming process. Once a PMA has been submitted, the +FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data and facility inspections +before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or +the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several +years. In addition, if the FDA discovers that an applicant has submitted false or misleading information, the FDA may refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in +receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, +financial condition and results of operations. +If there are any modifications made to our marketed devices, a premarket notification or PMA may be +required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, +certain types of modifications to the device’s indications for use, manufacturing process, manufacturing facility, critical components, labeling and design. +21 +Table of Contents +A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA +application. These trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed a non-significant risk study, which is +eligible for an exemption from the IDE requirements. The IDE application must be supported by appropriate data, such as laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate +institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that +the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to +the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed +consent be obtained from each subject. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the +product in the United States. +Some of our products are used for research only or other non-medical purposes. Our molecular collection products are sold +to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, +although other state and federal regulatory requirements may apply. +Every company that manufactures medical devices distributed in the United States must +comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the manufacturing process, including design, manufacture, testing, release, packaging, distribution, +documentation and purchasing as well as complaint handling, corrective and preventative actions and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production and quality to +ensure full technical compliance. +We believe that our facilities and procedures are in material compliance with the FDA’s QSR regulations, but the +regulations are subject to change, and we cannot be sure that FDA investigators will agree with our compliance with the QSR requirements. Companies are also subject to other post-market and general requirements, including product listing and +establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of +certain adverse reactions. Medical device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a +death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance +with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has +observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial +suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter primarily focused on +DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s products and +focused in particular on the design planning and design history +22 +Table of Contents +file for DNAG’s 510(k)-cleared Oragene ® — Dx collection device. In addition, the +warning letter requested additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ™ collection device. The letter further noted that DNAG +does not currently have in place an approved PMA or 510(k) clearance for its ORAcollect ™ device. +DNAG has submitted a formal response and is actively engaged and working with the FDA to address the issues referenced in the warning letter. In addition, +DNAG has submitted to the FDA an application for 510(k) clearance of its ORAcollect ™ device. While the warning letter still remains pending, DNAG intends to continue to sell and market all of +its products. We expect no material impact to product sales or our consolidated financial performance for the forseeable future as a result of the issues raised by the warning letter. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that does laboratory testing on specimens derived from humans from +providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and +Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the +design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. A CLIA waiver allows +certain customers to use the waived products that may not have been able to use them without complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in the United States. We are presently working with legislators or regulators in certain of +these states in an effort to modify or remove any restrictions affecting our ability to sell products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) +and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorney generals. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or +approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham +Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that +we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC +enforcement actions often result in consent decrees that constrain future actions. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from +the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA or European regulating bodies, as applicable. In particular, international sales of medical devices manufactured in the United +States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +23 +Table of Contents +Foreign countries often require, among other things, an FDA certificate for products for export, also called a +Certificate for Foreign Government. To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing +facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve +the issues to the FDA’s satisfaction. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval from +international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances +may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, +established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our +quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic +Directive (“IVDD”) must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements +allows us to affix the CE mark to our products, without which they may not be placed on the market in the EU. +We have received authorization to use the +CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed +this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements +in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to +induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental +healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as +civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +24 +Table of Contents +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or +Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil +monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, restrictions +on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting +fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial +arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, +including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent +years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state +legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of gifts or other payments to healthcare professionals and providers. +For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching +hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we +have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care +Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The +Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product +training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. +Foreign +Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals +from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or +authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official +capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the +“Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. +companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain +circumstances. +25 +Table of Contents +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local +laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are +subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, +cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high +concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We +believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely +eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes +included in Item 15 of this Annual Report. \ No newline at end of file diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/item13.txt b/raw/filings/0001116463/2014/0001193125-15-089338/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..28836c9e51320d04ac8657be6b112127148c8779 --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by +this Item is incorporated by reference to the information under the captions, “Transactions with Related Persons” and “Corporate Governance—Director Independence,” in the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/item9a.txt b/raw/filings/0001116463/2014/0001193125-15-089338/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9d2f75c859844b2adf99a47111c29465eaa65918 --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/item9a.txt @@ -0,0 +1,54 @@ +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the +effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2014. Based on that evaluation, the Company’s management, +including such officers, concluded that as of December 31, 2014 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we +file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and +is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) +Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and +maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, +including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework +in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal +control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting +principles as of December 31, 2014. +The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited +by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +Because of its inherent limitations, +internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, +or that the degree of compliance with the policies or procedures may deteriorate. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2014 that have materially affected, or +are reasonably likely to materially affect, our internal control over financial reporting. +74 +Table of Contents +(d) Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, +Inc.: +We have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria +established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective +internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our +responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. +We conducted our audit in +accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial +reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating +effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, +2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of +OraSure Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the years in the three-year period +ended December 31, 2014, and our report dated March 12, 2015 expressed an unqualified opinion on those consolidated financial statements. +/s/ +KPMG LLP +Philadelphia, Pennsylvania +March 12, 2015 \ No newline at end of file diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/rp_note.txt b/raw/filings/0001116463/2014/0001193125-15-089338/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2014/0001193125-15-089338/rpt_disclosure.txt b/raw/filings/0001116463/2014/0001193125-15-089338/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e7578034d9eb5e4f9653dadc6c6e9e8a31e14ab --- /dev/null +++ b/raw/filings/0001116463/2014/0001193125-15-089338/rpt_disclosure.txt @@ -0,0 +1,9 @@ +Transactions With Related Persons +Since January 1, 2015, there have been no transactions +with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party +transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in +our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +26 +Table of Contents +Information regarding employment and severance agreements between our executive +officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/filing.txt b/raw/filings/0001116463/2015/0001193125-16-503534/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..fb2c8d4e356d193a89b25121bf4a6f1c9bf2ffd3 --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/filing.txt @@ -0,0 +1,5759 @@ +10-K +1 +d111696d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2015 +OR +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC. +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem, Pennsylvania +18015 +(Address of Principal Executive Offices) +(Zip Code) +(610) 882-1820 +(Registrant’s Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ¨ No x +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of +the Exchange Act. Yes ¨ No x +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) +of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes x No ¨ +Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every +Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such +files). Yes x No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, +and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x +Indicate by check mark whether the Registrant is a large accelerated filer, an +accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +¨ +Accelerated filer +x +Non-accelerated filer +¨ +Smaller reporting company +¨ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of +the Exchange Act). Yes ¨ No x +State the aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the +price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2015): $298,662,067 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of March 10, 2016: +55,482,238 shares. +Documents Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference into Part +III of this Annual Report. +Table of Contents +Table of Contents +Page +PART I +ITEM 1. +Business +3 +ITEM 1A. +Risk Factors +28 +ITEM 1B. +Unresolved Staff Comments +54 +ITEM 2. +Properties +54 +ITEM 3. +Legal Proceedings +54 +ITEM 4. +Mine Safety Disclosures +55 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +56 +ITEM 6. +Selected Consolidated Financial Data +58 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +59 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +76 +ITEM 8. +Consolidated Financial Statements and Supplementary Data +76 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +76 +ITEM 9A. +Controls and Procedures +76 +ITEM 9B. +Other Information +78 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +79 +ITEM 11. +Executive Compensation +79 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +79 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +79 +ITEM 14. +Principal Accountant Fees and Services +79 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +80 +Table of Contents +This Report contains certain “forward-looking statements,” within the meaning of the +Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business +transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include +words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual +performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to +manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or +applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the FDA or other regulators; changes in +relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; the continuation of our HCV co-promotion +agreement with AbbVie and our ability to achieve financial and performance objectives under that agreement; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our +products; impact of replacing distributors; inventory levels at distributors and other customers; ability of DNAG to achieve its financial and strategic objectives; ability to identify, complete, integrate and realize the full benefits of future +acquisitions; impact of competitors, competing products and technology changes; impact of negative economic conditions, high unemployment and poor credit conditions; reduction or deferral of public funding available to customers; competition from +new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of oral fluid testing or other products; changes in market acceptance of products based on product performance or other +factors, including changes in CDC or other testing guidelines, algorithms or other recommendations; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution +channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; history of losses and ability to achieve sustained +profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of OraSure’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of +litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of +products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to +attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to +obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A, +entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are +cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to +disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or +report. Furthermore, we have a policy against issuing or +1 +Table of Contents +confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not +the responsibility of OraSure. +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References +in this Annual Report to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +2 +Table of Contents +PART I +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and +sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. +We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a +laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, +physicians’ offices, and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the +U.S. Food and Drug Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale +in the over-the-counter (“OTC”) or consumer retail market in the United States. More recently, we completed development and recorded initial sales of our new OraQuick ® rapid Ebola +antigen test. We also sell OTC cryosurgical products to consumers in North America, Europe, Central and South America, and Australia. +In vitro diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of +specific substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and +specificity comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid tests represent a very competitive alternative to the more traditional testing methods in the +diagnostic space. +Through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell +kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics +markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We serve customers in many +countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely +for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were +merged into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided +at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and +filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be +incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care +qualitative +test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole blood. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +World Health Organization (“WHO”) pre-qualification. +Pending +Also registered in various other countries. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +CE Mark (European Union) approved for OTC use. +Not Marketed +OraQuick ® HIV Self-Test +Rapid point of care qualitative and oral fluid HIV1/2 self-test that can be visually read in approximately 20 minutes. +Investigational use only. +Marketed +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraSure QuickFlu ® Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and +cotinine. +Marketed +Oragene ® •DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® •DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® •RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) clearance pending. +CE marked and registered as Class 1 Medical Device in the U.S. and Canada. +Registered in various other countries. +Marketed +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene• +LIVESTOCK and +Oragene ® •ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of livestock DNA from nasal samples. +Animal research use only. +Marketed +OMNIgene ® • Gut +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples +Research use only product. +CE marked and registered in certain countries. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OMNIgene ® • Sputum +Reagent for liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples +Research use only product. +CE marked and registered in certain countries. +Marketed +PrepIT ® • MAX +Reagent for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol +(“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Marketed +Assays CE marked and registered in certain countries. +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Marketed +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems - Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® +tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +Marketed +CE marked and registered in certain countries. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Marketed +Registered in Canada for warts and skin tags. +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names. +Marketed +CE marked for skin tags. +Not Marketed +In addition to the above products, we also sell certain immunoassay tests and reagents for insurance risk +assessment, substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole +blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial +containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the +collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe +and certain other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 +in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform +moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA +to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the +international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization +and this product is registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also submitted an +application for WHO pre-qualification for our export only version of this product. +We believe that the OraQuick ® device, because it is approved for detecting antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid and plasma samples, provides a competitive advantage in the +market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter version of our OraQuick +ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market and we have also received CE +7 +Table of Contents +mark authorization for sale of this product in the European Union. The In-Home test is performed in the same manner as the OraQuick +ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to +provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +We have completed development of a low cost OraQuick ® HIV self-test for use +in certain foreign countries. This product has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test. We are working with Population Services International +(“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from Malawi, Zambia and Zimbabwe to launch the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. As part of STAR, PSI is +implementing a two-year pilot program funded by UNITAID. We expect that our new OraQuick ® self-test, with labeling and instructions specifically tailored for the African marketplace, will be +used in the two-year initial phase of the program. The purpose of the STAR project is to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public +health impact of self-testing will be. Our OraQuick ® self-test was chosen for the first phase of the PSI pilot because of its quality, ease-of-use and oral fluid option. Initial shipments of +our test to PSI occurred during the first quarter of 2016. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood +specimens, making it the first rapid and only HCV test approved by the FDA for use in the United States. We have also received a CLIA waiver for use of this product in the same specimen types. The +OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe and other foreign countries. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the +OraQuick ® technology platform for the detection of Ebola antigen. This test has received an EUA from the FDA for emergency use by laboratories and facilities adequately equipped, trained and +capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and venous whole blood samples. More recently, we received an EUA for use of the product in oral fluid specimens collected from cadavers. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid +qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test +cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation and is currently sold in certain U.S. +markets. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and +confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, +8 +Table of Contents +treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that +contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 +antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device +involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for +use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +A trained health care professional then conveys test results and provides appropriate counseling to the individual who +was tested. +We believe that oral fluid testing has several significant advantages over blood-based systems for infectious disease +testing, for both health care professionals and the individuals being tested. These advantages include eliminating the risk of needle-stick accidents, providing a non-invasive collection technique, requiring minimal training to administer, providing +rapid and efficient collection in almost any setting, and reducing the cost of administration by a trained health care professional. +Molecular +Collection Systems +Our wholly-owned subsidiary, DNAG, sells a number of products that provide all-in-one systems for the collection, +stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. DNAG’s lead product is sold under the Oragene ® brand and is used to collect DNA from +human saliva. DNAG products are currently sold to thousands of academic and research customers in many countries worldwide. +DNAG products +are available in several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for +self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When +the container is closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at +ambient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal +swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended +periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +DNAG products historically have been +sold primarily as Class I medical devices for use by research and academic institutions. DNAG has received FDA 510(k) clearance for the Oragene ® •Dx product which enables the Oragene ® •Dx product to be used with other FDA-cleared or exempt molecular diagnostic applications. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested +with either an exempt or 510(k) cleared molecular tests. An application for 510(k) clearance of DNAG’s ORAcollect ® product is currently pending with the FDA. +9 +Table of Contents +DNAG has received CE mark approval for the +OMNIgene ® • GUT microbiome collection kit. This product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool +samples for gut microbiome profiling for use in clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for +weeks at room temperature. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold by us +under the name Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the +Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., +tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with +the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and +other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for +specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby +streamlining the testing process. +During 2014, we completed development of a next generation collection device, which we are marketing +under the tradename “Intercept i2 ® ” he ”. This device offers several important advantages over our original +Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample +required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® device is currently being +sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific +(“Thermo Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid +nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, +these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating +localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin +lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. In 2014, we began supplying this product on a private label basis for resale by one of our physician +office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), +under the POINTTS tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt +Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on +a private label basis for the treatment of warts in the U.S. and for the treatment of both warts and skin tags in Canada. +10 +Table of Contents +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , +to meet the specific needs of our customers. During 2014, we also began selling fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The +result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available +laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the +Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents +are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, +automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests +continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We entered into the agreement with Thermo Fisher in 2013 after terminating a similar agreement with Roche Diagnostics. Under our new +agreement, Thermo Fisher has agreed to develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® he device. Under the first phase +of this agreement, we are selling a NIDA-5 panel of assays supplied by Thermo Fisher. The parties expect to complete development of several additional assays and obtain FDA 510(k) clearance of the Intercept i2 ® he device for use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept +i2 ® he collector and Thermo Fisher assays into Europe and other foreign countries. +The assays from Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to be issued by the Substance +Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe the offering of an Intercept +i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively +against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the original +specimen collected with the OraSure ® oral fluid collection device to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit +contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device +is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +11 +Table of Contents +Products Under Development +Infectious Disease Testing +Since 2014, we +have been pursuing the development and commercialization of a rapid Ebola antigen test using our OraQuick ® technology platform. Product development is now largely complete and significant +progress has been made in preparing for the commercial manufacturing of the product and obtaining the required regulatory approvals and registrations. In July 2015, we received an EUA for our +OraQuick ® Ebola rapid antigen test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services +(“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up +to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million +to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million of this funding for our OraQuick ® Ebola test. Funding received under +this contract is recorded as other revenue in our consolidated statement of operations as the activities are being performed. +In March +2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers and we have submitted for pre-qualification of the product with the WHO. These approvals will allow expanded use of the product, particularly in Africa. +We also intend to seek 510(k) clearance of our Ebola test from the FDA in the next year to eighteen months. +In response to global +concerns regarding the Zika virus, we are evaluating the technical feasibility of developing a rapid Zika test on our OraQuick ® platform. This virus is believed to be spread primarily through +infected mosquitoes and has been linked as a possible cause of microcephaly in new born babies whose mothers are infected. There has also been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. We +expect to continue our feasibility work during 2016. +Molecular Collection Systems +The following new product initiatives are continuing at DNAG: +• +OMNIgene ® • GUT is a system for the collection, stabilization, transportation and +storage of microbial DNA in stool samples. This product is being offered to academic researchers for early-stage testing in gut microbiome studies. +• +PrepIT ® MAX for tuberculosis (“TB”) is a reagent for extraction of DNA from TB +bacteria. This product is being offered for early-stage testing by TB researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +• +OMNIgene ® • SPUTUM is a reagent for the liquefying, decontaminating, transporting and +preserving of TB bacteria in sputum samples. OMNIgene ® • SPUTUM is expected to improve laboratory and operational workflows, compared to current approaches, and improve overall test +results. This product is being offered to TB laboratories for evaluation. +These products represent potential, long-term +market opportunities that we are still developing or are in the early stages of commercializing. Much of our activities for these products are currently centered around ensuring that early versions are being provided to key opinion leaders or early +adopters in the relevant markets. We expect these products will enable researchers and other customers to improve their results through better and lower cost sample collection, stabilization and preservation. +12 +Table of Contents +Microbiome +During 2015, we received CE mark approval and completed design validation on a high-throughput automated processing system for the OMNIgene ® • GUT product. Several technical manuscripts with academic and biotech groups are also in process which will report on the ability of this product to “snapshot” microbiome +communities at the point of collection. +Tuberculosis +The OMNIgene ® • Sputum and +PrepIT ® MAX products are gaining greater interest for tuberculosis testing. Healthcare providers from more than 60 countries have expressed interest in evaluating these products and more than +20 entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their evaluations of our product offerings. Our tuberculosis products are well positioned to support the National +Action Plan for combatting multi drug-resistant tuberculosis, recently announced by the Obama Administration, by providing much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Although we are excited about the potential opportunities in this market, it will likely take some time for these products to generate +meaningful financial results. +Research and Development +In 2015, our research and development activities focused primarily on development of our next generation Intercept i2 ® collection device, our new rapid Ebola antigen test, our molecular collection product offerings for the microbiome and tuberculosis markets, and clinical and technical support for our existing +products. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +Research and development expenses were $11.7 million in 2015, $12.1 million in 2014, and $10.9 million in 2013. These expenses include our +costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our +marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order +to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues +attributable to customers in the United States were $96.5 million, $82.3 million and $77.2 million in 2015, 2014 and 2013, respectively. Consolidated net revenues attributable to international customers amounted to $23.2 million, $24.2 million and +$21.7 million, or 19%, 23% and 22% of our total revenues, in 2015, 2014 and 2013, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our consolidated +financial statements included elsewhere in this Annual Report. +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to +customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional +facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of +13 +Table of Contents +encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through +distributors into the U.S. physician office market and to retail clinics operated by pharmacies. We have engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we +distribute our OraQuick ® HIV test in Europe and certain other foreign countries. +We market the OraSure ® oral fluid collection device for HIV-1 testing, on its own and +as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged OraSure ® test kits, +with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in Europe and other countries through distributors. Under an +agreement with AbbVie, we are co-promoting our OraQuick ® HCV test in certain U.S. markets, including general practitioners and certain specialty physicians. Under this arrangement, AbbVie has +agreed to detail our OraQuick ® HCV test in the physician markets and we pay AbbVie a fee for these detailing services. In addition, we have implemented a broad-based program for training +physicians on our OraQuick ® HCV test and have developed and implemented a patient care database under this agreement. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date +has been the CDC, which has purchased the product for field testing in Africa. Our ability to expand sales of this test to other customers will likely depend on the availability of government or other funding and whether we are able to obtain FDA +510(k) clearance and pre-qualification with the WHO for our product. +We have distribution rights to an FDA 510(k) cleared rapid flu +A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. +hospital and public health markets. +Infectious Disease Testing—OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers +carrying the product include CVS, Walgreens, Rite Aid, Wal-Mart and Kroger. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is +comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. In 2014, we changed our promotional strategy by implementing a more +cost-effective promotional approach focused on retail outlets and moved away from more expensive broad-based consumer advertising. We continued this strategy in 2015. +To support individuals that purchase and use our test, we have established a toll-free customer support center that operates on a 24/7, +365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up +confirmatory testing, counseling and medical treatment. +Molecular Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some countries distributors are used, +particularly in the Asia-Pacific region. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular +science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +14 +Table of Contents +Historically, most of DNAG’s revenues have been derived from product sales into the academic +and research markets. However, sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and now account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are +derived from repeat customers, in both markets. DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of +microbes and their effect on human health. DNAG’s initial product offering, OMNIgene ® • Gut, is focused on the human gut microbiome (microbes living in human stool). In 2015, DNAG +sold in excess of $500,000 of this product to a variety of both academic and commercial research organizations. DNAG is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish +itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. +In addition, DNAG has been +working to bring to market the OMNIgene ® • Sputum and PrepIT ® • Max products. These products include a lab reagent for +liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples. TB is a major global health issue, with long established relationships among public health agencies, NGO’s, and suppliers. DNAG has a focused sales and +market development team working with these key players to have its products evaluated and adopted where possible. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug +rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our +Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory +distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a +kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with +prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse +testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and +community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® +collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the +criminal justice and drug treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 T ® device for use with the NIDA-5 +assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) +cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® +collector and MICRO-PLATE assays in the drug testing market. +We distribute our +Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad +range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause +and return-to-duty testing. +15 +Table of Contents +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in +turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a +manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than +20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand +through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We also sell +OTC cryosurgical products for the removal of warts and skin tags under private label arrangements with retailers in Canada and private label OTC wart remover products to several U.S. retailers. +Insurance Risk Assessment +We currently +market the OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting +risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life +insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® +Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being +used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some +customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and +instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during +the past three years. The OraQuick ® rapid HIV testing products, the cryosurgical systems products, and our Oragene ® product line +accounted for total revenues of $34.3 million, $11.9 million and $29.4 million, respectively, in 2015, $38.9 million, $15.5 million and $23.8 million, respectively, in 2014, and $44.8 million, $14.5 million and $20.4 million, respectively, in 2013. +One of our customers accounted for approximately 12% of our net consolidated revenues in 2015. We had no individual customers who +accounted for more than 10% of our total revenues in 2014 or 2013. +16 +Table of Contents +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral +fluid collection devices that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues +consist primarily of product sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, and commercial and industrial entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG +revenues consist of product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external +customers, income and total assets, please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the +consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, Western blot HIV-1 confirmatory +test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this +location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device in order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party +provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture the OraQuick ® test on terms no less favorable than those +set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. This supplier will also assemble our OraQuick ® HIV self-test. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 confirmatory test only +from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any +of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our +ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and +sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw +materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput +oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these +products. +17 +Table of Contents +The Histofreezer ® product sold in the +U.S. is assembled by U.S. vendors and the Histofreezer ® product sold internationally was previously assembled in the Netherlands by Koninklijke, Utermöhlen, N.V. +(“Utermöhlen”), the company from which we acquired the product line in 1998. The supply agreement with Utermöhlen has expired and we have successfully transferred our supply arrangement for international versions of this product +to a vendor located in Germany. The cryosurgical wart removal products distributed in OTC markets are assembled by vendors located in the United States. We believe that additional suppliers of all of our cryosurgical products are available on terms +no less favorable than the terms of our existing supply agreements in the event that our current suppliers would be unable or unwilling to continue manufacturing these products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2015, we had 326 full-time employees (including 103 employees at our subsidiary, DNAG). Of this total, +there were 119 in sales, marketing and client services; 36 in research and development; 123 in operations, manufacturing, quality control, information systems, purchasing and shipping; 18 in quality assurance and regulatory affairs; and 30 in +administration and finance. This compares to 320 employees as of December 31, 2014. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +Important competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry +competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size +companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +18 +Table of Contents +The future market for diagnostic products is expected to be characterized by greater cost +consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better +performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. +Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and +products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United +States. We expect the number of devices competing with our OraQuick ® , OraSure ® , +Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal +competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA +waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against +laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors +in the domestic infectious disease testing market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we +charge for our products. This competition can result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in +Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is +entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand +sales of our OraQuick ® HIV and HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the +FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. +Competition for our OraQuick ® Ebola test includes government and +commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both +whole blood samples from living patients and oral fluid samples from cadavers. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +19 +Table of Contents +Our Oragene ® collection system competes +against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the +Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of +lower price competitive devices can result in lost sales and degradation in pricing and profit margin. +OMNIgene ® • Gut is being sold in the emerging microbiome market where the primary competition currently is a variety of non-standard in-house solutions developed by various researchers, including +simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few +vendors to offer a solution that fully meets these requirements. +The OMNIgene ® +• Sputum and PrepIT ® MAX products are unique and have no direct competition in terms of a comparable product. The primary competition for these products is the incumbent methodologies +that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing +market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our +products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the +United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our +Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original +Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from +“home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong +competitive pressure because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE +drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on +radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run +on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and +heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® +urine assays have declined substantially during the past several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically +paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have +received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be +substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +20 +Table of Contents +Our professional cryosurgical product is sold primarily to physicians, including family +practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private +label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain +international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the +results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new +product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States +patents generally have a maximum term of 20 years from the date an application is filed. +We have six United States patents and numerous +foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for +oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from September 2016 to December 2026. We have also applied +for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United +States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire +from March to July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held by other parties. We also have obtained a license to certain HCV patents which we use to +manufacture and sell a rapid HCV test on the OraQuick ® technology platform. We obtained these licenses through the payment of certain upfront fees and an agreement to pay ongoing royalties. We +believe these fees and royalties are comparable to those generally paid by other companies under similar arrangements. +We hold, through +our subsidiary, DNAG, seventeen United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and +other bodily fluids and tissues. These patents expire from July 2019 through March 2031. +We have two United States patent and numerous +foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain +foreign countries. These patents expire from September 2025 to August 2032. +We require our employees, consultants, outside collaborators +and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the +course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions +conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United +States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept +i2 ® , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® , PrepIT ® and AUTO-LYTE ® trademarks. We also own many of these marks and +21 +Table of Contents +others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, +New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the +issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. +Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or +enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade +secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are +regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product testing, +authorizations to market, labeling, promotion, manufacturing and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale of our +products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of action by the FDA before they can be marketed in the United States. After approval or +clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could +disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products +are regulated in the United States as medical devices. +There are several mechanisms by which regulated medical devices can be placed on +the market in the United States. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must provide a premarket notification that it +intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise +different questions of safety and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding substantial equivalence. An applicant must +submit a 510(k) application at least 90 days before marketing of the affected product commences. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed +device or because it is required by statute and the FDA’s regulations to have an approved PMA), the FDA must approve a PMA before marketing can begin. PMAs must demonstrate, among other matters, that the medical device provides a reasonable +assurance of safety and effectiveness. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies. Preparing a PMA is a detailed and time-consuming process. Once a PMA +has been submitted, the FDA is +22 +Table of Contents +required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests +for additional data and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place +restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional +clinical trials, which can delay the PMA approval process by several years. In addition, if the FDA discovers that an applicant has submitted false or misleading information, the FDA may refuse to review submissions until certain requirements are +met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory +requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any +modifications made to our marketed devices, a premarket notification or PMA may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for +modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indications for use, manufacturing process, manufacturing facility, critical components, labeling and +design. +A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials +generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed a non-significant risk study, which is eligible for an exemption from +the IDE requirements. The IDE application must be supported by appropriate data, such as laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at +the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trials support +the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way +that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject. +Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other non-medical purposes. Our molecular collection products are sold to many academic and +research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and +federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through Emergency Use Authorization, or +EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the emergency. Typically, +analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral pathogens that have +the potential to affect public health. +Every company that manufactures medical devices distributed in the United States must comply with +the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the manufacturing process, including design, manufacture, testing, release, packaging, distribution, documentation +and purchasing as well as complaint handling, corrective and preventative actions and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production and quality to ensure full +technical compliance. +23 +Table of Contents +We believe that our facilities and procedures are in material compliance with the FDA’s QSR +regulations, but the regulations are subject to change, and we cannot be sure that FDA investigators will agree with our compliance with the QSR requirements. Companies are also subject to other post-market and general requirements, including +product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping +and reporting of certain adverse reactions. Medical device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or +contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects +companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an +inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating +restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter +primarily focused on DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s +products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • Dx collection device. In addition, the warning letter requested +additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter further noted that DNAG does not currently have in +place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG has +submitted a formal response and is actively engaged and working with the FDA to address the issues referenced in the warning letter. In addition, DNAG has submitted to the FDA an application for 510(k) clearance of its ORAcollect ® device. While the warning letter still remains pending, DNAG intends to continue to sell and market all of its products. We expect no material impact to product sales or our consolidated +financial performance for the forseeable future as a result of the issues raised by the warning letter. +The Clinical Laboratory +Improvement Amendments of 1988, or CLIA, prohibit any facility that does laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, +the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this +regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick +ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. A CLIA waiver allows certain customers to use the waived products that may not have been able to use them without +complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in +the United States. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell products. +24 +Table of Contents +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission +(“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorney generals. +Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our +products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, +under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved +use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or +criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products +for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA or European regulating bodies, as applicable. In particular, international sales of medical devices manufactured +in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign +Government. To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in +compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the +FDA’s satisfaction. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain +approval from international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain +other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 +countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates +that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro +Diagnostic Directive (“IVDD”) must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these +requirements allows us to affix the CE mark to our products, without which they may not be placed on the market in the EU. +25 +Table of Contents +We have received authorization to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC +cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We +have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various +ISO requirements in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in +return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, +Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable +under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers +that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare +programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the +person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each +wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and +penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to +other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by +limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by +criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing +interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction +and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of gifts or other payments to +healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of +value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device +26 +Table of Contents +manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to +accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is +based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all +employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, +grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. +Foreign Corrupt Practices Act and +Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from +engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or +authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official +capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the +“Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. +companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain +circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, +state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in +Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, +mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of +very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our +manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities +cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial +statements and accompanying notes included in Item 15 of this Annual Report. +27 +Table of Contents +ITEM 1A. +Risk Factors +You should carefully consider the risks and +uncertainties described below, together with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing +us. Additional risks and uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition +or results of operations. +Regulatory Risks +The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies. In +particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. +The process of obtaining required approvals or registrations can involve lengthy and detailed laboratory testing, human clinical trials, +sampling activities and other costly, time-consuming procedures. These approvals and registrations can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible +that a product will not perform at a level needed to generate the clinical data required to obtain approval or registration. The submission of an application to the FDA or other regulatory authority does not guarantee that an approval or +registration to market or import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval or registration, may include significant restrictions or limitations as part of any approval or +clearance it grants and may delay or refuse to grant approval or registration, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive +such clearances or approvals could have a material adverse effect on our business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential +requirements of the IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those +marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE +mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our distributors are often required to obtain approval or registration with foreign governments or regulatory bodies before +we can import and sell our products in foreign countries. Any change in our arrangement with such a distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those +products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production of +Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other +federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and +record keeping. We and our suppliers and distributors are subject to routine inspection by the FDA and other agencies to determine compliance with QSR +28 +Table of Contents +and Medical Device Reporting requirements in the United States and other applicable regulations worldwide, including but not limited to ISO regulations. We believe that our facilities and +procedures are in material compliance with the QSR requirements, but the regulations are subject to change and we cannot be sure that the FDA investigators will agree with our compliance with the QSR requirements. The FDA and foreign regulatory +agencies may require post-marketing testing and surveillance to monitor the performance of approved products or place conditions on any product approvals that could restrict the commercial applications of those products. Regulatory agencies may +impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a +product may result in restrictions on the product, including withdrawal of the product from the market. +Failure to comply with the +applicable requirements can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, +refusal to grant premarket clearance or PMA approval for devices, withdrawal of marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our +products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and +regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with +respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a +material adverse effect on our business. +Our Ability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our +Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, including the +QSR, but the regulations regarding the manufacture and sale of our products and the QSR requirements are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or +make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose +new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes +or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain product approvals. In addition, the FDA may revoke an Emergency Use +Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. We cannot predict the effect, if any, that these changes might have on our business, +financial condition or results of operations. +Our Inability to Manufacture Products in Accordance With Applicable Specifications, +Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture +our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a +result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in +materials or production methods by our vendors, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our +label claims or the expectations of our customers. +29 +Table of Contents +Any failure or delay in our ability to meet the applicable specifications, performance standards, +quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our +Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our +ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, +fire hazard control, disposal of hazardous substances and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws +and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures +associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure To Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +The Company believes it is neither a covered entity nor a business associate of a covered entity and is not responsible for complying with the +Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). However, the Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ +personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach +reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In +addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex +compliance issues. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive. +Many laws and regulations impose obligations on public companies, which have increased the scope, complexity and cost of corporate governance, +reporting and disclosure practices. Examples include the Sarbanes-Oxley Act of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s requirements for public companies to +provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”), and the International Financial Reporting Standards conversion requirements. Our implementation of certain aspects of these +laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually evaluate and monitor developments with respect to +new and proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and regulations are also subject to varying interpretations, in many cases due to their lack of +specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated +by ongoing revisions to disclosure and governance practices. Although we +30 +Table of Contents +are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against us, +which may adversely affect our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our +Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic +testing by clinical laboratories. In the past, the FDA has claimed regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating LDTs performed by high complexity CLIA-certified +laboratories. LDTs are tests developed in-house by a laboratory where the laboratory makes a determination about its ability to perform the test and whether the test yields clinically relevant information. A significant portion of the total volume +of genetic or molecular testing is performed with LDTs. +In mid-2014, the FDA announced that it would begin regulating LDTs, including +laboratory developed molecular tests, and has issued proposed guidance on the regulation of LDTs for public comment. Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s +increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for DNAG’s products and adversely impact our +revenues. +Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could Affect Our Molecular +Collection Systems Business. +The adoption of genetic testing is occurring within the broader context of a myriad of decisions related +to genetic patenting and genotyping. Issues associated with regulatory requirements, health insurance, data access and privacy, intellectual property protection, national and international legislative initiatives and other variables impact the +widespread adoption of genetic testing or specific segments or tests within the genetic testing market. These developments could impact sales of our molecular collection systems products. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of +Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including +anti-kickback laws, false claims laws, laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements we may enter into with physicians, hospitals, +laboratories and other potential purchasers of medical devices and laws requiring the reporting of certain transactions between us and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including +substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, +and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In +addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a +material adverse effect on our business, financial condition and results of operations. +Our International Sales Create Potential +Exposure Under Anti-Corruption Laws. +In 2015, approximately $23.2 million of our consolidated net revenues were generated from sales +in a variety of foreign countries. These international activities subject us to the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign +governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in countries known to experience +31 +Table of Contents +corruption. Further international expansion may create increased exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by +one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage +these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements +may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be +severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of operations and financial condition. +Risks Relating to Our Industry, Business and Strategy +If We Fail to Achieve Performance Objectives Under Our HCV Agreement With AbbVie or this Agreement is Terminated, Our Financial Results and +Business Prospects Could Be Adversely Affected . +We have entered into an agreement with AbbVie for the co-promotion of our +OraQuick ® HCV test into certain markets in the U.S. Under the agreement, we have granted exclusive co-promotion rights to AbbVie for the +OraQuick ® HCV test in these markets and we provide certain services in support of HCV testing. In exchange for these exclusive rights and the services provided to AbbVie, we are eligible to +receive up to $75.0 million in aggregate payments over the term of the agreement, which runs through December 31, 2019. If certain performance milestones are achieved, we will also be eligible to receive additional annual incentive fees. The +agreement contains certain termination, indemnification and other provisions typical of agreements of its type. +We have not yet earned an +incentive fee under the AbbVie agreement and it is difficult to predict when, or if, we will be able to achieve one or more of the performance milestones required to receive such a fee. In addition, under certain circumstances, either party may +terminate the agreement before its expiration and such a termination could occur as early as December 31, 2016. In 2015 and 2014, $13.5 million and $7.6 million of our revenues, respectively, were from the recognition of exclusivity revenues +under the AbbVie agreement. If we fail to achieve performance milestones under the AbbVie agreement or AbbVie terminates the agreement before its expiration, the amount of exclusivity payments and incentive fees we receive under the agreement could +be reduced or eliminated and our financial results and business prospects could be materially and adversely affected. +Our Ability to +Sell Products Could be Adversely Affected by Competition From New and Existing Products. +The markets we serve are highly competitive +and rapidly changing and we expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Many of our principal competitors have considerably greater financial, technical and +marketing resources than we do. As new products enter the market, our products may become obsolete or a competitor’s products may be more effective or more effectively marketed and sold than ours. In addition, there can be no assurance that our +competitors will not succeed in obtaining regulatory approval for new products that would render our technologies and products obsolete or otherwise commercially unattractive, or introduce or commercialize such products, before we can do so. If we +fail to maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial +condition and results of operations. +We also face competition from products that are sold at a lower price. Where this occurs, customers +may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be +required to increase our marketing efforts in order to compete effectively, which would increase our costs. +32 +Table of Contents +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and +Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, +competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed +pricing pressure on medical device suppliers. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or +Successful Products. +In order to remain competitive, we must regularly commit substantial resources to research and development and +the commercialization of new or enhanced products. The research and development process generally takes a significant amount of time from product inception to commercial launch. This process is conducted in various stages. During each stage there is +a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. +During 2015, 2014 and 2013, we incurred $11.7 million, $12.1 million and $10.9 million, respectively, in research and development expenses. We +expect to continue to incur significant costs related to our research and development activities. +Successful products require significant +development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. In addition, regulatory approval must be obtained before most products may be sold. +Additional development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition +approval. In addition, even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product. Moreover, we may spend a significant amount of money on advertising and fail to develop a +market for the product. Other factors that could affect the success of our efforts include our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to +obtain reimbursement authorizations in the markets where the product will be sold. +Accordingly, if we fail to develop and gain commercial +acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to purchase our products or may purchase and use products developed by our competitors. This +would result in a loss of revenues and adversely affect our results of operations, cash flow and business. +Failure to Successfully +Commercialize a Rapid Point–of-Care Ebola Test Could Adversely Affect Our Results of Operations and Business Prospects. +We have +completed development of a rapid, point-of-care Ebola antigen test using our OraQuick ® technology platform. In 2015, under an EUA (Emergency Use Authorization) received from the FDA for this +product, we sold $2.3 million of this product to the CDC for field testing. Despite this initial progress, there is no assurance that our test will perform at a level necessary to receive all of the regulatory approvals required for its use. In +addition, it is possible that the FDA may revoke our EUA if it is determined that Ebola is no longer an emergency warranting that authorization. Such action would negatively affect our ability to sell the product. +It is also uncertain whether, and to what degree, we will be successful in obtaining sustainable purchase commitments for our Ebola test. +Failure to successfully obtain the required regulatory approvals or receive sustainable and significant purchase commitments for our Ebola test could adversely affect our revenues and results of operations. +33 +Table of Contents +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact +on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that +we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products, achieve the performance milestones under our HCV agreement with AbbVie, or continue growing our molecular +collection systems business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and +development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our +business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure +to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and +scientific staff. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products and other life science businesses. Our ability to +recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We generally do not enter into employment +agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary +personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic partners in a timely fashion, or to +support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic +and other research institutions may limit our ability to do so on acceptable terms. +Acquisitions or Investments May Not Generate the +Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +We may pursue strategic acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are +subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our +objectives; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as +regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting +policies and practices, products and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +34 +Table of Contents +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of +acquisition; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing +stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or +restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected +from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if +end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private +healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and +other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall +escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and +reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage +may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce +the demand for our products or our ability to sell our products on a profitable basis. +Changes in Healthcare Regulation Could Affect Our Revenues, +Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive +reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, +including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law +enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are +likely to continue to pursue healthcare reform initiatives and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of any healthcare reform legislation and its resulting impact on +us are impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results +of operations. +35 +Table of Contents +The Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales +of many medical devices, which includes domestic sales of certain of our products. This new tax became effective in January 2013. However, the Consolidated Appropriations Act of 2016, which was enacted late 2015, suspended the tax beginning +January 1, 2016, with the suspension ending December 31, 2017. It is unclear whether and to what extent this tax will impact our business if and when the suspension is lifted. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention (“CDC”) issue diagnostic testing +guidelines or recommendations, which can affect the usage of our HIV and HCV testing products. For example, domestic professional OraQuick ® HIV sales decreased 17% from 2014 to 2015, in part +due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under new testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and +regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, +could impact the degree to which our OraQuick ® rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of +testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or +otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in +Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick +ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the public health market which consists of state, county and other governmental +public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by +governmental agencies to run their operations including programs that use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such agencies. +Our subsidiary, DNAG, sells many of its products to researchers at academic institutions, pharmaceutical and biotechnology companies, +government laboratories and private foundations. Many of DNAG’s research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors +including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Any reduction or delay in government funding as a result of legislative or +regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products. +Increases in +Demand for Our Products Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products, we and our suppliers may not be able to meet that demand +without expending additional capital resources. These capital resources could involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be +unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we +are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. +36 +Table of Contents +If we or our suppliers are unable to develop necessary manufacturing capabilities in a timely +manner, our sales could be adversely affected. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our +manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the +demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term +agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers +may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect +on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the +industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our +Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, +including for management of inventory, purchase orders, invoices, shipping, interactions with our third-party logistics provider, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. +Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends +significantly on the reliability and capacity of these systems and the internet. In addition, we rely on information technology systems for the development and implementation of a patient care database that we are providing as part of our services +under the HCV co-promotion agreement with AbbVie. This database contains patient specific healthcare information and must be maintained and operated in accordance with stringent privacy and security requirements. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or +disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, +our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this +information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +Computer hackers may attempt to penetrate our computer systems or our third party IT service provider’s systems and, if successful, +misappropriate personal or confidential information. In addition, a contractor or other +37 +Table of Contents +third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive +information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change +rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our information technology +networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. Even the most well protected IT networks, systems, and facilities remain potentially vulnerable +because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such +compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims proceedings, liability under laws to protect, +privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, damage our reputation and customers willingness to transact business with +us, any of which could adversely affect our business. +Risks Relating to Collaborators +The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For +example, the biological antigens, nitrocellulose and certain other components required to make our OraQuick HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source +suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third party suppliers. +In +addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of its products, including its Oragene ® line of collection kits. Many of the raw materials and +components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a +component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find +such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or +manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or +other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing +so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a +substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +38 +Table of Contents +Relying on distributors or others to market and sell our products could harm our business for +various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the +manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales +of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual +obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, +a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for development and commercialization of +products may entail entering into arrangements with distributors or other corporate partners, universities, research laboratories, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, +including: +• +We may be required to transfer material rights to such strategic partners, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +An important strategic arrangement is our HCV co-promotion agreement with AbbVie. Our ability to increase HCV sales and +receive additional compensation under this agreement will depend on whether the +39 +Table of Contents +agreement continues through at least the end of its initial term and whether AbbVie fulfills its contractual obligations, including its obligation to detail our OraQuick ® HCV test into the physician and specialty physician office markets and the success of those detailing efforts. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual +responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also +make it difficult to accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Actions of Third-Party Inventory Management and Logistics Providers Could Adversely Affect Our Ability to Supply Products to Our Customers. +We use third-party logistics providers to store and manage our finished goods inventory and ship finished product to our customers. +We have selected highly reputable providers with extensive experience in the logistics field for these services. However, in the event any of our providers lose or damage our products, experience a casualty or catastrophic event at a warehouse or +otherwise fail to provide safe storage and timely handling and delivery of our products, we could incur additional costs, experience difficulty in supplying our products to our customers or suffer damage to our reputation in the industry. These +events could, in turn, reduce our revenues and adversely affect our results of operations. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property +rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies both in the United States and in other +countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenue and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may +not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for +our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or +manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual +property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” +system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of +our issued patents. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary +technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us +interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +40 +Table of Contents +We cannot guarantee that the process of filing patents, the laws governing trade secrets and +proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, employees, consultants and others who participate in +the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some +foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection +outside of the U.S. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that +are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. +Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage +and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. +We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any +inventions or technical information derived from our collaboration with them. +To facilitate development and commercialization of a +proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain +these types of licenses, our product development and commercialization efforts may be delayed or precluded. +We May Become Involved in +Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large +number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We or our customers may be sued for infringement of patents or misappropriation of other +intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that +license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, +there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover +technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third +party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +41 +Table of Contents +Our involvement in litigation or other legal proceedings with respect to patents or other +intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that +the third-party patent claims are valid and infringed by our products; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, +reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop +or acquire; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products. +We may indemnify some customers and strategic partners under our agreements with such parties if our products or +activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or customers, and +we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an +infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes regarding +intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or +revocation proceedings could be instituted in a foreign patent office as well. Under the AIA, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain +persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that +could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +The Sales +Potential for Our OraQuick ® Products Could be Affected by Our Ability to Obtain Certain Licenses and by Future Litigation. +Our OraQuick ® test platform is a lateral flow assay that tests for specific +antibodies or other substances. The term “lateral flow” generally refers to a test strip through which a sample flows and which provides a test result on a portion of the strip downstream from where the sample is applied. There are +numerous patents in the United States and other countries which claim lateral flow assay methods and devices. There are also patents that cover the type of analyte or antibody (i.e., HIV-1, HIV-2, HCV, Ebola, etc.) which our OraQuick ® test is designed to detect. Some of these patents may broadly cover aspects of our OraQuick ® test and are in force in the United States +and other countries. We may not be able to make or sell the OraQuick ® test in the United States or other countries where these patents are in force. +42 +Table of Contents +We have obtained licenses under several lateral flow patents, and patents covering assays +directed at specific analytes, which we believe are sufficient to permit the manufacturing and sale of our OraQuick ® products as currently contemplated. However, licenses under additional +patents may be required and it is possible that a third party could seek to enforce one or more patents against us. +If we are unable to +successfully defend against or resolve patent infringement litigation or it is determined that a license is required and it is not possible to negotiate or otherwise obtain a license agreement on reasonable terms under a necessary patent, our +ability to manufacture and sell OraQuick ® products and develop and commercialize new applications using the same technology could be limited and we may incur increased costs or damages. In +such case, we may be able to modify an OraQuick ® product to avoid the claim of infringement or the need for a license. However, this alternative could preclude or limit our ability to sell the +OraQuick ® product in the United States and other markets, which would adversely affect our results of operations, cash flow and business. +Risks Relating to Products, Marketing and Sales +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products. +Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick ® HCV test, OraQuick ® In-Home HIV test, OraQuick ® Ebola test, OMNIgene ® • Gut and OMNIgene ® • Sputum product offerings, and other new products or technologies that may be developed or acquired. To +achieve market acceptance, we and/or our distributors will likely be required to undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these +products. In addition, governmental funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products. +There may be limited evidence on which to evaluate the market reaction to products that may be developed and our marketing efforts for new +products may not be successful. It is also possible that governmental funding may be limited for new products, such as our OraQuick ® HCV and Ebola tests or the new sample collection and +stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public +health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that +are used with molecular testing applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use +today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +Our Customers May Resist Adoption of Rapid Point-of-Care Diagnostic Testing. +Sales of our rapid point-of-care diagnostic products, such as our OraQuick +ADVANCE ® HIV-1/2, OraQuick ® HCV and OraQuick ® In-Home HIV tests, are an +important part of our business. Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central +laboratories and can help ensure that test results are delivered to the individuals being tested. +However, clinical reference +laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets +43 +Table of Contents +such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care +testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to compete vigorously +against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to +rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on +our future sales growth. +We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection +Products. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is +particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test. In addition, the Oragene ® product line sold by our +subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may +have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we +have. If our competitors’ products take market share from our products through more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating +results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs. +Sales of Our OraSure QuickFlu ® Test May be Affected by Factors Beyond Our Control. +We sell a rapid flu test under the tradename OraSure QuickFlu ® , primarily in +the U.S. hospital and public health markets. A number of factors that are beyond our control could affect sales of this product, including: +• +Variability in the timing of the onset, length and severity of the flu season, which typically occurs from November of one year to May of the +following year; +• +Competition from other rapid flu tests in the markets we serve; +• +Deficiencies in the manufacture, design or performance of the product or failure by the manufacturer to meet applicable quality and regulatory +standards; +• +The inability of our supplier to provide sufficient quantities of the product; +• +Changes in the types or strains of influenza during a particular flu season; and +• +Lower than expected market penetration of the OraSure QuickFlu ® test. +Our Inability to Carry Out Certain of Our Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain +Our Business. +We have implemented in the past, and we intend to implement in the future, an aggressive sales and marketing plan to +expand sales of our products. Specifically, we will continue to expand the impact of our direct field sales force, use third-party distributors and manufacturers’ sales representatives, and implement other sales and marketing programs. If we +are unable to successfully implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our business could suffer. +44 +Table of Contents +Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability +and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more +difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require +many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in +past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of +HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend +considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes +injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Regardless of +merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling cryosurgical products in the consumer or OTC market in the United States and certain countries and we may expand OTC sales of +these products into other countries. We also sell the OraQuick ® In-Home HIV test in the United States OTC market, and we intend to offer HIV self-tests to consumers internationally. We believe +the sale of products in the OTC market increases our potential exposure to product liability and other claims. +The Insurance We +Purchase to Cover Our Potential Business Risks May be Inadequate. +Although we believe that our present product liability and other +insurance coverage is sufficient to cover our current estimated exposures, we cannot be sure that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate +coverage in the future, there is no assurance that we will be able to do so at acceptable costs. +We Could Suffer Monetary Damages, +Incur Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal Proceedings. +We have +been and in the future may become involved in various legal proceedings arising out of our businesses. These may include commercial disputes, negligence claims or various other lawsuits arising in the ordinary +45 +Table of Contents +course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include +claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or otherwise have a material adverse +effect on our sales, operations or financial performance. +Performance of Our Products May Affect Our Revenues, Stock Price and +Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other +regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a +false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product +performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label +claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be +required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse +effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our +International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to +increase revenue derived from international sales of our products. Our international sales accounted for $23.2 million or 19% of consolidated net revenues in 2015, $24.2 million or 23% of consolidated net revenues in 2014, and $21.7 million or 22% +of consolidated net revenues in 2013. In addition, our molecular collection systems business, which accounted for $29.9 million or 25% of consolidated net revenues in 2015, is operated in Canada. +A number of factors could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of +our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our +products; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or +representatives; +• +Regulatory requirements (including compliance with applicable customs regulations) and the need for reimbursement approvals; +• +Trade protection measures, trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to obtain or maintain regulatory approvals or registrations for our products; +46 +Table of Contents +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a +replacement distributor; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign +countries; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public +health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our OraQuick ® HIV-1/2 tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, +economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause +us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. +Our Government Contracts and Related Administrative Processes Are Subject To Audits and Cost Adjustments by the Federal Government +We sell some of our products to the federal government and we are receiving federal funding related to our OraQuick ® Ebola rapid antigen test. As a result, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. A violation of specific laws +and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. These fines and penalties could be imposed for failing to file procurement integrity and bidding rules, +employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious +reputational harm if allegations of impropriety related to such contracts are made against us. +In addition, our contracts with the U.S. +government are subject to future funding and are subject to the right of the government to terminate the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds +or the termination for the government’s +47 +Table of Contents +convenience of our contracts could negatively affect our financial results. For U.S. government contracts that include options, such as our Ebola funding contract with BARDA, the U.S. government +generally has the unilateral right not to exercise such options and may not exercise an option if the agency is not satisfied with our performance under the contract or does not receive funding to continue the program, among other reasons. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government +contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and +policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific +government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Moreover, if any administrative process or system related to such +contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely +manner. An unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +Risks Relating +to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption +Could Adversely Affect Our Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers. +Volatile +economic conditions may occur again or continue in the future. These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to +liquidity needed to conduct or expand our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and +may continue to be reduced or deferred as a result of economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with +necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict +the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery. +We Have a History of Losses and +May Not Be Able to Achieve Sustained Profitability. +We experienced annual net losses during the five years prior to 2015. In +addition, as of December 31, 2015, the Company had an accumulated deficit of $170.2 million. Even though we achieved profitability in 2015 there can be no assurance that we will be able to achieve or sustain profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the +following: +• +Our ability to increase use of our OraQuick ® HCV test and continue to receive compensation +under our HCV co-promotion agreement with AbbVie; +• +The potential for AbbVie to unilaterally terminate our HCV co-promotion agreement on or after December 31, 2016; +• +Creating market acceptance for and selling increasing volumes of our OraQuick +ADVANCE ® HIV-1/2 test, OraQuick ® HCV test and other products in the United States and internationally; +• +Our ability to continue growing our molecular collection systems business; +48 +Table of Contents +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new +products; +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our +products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency +fluctuations; +• +Failure to achieve our targets for growth in revenues; +• +Changes in distributor buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted against us. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall +below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may +fall short of expectations because of lower than estimated customer demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, reduced governmental funding and other circumstances described +elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this +can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or +risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results could also fluctuate +and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect +our reputation and the price of our Common Stock. +Our Estimates or Judgments Relating to Critical Accounting Policies Are Based on +Assumptions That Can Change or Prove to be Incorrect. +Our discussion and analysis of financial condition and results of operations is +based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The +49 +Table of Contents +preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the +financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements, including those related to: +• +Revenue recognition; +• +Potential impairment of long-lived and intangible assets including goodwill; +• +Customer sales returns and allowances; +• +Allowance for uncollectible accounts receivable; +• +Reserve for inventory write-downs; +• +Stock-based compensation; +• +Income taxes; and +• +Contingencies. +We +base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in our discussion and analysis of financial condition and results of operations, the results of which +form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances +differ from those in our assumptions. If our operating results fall below the expectations of securities analysts and investors, the price of our Common Stock may decline. +Changes in Foreign Currency Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international sales have also been denominated in U.S. +Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. +dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and certain of its international sales are +denominated in local currencies, including the Euro, British Pound and Australian Dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our +expectation is that the DNAG business will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect DNAG’s revenues and expenses and the translation of DNAG’s financial results into U.S. +Dollars. Favorable movement in exchange rates have benefited us in prior periods. For example, in 2015, DNAG generated total revenues of U.S. $29.9 million and incurred total operating expenses of $17.0 million. As a result of a favorable change in +the U.S./Canadian dollar exchange rate, DNAG’s cost of goods sold and operating expenses were reduced by approximately $800,000 and $2.0 million, respectively, in 2015. Where there are unfavorable currency exchange rate fluctuations, our +consolidated financial statements including our balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, +we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully +hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +50 +Table of Contents +Changes in Tax Laws or Their Application Could Adversely Affect Our Results of Operations. +Changes in tax laws or their application could increase our costs and adversely affect our results of operations. Such changes could +affect applicable tax rates, utilization of tax loss carryforwards, and treatment of inter-company debt and interest payments. +We May +Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous +factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products; +• +The costs and timing of the expansion of our manufacturing capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments; +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There +can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks or Natural Disasters May Adversely Affect Our Business. +Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions +could adversely affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ +ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. +Although we have +business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including +earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities and computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have +difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. +51 +Table of Contents +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial +declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® +HIV, HCV and molecular collection systems products and our OraQuick ® In-Home HIV test; +• +The continuation of our HCV co-promotion agreement with AbbVie and the successful execution of other strategic arrangements; +• +Future announcements concerning us and our products, including with respect to significant acquisitions, strategic collaborations and joint +ventures; +• +Clinical results with respect to our products or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products; +• +Legislative developments and industry or competitive trends; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through +social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major +stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +The relatively low trading volume for our Common Stock; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our +Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +52 +Table of Contents +In the past, following periods of volatility in the market price of a company’s stock, +securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and a diversion of our management’s attention and resources, each of +which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common +Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the +perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the +market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional +stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock +could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales +plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Investor Confidence and Share Value May be Adversely Impacted if We and/or Our Independent Registered Public Accounting Firm Conclude That +Our Internal Control Over Financial Reporting is Not Effective. +As directed by Section 404 of the Sarbanes-Oxley Act of 2002, +the SEC adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our +independent registered public accounting firm must report on the effectiveness of these internal controls. +We expect that our internal +controls will continue to evolve as our business activities change. Although we seek to diligently and vigorously review our internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any +control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal +control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business. +If, during any year, our independent registered public accounting firm is not satisfied with our internal control over financial reporting or +the level at which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report that +is qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our +financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if it Appreciates in +Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and +do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a +53 +Table of Contents +result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain +the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under +Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions +that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. +These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +Future Sales of +Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the +perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as +to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary +corporate office and manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for +manufacturing activities. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis. In addition, our subsidiary, DNAG, changed the location of its offices near the end of 2015 and +now leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, research and development, and regulatory and quality operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings +From time to time, we are involved in certain legal actions arising in the ordinary +course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +In May 2015, our subsidiary DNAG filed a complaint in the United States District Court for the District of Delaware against Ancestry.com DNA +LLC (“Ancestry”) relating to the manufacture and sale by Ancestry of its oral fluid DNA collection device (the “Ancestry Device”). Ancestry previously purchased DNAG’s patented oral fluid DNA collection +devices. The complaint alleges that the manufacture and sale by Ancestry of the Ancestry Device infringes U.S. Patent No. 8,221,381 B2, which is owned by DNAG. In addition, the complaint alleges that Ancestry has breached the terms of +agreements under which Ancestry previously purchased DNAG products. The complaint also contains claims for conversion and trespass to chattel and includes an action to quiet title to the Ancestry Device and related patent +applications. DNAG is requesting the court to grant injunctive relief and damages. +54 +Table of Contents +On October 20, 2015, Ancestry filed with the United States Patent and Trademark Office +(“USPTO”) a Petition for Inter Partes Review of some, but not all, claims of U.S. Patent No. 8,221,381 B2. We expect the PTO to decide whether to initiate review of the DNAG patent in April 2016. +In July 2015, DNAG filed a complaint in the United States District Court for the District of Delaware against Spectrum DNA, Spectrum Solutions +L.L.C. and Spectrum Packaging L.L.C. (collectively “Spectrum”) relating to the manufacture and sale by Spectrum of an oral fluid DNA collection device (the “Spectrum Device”). We believe the Spectrum Device is the same as the +Ancestry device mentioned above and that Spectrum is the manufacturer of the Ancestry Device for Ancestry. The complaint alleges that the manufacture and sale by Spectrum of the Spectrum Device infringes U.S. patent number 8,221,381 B-2, which is +owned by DNAG. DNAG is requesting the court to grant injunctive relief and damages. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +55 +Table of Contents +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is +listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol OSUR. High and low sales prices reported by NASDAQ during the periods indicated are shown below. +Year ended December 31 +2015 +2014 +High +Low +High +Low +First Quarter +$ +10.62 +$ +6.10 +$ +8.60 +$ +5.34 +Second Quarter +$ +7.64 +$ +4.42 +$ +9.00 +$ +5.78 +Third Quarter +$ +5.95 +$ +4.39 +$ +8.94 +$ +7.21 +Fourth Quarter +$ +6.99 +$ +4.40 +$ +10.93 +$ +6.93 +On March 7, 2016, there were 415 holders of record and approximately 14,500 holders in street name of our +Common Stock, and the closing price of our Common Stock was $7.17 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend +to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number +of shares +purchased +Average price +paid per +Share +Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar +value) of shares that +may yet be repurchased +under the plans or +programs (2, 3) +October 1, 2015 - October 31, 2015 +255 +(1) +$ +4.94 +— +$ +19,570,287 +November 1, 2015 - November 30, 2015 +— +— +— +19,570,287 +December 1, 2015 - December 31, 2015 +777,061 +6.34 +777,061 +14,644,661 +777,316 +(1) +Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted shares, these shares were retired to +satisfy minimum tax withholdings. +(2) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 +million of outstanding shares. This share repurchase program may be discontinued at any time. +(3) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no +commitment to purchase any shares under this plan. +56 +Table of Contents +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of +Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the +Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the NASDAQ Composite Index and the +NASDAQ Biotechnology Index for the period from December 31, 2010 through December 31, 2015. The graph assumes that $100 was invested on December 31, 2010 in the Company’s Common Stock and in each of the above-mentioned indices, +and that all dividends, if any, were reinvested. +The NASDAQ Composite Index was chosen because it is a broad index of companies whose +equity securities are traded on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be +representative of the returns for any other past or future period. +12/10 +12/11 +12/12 +12/13 +12/14 +12/15 +OraSure Technologies, Inc. +100.00 +158.43 +124.87 +109.39 +176.35 +112.00 +NASDAQ Composite +100.00 +100.62 +116.97 +166.27 +188.90 +200.15 +NASDAQ Biotechnology +100.00 +113.92 +153.97 +263.29 +348.49 +369.05 +57 +Table of Contents +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, +“Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +ITEM 6. +Selected Consolidated Financial Data +The following table sets forth selected +consolidated financial data of the Company. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 15 and the information set forth in Item 7, “Management’s +Discussion and Analysis of Financial Condition and Results of Operations.” +Selected Consolidated Financial Data +(In thousands, except per share data) +Years ended December 31, +2015 +2014 +2013 +2012 +2011 (5) +Operating Results: +Net revenues +$ +119,719 +$ +106,464 +$ +98,940 +(2) +$ +87,820 +$ +81,881 +Costs and expenses +111,661 +111,266 +(1) +111,102 +(3) +104,090 +91,278 +Operating income (loss) +8,058 +(4,802 +) +(12,162 +) +(16,270 +) +(9,397 +) +Other income (expense), net +774 +531 +200 +(242 +) +(313 +) +Income tax expense (benefit) +665 +343 +(772 +) +(1,397 +) +(869 +) +Net income (loss) +8,167 +(4,614 +) +(11,190 +) +(15,115 +) +(8,841 +) +Earnings (loss) per share +Basic and Diluted +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +$ +(0.29 +) +$ +(0.19 +) +Shares used in computing earnings (loss) per share +Basic +56,397 +55,949 +55,555 +51,457 +46,908 +Diluted +56,846 +55,949 +55,555 +51,457 +46,908 +Cash Flow: +Cash flows provided by (used in) operating activities +$ +15,773 +$ +7,526 +(1) +$ +8,385 +(3) +$ +(5,373 +) +$ +(2,994 +) +December 31, +2015 +2014 +2013 +2012 (4) +2011 (5) +Financial Position: +Cash and short-term investments +$ +101,319 +$ +97,867 +$ +93,191 +$ +87,888 +$ +23,878 +Working capital +111,480 +104,752 +100,590 +103,483 +30,860 +Total assets +189,321 +189,633 +184,245 +191,439 +127,861 +Accumulated deficit +(170,178 +) +(178,345 +) +(173,731 +) +(162,541 +) +(147,426 +) +Stockholders’ equity +159,436 +158,701 +161,146 +170,315 +100,250 +(1) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a +reduction of operating expenses in the indicated period. +(2) +Includes a non-recurring net favorable $2.5 million adjustment to account for a change in the Company’s revenue recognition policy related to +its OraQuick ® In-Home HIV test. +(3) +Includes an $8.3 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a +reduction of operating expenses in the indicated period. +(4) +We received net proceeds of $70.2 million from a stock offering of 6,100,000 common shares completed on July 11, 2012. +(5) +Includes the results of DNA Genotek, Inc. from the acquisition date of August 17, 2011, as well as $2.6 million of transaction costs +associated with the acquisition. +58 +Table of Contents +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private +Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled +“Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned +not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, +along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. +Overview +We develop, manufacture, market and sell diagnostic products and specimen collection devices using our proprietary technologies, as well as +other diagnostic products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point-of-care, tests that are +processed in a laboratory, and a rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter (“OTC”) market. We also manufacture and sell oral fluid collection devices used to collect, stabilize and +store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Lastly, we manufacture and sell medical devices +used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, +research and academic institutions, distributors, government agencies, physicians’ offices, commercial and industrial entities, retail pharmacies and mass merchandisers, and to consumers over the internet. +Current Consolidated Financial Results +During the year ended December 31, 2015, our consolidated net revenues were $119.7 million, compared to $106.5 million for the year ended +December 31, 2014. Net product revenues during the year ended December 31, 2015 increased 6% to $104.5 million when compared to 2014, primarily as a result of higher sales of our molecular collection systems, OraQuick ® HCV and Intercept ® products. These increases were partially offset by lower sales of our OraQuick ® professional HIV and cryosurgical systems products. Consolidated other revenues for 2015 were $15.3 million, of which $13.5 million represents the ratable recognition of payments for exclusive +co-promotion rights and certain services provided under our HCV co-promotion agreement with AbbVie, and $1.8 million represents revenue recognized in connection with Ebola-related funding from the U.S. Department of Health and Human Services Office +of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”). Other revenues in 2014 of $7.6 million represent the recognition of exclusivity payments under the AbbVie +co-promotion agreement. +Our consolidated net income for the year ended December 31, 2015 was $8.2 million, or $0.14 per share on a +fully diluted basis, compared to a net loss of $4.6 million, or ($0.08) per share, for the year ended December 31, 2014. Our consolidated net income for the current period reflects the increase in product and other revenues, lower advertising +and promotional expenses associated with our OraQuick ® In-Home HIV test, and the impact of a favorable change in the Canadian to U.S. dollar exchange rate of approximately $2.8 million. These +improvements to the bottom line were partially offset by the absence of a $5.5 million Roche termination payment received in 2014 and which was reflected as a reduction in operating expenses. Additionally, we experienced higher legal costs and +increased expenses under our HCV co-promotion agreement with AbbVie in 2015 than in the prior year. +59 +Table of Contents +Cash provided by operating activities for the year ended December 31, 2015 was $15.8 +million, compared to $7.5 million for the year ended December 31, 2014. As of December 31, 2015, we had $101.3 million in cash and short term investments, compared to $97.9 million at December 31, 2014. +2015 Developments +Rapid Ebola Test +Early in 2015, we completed the design of a rapid Ebola antigen test using our +OraQuick ® platform. In June 2015, we entered into a contract for up to $10.4 million in total funding from BARDA related to our +OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and +regulatory activities. In September 2015, BARDA exercised an option under the contract to provide $7.2 million in additional funding for our OraQuick ® Ebola test. This funding will be used +primarily for clinical and regulatory activities required to request FDA 510(k) clearance for this product. Funding received under this contract is recorded as other revenue in our consolidated statement of operations as the activities are being +performed. +In July 2015, we received a U.S. Food and Drug Administration (“FDA”) Emergency Use Authorization (“EUA”) +for the OraQuick ® Ebola test. This authorization allows the use of the test for the duration of the U.S. Secretary of the Department of Health and Human Services’ (“HHS”) +August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. We have also +submitted for pre-qualification of this product with the World Health Organization. +During 2015, we recognized $2.3 million in revenue +from sales of this product to the Centers for Disease Control and Prevention (“CDC”) for investigational use and field testing in Africa. Data generated in these clinical and non-clinical studies was used in the application to obtain the +EUA from the FDA. We are also continuing to focus our efforts on securing sustainable product purchase commitments from both government and non-government sources for the OraQuick ® Ebola rapid +antigen test. +Microbiome Product Offering +During 2015, an area of focus for our molecular collection business has been the microbiome market, through the offering of our OMNIgene ® • Gut product for which we received CE mark approval and completed design validation on a high-throughput automated processing system. Several technical manuscripts with academic and biotech +groups are in process that will report on the ability of this product to “snapshot” microbiome communities at the point of collection. We sold our collection kit to over 100 customers and generated approximately $539,000 of revenue in +2015. +Business Segments +We operate +our business within two reportable segments: our “OSUR” business, which consists of the development, manufacture and sale of diagnostic products, specimen collection devices, and medical devices, and our “DNAG” or molecular +collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices that are used to collect, stabilize, transport, and store samples of genetic material for molecular testing. OSUR +revenues are derived primarily from products sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, +physicians’ offices, commercial and industrial entities, retail pharmacies, mass merchandisers and consumers over the internet. DNAG revenues result primarily from products sold into the commercial market, which consists of customers engaged in +consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetic testing, as well as products sold into the academic research market which consists of research laboratories, universities and +hospitals. +60 +Table of Contents +Results of Operations +YEAR ENDED DECEMBER 31, 2015 COMPARED TO DECEMBER 31, 2014 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +2015 +2014 +2015 +2014 +OSUR +$ +74,534 +$ +75,116 +(1 +)% +62 +% +71 +% +DNAG +29,924 +23,778 +26 +25 +22 +Net product revenues +104,458 +98,894 +6 +87 +93 +Other +15,261 +7,570 +102 +13 +7 +Net revenues +$ +119,719 +$ +106,464 +12 +% +100 +% +100 +% +Consolidated net product revenues increased 6% to $104.5 million in 2015 from $98.9 million in 2014, primarily +as a result of higher sales of our molecular collection systems, OraQuick ® HCV and Intercept ® products. These increases were partially +offset by lower sales of our OraQuick ® professional HIV and cryosurgical systems products. Other revenues were $15.3 million in 2015, of which $13.5 million represents exclusivity payments +received under our HCV co-promotion agreement with AbbVie and $1.8 million represents Ebola-related funding from BARDA. Other revenues were $7.6 million in 2014, all which represent exclusivity payments from AbbVie. +Consolidated net revenues derived from products sold to customers outside the U.S. were $23.2 million and $24.2 million, or 19% and 23% of +consolidated net revenues during the years ended December 31, 2015 and 2014, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not +material to our total net revenues. +Net Revenues by Segment +OSUR Segment +The +table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +Market +2015 +2014 +2015 +2014 +Infectious disease testing +$ +49,129 +$ +47,515 +3 +% +55 +% +58 +% +Substance abuse testing +10,271 +8,437 +22 +11 +10 +Cryosurgical systems +11,920 +15,505 +(23 +) +13 +19 +Insurance risk assessment +3,214 +3,659 +(12 +) +4 +4 +Net product revenues +74,534 +75,116 +(1 +) +83 +91 +Other +15,261 +7,570 +102 +17 +9 +Net revenues +$ +89,795 +$ +82,686 +9 +% +100 +% +100 +% +61 +Table of Contents +Infectious Disease Testing Market +Sales to the infectious disease testing market increased 3% to $49.1 million in 2015 from $47.5 million in 2014, primarily due to higher sales +of our OraQuick ® HCV product and OraQuick ® In-Home HIV test, partially offset by lower sales of our OraQuick ® HIV professional product. In addition, 2015 net infectious disease testing revenues included $2.3 million in initial sales of our +OraQuick ® Ebola rapid antigen test to the CDC for field testing in Africa. +The +table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2015 and 2014. +Year Ended December 31, +Market +2015 +2014 +% +Change +Domestic HIV +$ +24,956 +$ +29,933 +(17 +)% +International HIV +2,410 +2,483 +(3 +) +Domestic OTC HIV +6,992 +6,493 +8 +Net HIV revenues +34,358 +38,909 +(12 +) +Domestic HCV +7,502 +4,220 +78 +International HCV +3,884 +3,048 +27 +Net HCV revenues +11,386 +7,268 +57 +Net OraQuick ® revenues +$ +45,744 +$ +46,177 +(1 +)% +Domestic OraQuick ® HIV sales decreased 17% to $24.9 +million in 2015 from $29.9 million in 2014. This decrease was primarily the result of the migration of some customers to fourth generation automated HIV immunoassays performed in a laboratory or at the point-of-care, as recommended under testing +guidelines issued by the CDC, or to competitive point-of-care HIV tests perceived to be more sensitive. We anticipate that future sales of our professional HIV product will continue to be negatively affected as a result of the CDC’s testing +guidelines, changes in government funding, and continued price and product competition. International sales of our OraQuick ® HIV test decreased 3% during 2015 to $2.4 million from $2.5 million +in 2014 primarily due to lower sales in Africa and Europe partially offset by an increase in sales in Asia. +Sales of our OraQuick ® In-Home HIV test increased 8% to $7.0 million in 2015 from $6.5 million in 2014 largely due to a price increase implemented in August 2015 and an increase in sales volume in the fourth quarter of +2015 immediately following a celebrity’s announcement that he had tested positive for the HIV virus. These increases in the latter half of 2015 were partially offset by a decline in sales in the first quarter of the year which was primarily the +result of our decision to transition away from broad-based consumer advertising and focus our marketing and promotional efforts at the retail outlet level in the second half of 2014. +Domestic OraQuick ® HCV sales increased 78% to $7.5 million in 2015 from $4.2 million +in 2014, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV testing programs. International OraQuick ® HCV sales increased 27% +to $3.9 million in 2015 from $3.0 million in 2014, primarily due to the expansion of our business into Asia. +We believe our OraQuick ® HCV product represents an opportunity for future sales growth given the recent FDA approval of several new drug therapies for treating HCV. However, demand for our HCV product, particularly in +the public health marketplace, may be somewhat tempered by the limited availability of government funding allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid HCV testing. Sales to physicians can +also be adversely affected by the level of reimbursement available from insurance providers and competition from laboratory-based HCV tests. The intensely competitive market for new HCV therapies and the decisions by insurance providers and payors +to grant preferred or exclusive formulary status to one HCV therapy over another have adversely affected our initiatives under the HCV co-promotion agreement with AbbVie. These and other factors could limit the future growth of our HCV business. +62 +Table of Contents +International orders for both our HIV and HCV products can be sporadic in nature and are often +predicated upon the availability of governmental funding, the impact of competition and other factors. As such, there is no assurance that such sales will continue at the same levels in future periods. +Substance Abuse Testing Market +Net +substance abuse testing revenues increased 22% to $10.3 million in 2015 from $8.4 million in 2014, primarily as a result of higher sales of our Intercept ® drug testing system. Domestic +Intercept ® sales in 2015 increased to $7.8 million compared to $6.1 million in 2014 largely due to the recovery of customers previously lost to competition, improved domestic employment +conditions, and the addition of customers who we believe recognize the advantages of oral fluid testing in identifying recent drug use. +Cryosurgical +Systems Market +Sales of our cryosurgical systems products (which includes both the physicians’ office and OTC markets) decreased +23% to $11.9 million in 2015 from $15.5 million in 2014. +The table below shows a breakdown of our total net cryosurgical systems revenues +(dollars in thousands) generated in each market during 2015 and 2014. +Year Ended December 31, +Market +2015 +2014 +% +Change +Domestic professional +$ +4,311 +$ +6,750 +(36 +)% +International professional +916 +693 +32 +Domestic OTC +390 +108 +261 +International OTC +6,303 +7,954 +(21 +) +Net cryosurgical systems revenues +$ +11,920 +$ +15,505 +(23 +)% +Sales of our Histofreezer ® product in the domestic +professional market decreased 36% to $4.3 million in 2015, compared to $6.8 million in 2014 largely as a result of distributor consolidation and competition from new private-label brands. During 2015, international sales of Histofreezer ® increased to $916,000, compared to $693,000 in the prior year primarily due to higher sales in Asia. +In the fourth quarter of 2014, we re-launched our OTC wart removal product in the U.S. retail market through private labeling with a large +pharmacy chain. Sales related to this product were $390,000 for the full year of 2015 compared to $108,000 in 2014. We expect this area of cryosurgical sales to increase due to broader retail adoption of our product. +Sales of our international OTC cryosurgical products during 2015 decreased 21% to $6.3 million, compared to $8.0 million in 2014, largely due +to lower sales to our Latin American distributor. Sales decreased to $1.3 million, compared to $3.0 million in 2014, due to challenges in the local markets, including declining economic conditions in Argentina, a restructuring of our +distributor’s business operations in Mexico, and overall customer ordering patterns. +Insurance Risk Assessment Market +Sales to the insurance risk assessment market decreased 12% to $3.2 million in 2015 from $3.7 million in 2014, as a result of reduced demand in +the domestic life insurance market, as well as the continued adoption by some underwriters of a “Simplified Issue” policy. Where such a policy is issued, applicants are required to respond to a questionnaire about their behaviors rather +than undergoing lab-based tests. We expect this trend to continue. +63 +Table of Contents +Other revenues +Other revenues were $15.3 million in 2015, of which $13.5 million represent the recognition of exclusivity revenues under our HCV co-promotion +agreement with AbbVie, and $1.8 million represents Ebola-related funding from BARDA. Other revenues in 2014 were $7.6 million and represent the recognition of exclusivity revenues from AbbVie. +DNAG Segment +Molecular +Collection Systems +Net molecular collection systems revenues, which primarily represent sales of our Oragene ® product line, increased 26% to $29.9 million in 2015 from $23.8 million in 2014. Sales of Oragene ® in the commercial market increased +approximately 41% in 2015, primarily due to increased orders from DNAG’s largest existing U.S. customer and incremental revenues from new customers, partially offset by lower sales to other existing U.S. customers who experienced regulatory and +reimbursement challenges during 2015. Sales in the academic market were flat at $9.8 million in both 2015 and 2014. +CONSOLIDATED +OPERATING RESULTS +Consolidated gross margin was 67% in 2015 compared to 63% in 2014. This increase was largely due to the $7.7 +million increase in other revenues, a reduction in royalty expense and a favorable change in the exchange rate between the Canadian and U.S. dollar. +Consolidated operating income increased by $12.9 million to $8.1 million in 2015, compared to an operating loss of $4.8 million in 2014. The +higher operating income reflects the increase in product and other revenues, the impact of a favorable change in the Canadian to U.S. dollar exchange rate, and lower advertising and promotional expenses associated with our OraQuick ® In-Home HIV test. These improvements were partially offset by the absence of a $5.5 million Roche termination payment received in 2014 (which was reflected as a reduction in operating expenses), +as well as higher legal costs and increased expenses under our HCV co-promotion agreement with AbbVie in 2015. +OPERATING INCOME (LOSS) +BY SEGMENT +OSUR Segment +OSUR’s gross margin was 66% in 2015 compared to 60% in 2014. OSUR’s 2015 margin was positively impacted by the increase in other +revenues and a reduction in royalty expense during the current year. +Research and development expenses decreased 5% to $8.9 million in +2015 from $9.4 million in 2014, largely due to lower lab supply costs, partially offset by higher study and program costs related to the fully-automated high-throughput drugs-of-abuse assays we are jointly developing with Thermo Fisher. +Sales and marketing expenses decreased 20% to $26.6 million in 2015 from $33.1 million in 2014, primarily as a result of lower advertising and +promotional costs for our OraQuick ® In-Home HIV test which totaled $1.8 million in 2015, as compared to $8.5 million in 2014, partially offset by higher sales and marketing costs associated +with our OraQuick ® HCV co-promotion agreement with AbbVie. +General and +administrative expenses decreased 2% to $20.1 million in 2015 from $20.6 million in 2014 due to lower staffing expenses. +In 2014, we +received a $5.5 million Roche termination payment which was treated as a reduction in operating expenses. This payment did not recur in 2015. +64 +Table of Contents +All of the above contributed to OSUR’s operating income of $3.6 million for 2015, which +included non-cash charges of $3.0 million for depreciation and amortization and $5.5 million for stock-based compensation. +DNAG +Segment +DNAG’s gross margin was 70% in 2015 compared to 73% in 2014. This decrease was attributable to an increased volume of +lower margin sales experienced in 2015 when compared to 2014, partially offset by a favorable change in the U.S./Canadian dollar exchange rate of approximately $849,000 as compared to approximately $430,000 in 2014. +Research and development expenses increased 4% to $2.7 million in 2015 compared to $2.6 million in 2014 due to increased spending on the +microbiome product and the new product initiatives, partially offset by a favorable change in the U.S./Canadian dollar exchange rate of approximately $357,000 in 2015 as compared to approximately $179,000 in 2014. +Sales and marketing expenses increased 6% to $8.4 million in 2015 from $8.0 million in 2014 due to higher commission and staffing costs, +partially offset by a favorable change in the U.S./Canadian dollar exchange rate of $1.1 million in 2015 as compared to approximately $508,000 in 2014. +General and administrative expenses increased 68% to $5.3 million in 2015 compared to $3.1 million in 2014, largely due to higher litigation +costs partially offset by a favorable change in the U.S./Canadian dollar exchange rate of $464,000 as compared to approximately $218,000 in 2014. +All of the above contributed to DNAG’s operating income of $4.5 million for 2015, which included non-cash charges of $2.7 million for +depreciation and amortization and $566,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against OSUR’s total U.S. deferred tax asset is appropriate as +the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax expense was recorded for OSUR’s pre-tax income in 2015 and no income tax benefit was recorded for OSUR’s pre-tax loss in 2014. For +the year ended December 31, 2015 and 2014, we recorded Canadian income tax expense of $665,000 and $343,000, respectively. +YEAR ENDED DECEMBER +31, 2014 COMPARED TO DECEMBER 31, 2013 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +2014 +2013 +2014 +2013 +OSUR +$ +75,116 +$ +77,936 +(4 +)% +71 +% +78 +% +DNAG +23,778 +20,381 +17 +22 +21 +Net product revenues +98,894 +98,317 +1 +93 +99 +Other +7,570 +623 +NM +* +7 +1 +Net revenues +$ +106,464 +$ +98,940 +8 +% +100 +% +100 +% +* +Calculation is not considered meaningful. +65 +Table of Contents +Consolidated net product revenues increased 1% to $98.9 million in 2014 from $98.3 million in +2013, primarily as a result of higher sales of our molecular collection systems, OraQuick ® HCV and cryosurgical systems products. These increases were partially offset by lower sales of our +OraQuick ® In-Home HIV test and our professional OraQuick ® HIV, substance abuse, and insurance risk assessment products. Other revenues +were $7.6 million in 2014 and represent the recognition of revenues from AbbVie for exclusive co-promotion rights and certain services provided under our HCV agreement. Other revenues were $623,000 in 2013 and represent royalties received on sales +of Merck’s OTC cryosurgical wart removal product pursuant to a license and settlement agreement that expired in August 2013. +Consolidated net revenues derived from products sold to customers outside the U.S. were $24.2 million and $21.7 million, or 23% and 22% of +consolidated net revenues during the years ended December 31, 2014 and 2013, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not +material to our total net revenues. +Net Revenues by Segment +OSUR Segment +The +table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +% +Change +Percentage of Total +Net Revenues +Market +2014 +2013 +2014 +2013 +Infectious disease testing +$ +47,515 +$ +50,961 +(7 +)% +58 +% +65 +% +Substance abuse testing +8,437 +8,571 +(2 +) +10 +11 +Cryosurgical systems +15,505 +14,468 +7 +19 +18 +Insurance risk assessment +3,659 +3,936 +(7 +) +4 +5 +Net product revenues +75,116 +77,936 +(4 +)% +91 +99 +% +Other +7,570 +623 +NM +* +9 +1 +Net revenues +$ +82,686 +$ +78,559 +5 +% +100 +% +100 +% +* +Calculation is not considered meaningful. +Infectious Disease Testing Market +Sales +to the infectious disease testing market decreased 7% to $47.5 million in 2014 from $51.0 million in 2013, primarily due to lower sales of our OraQuick ® HIV professional product and OraQuick ® In-Home HIV test, partially offset by higher sales of our OraQuick ® HCV product. +The table below shows a breakdown of our total net OraQuick ® revenues (dollars in +thousands) during 2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% +Change +Domestic HIV +$ +29,933 +$ +32,301 +(7 +)% +International HIV +2,483 +3,365 +(26 +) +Domestic HIV OTC +6,493 +9,106 +(29 +) +Net HIV revenues +38,909 +44,772 +(13 +) +Domestic HCV +4,220 +2,847 +48 +International HCV +3,048 +2,268 +34 +Net HCV revenues +7,268 +5,115 +42 +Net OraQuick ® revenues +$ +46,177 +$ +49,887 +(7 +)% +66 +Table of Contents +Domestic OraQuick ® HIV sales decreased +7% to $29.9 million in 2014 from $32.3 million in 2013. This decrease was primarily the result of customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under new testing guidelines issued by the +CDC, and some price competition. International sales of our OraQuick ® HIV test during 2014 decreased 26% to $2.5 million from $3.4 million in 2013 largely due to lower order volume related to +testing initiatives in Africa and the inconsistent purchasing patterns of certain Latin American distributors. +During 2014, we recorded +$6.5 million in net revenues from sales of our OraQuick ® In-Home HIV test. In 2013, we recorded $9.1 million in net revenues from sales of our OraQuick ® In-Home HIV test, including $2.5 million of previously deferred gross revenue recognized in December 2013 when we changed our revenue recognition policy. Since the product launch in late 2012, +revenues had been recognized upon consummation of a purchase by consumers either in a store or over the internet. In December 2013, as a result of our growing experience with this product and improved ability to estimate potential product returns, +we began recognizing revenues upon shipment of the product to retailers or distributors. Based on available retail point-of-sale data, consumer purchases increased 5% in 2014 as compared to 2013. +Sales of our OraQuick ® In-Home HIV test in 2014 and 2013 included approximately +$392,000 and $701,000, respectively, of direct sales to public health customers. +Domestic OraQuick ® HCV sales increased 48% to $4.2 million in 2014 from $2.8 million in 2013, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV +testing programs. International OraQuick ® HCV sales increased 34% to $3.0 million in 2014 from $2.3 million in 2013, primarily as a result of the inclusion in 2014 of a full year of purchases +by a multi-national humanitarian organization, which first purchased the product in the latter half of 2013. Also contributing to the increase in international sales was higher sales into certain Asian markets. +Substance Abuse Testing Market +Net +substance abuse testing revenues decreased 2% to $8.4 million in 2014 from $8.6 million in 2013, primarily as a result of slightly higher sales of our Intercept ® drug testing system offset by +lower sales of our Q.E.D. ® rapid point-of-care saliva alcohol test. The table below shows a breakdown of our total net Intercept ® +revenues (dollars in thousands) generated in each market during 2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% +Change +Domestic +$ +6,101 +$ +5,693 +7 +% +International +149 +500 +(70 +) +Net Intercept ® revenues +$ +6,250 +$ +6,193 +1 +% +Domestic Intercept ® sales in 2014 increased to $6.1 +million compared to $5.7 million in 2013, primarily due to market growth resulting from increased interest in oral fluid testing by customers who previously used alternative specimen types for drug testing and improved domestic employment +conditions. International Intercept ® sales decreased 70% to $149,000 in 2014 from $500,000 in 2013 largely due to the absence of purchases by a UK distributor who began selling its own +competing oral specimen collection device in 2012. Sales to this distributor were $316,000 in 2013. +Cryosurgical Systems Market +Sales of our cryosurgical systems products (which includes both the physicians’ office and OTC markets) increased 7% to $15.5 million in +2014 from $14.5 million in 2013. +67 +Table of Contents +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in +thousands) generated in each market during 2014 and 2013. +Year Ended December 31, +Market +2014 +2013 +% +Change +Domestic professional +$ +6,750 +$ +6,020 +12 +% +International professional +693 +1,441 +(52 +) +Domestic OTC +108 +— +100 +International OTC +7,954 +7,007 +14 +Net cryosurgical systems revenues +$ +15,505 +$ +14,468 +7 +% +Sales of our Histofreezer ® product in the domestic +professional market increased 12% to $6.8 million in 2014, compared to $6.0 million in 2013. This increase is largely due to higher sales by one of our distributors to teaching hospitals, physician offices, and the military. This increase also +reflects below normal sales in early 2013, resulting from higher distributor purchases in the fourth quarter of 2012 in advance of a price increase implemented in January 2013. The current year increase in net revenues was negatively impacted by the +merger of our two largest distributors, who began selling a private label cryosurgical product in direct competition with our Histofreezer ® product in 2014. +During 2014, international sales of Histofreezer ® decreased to $693,000, compared to +$1.4 million in the same period of the prior year. Our long-term supply agreement for the Histofreezer ® product with a contract manufacturer terminated in late 2013, and that former supplier +has since begun promoting a competing product similar to Histofreezer ® . In order to remain competitive with this new product, we have decreased the per unit sales price of our Histofreezer ® product in certain international markets. In addition, we experienced delivery problems and inventory shortages as we transitioned to a new manufacturer of our international Histofreezer ® product line. +In the fourth quarter of 2014, we launched our wart removal product +in the U.S. retail market through private labeling with a large pharmacy chain. Sales related to this product were $108,000. +Sales of our +international OTC cryosurgical products during 2014 increased 14% to $8.0 million compared to $7.0 million in 2013, largely due to higher sales to our European distributor, partially offset by lower sales to our Latin American distributor. +Sales to our European distributor increased to $4.8 million, compared to $3.6 million during 2013, primarily due to the launch of our product +into new geographic territories and new market segments in Europe. Sales to our Latin American distributor decreased to $3.0 million, compared to $3.3 million in 2013, reflecting lower sales into Brazil, partially offset by an increase in sales into +Mexico. +Insurance Risk Assessment Market +Sales to the insurance risk assessment market decreased 7% to $3.7 million in 2014 from $3.9 million in 2013, as a result of reduced demand in +the domestic life insurance market, resulting from the adoption by some underwriters of a “Simplified Issue” policy, pursuant to which testing for risk factors is replaced by having applicants respond to a questionnaire about their +behaviors. +Other revenues +Other +revenues were $7.6 million in 2014 and represent the recognition of exclusivity revenues under our HCV co-promotion agreement with AbbVie. Other revenues in 2013 were $623,000 and represent royalties paid on domestic outsales of Merck’s OTC +cryosurgical wart removal product, pursuant to a license and settlement agreement which expired in August 2013. +68 +Table of Contents +DNAG Segment +Molecular Collection Systems +Net +molecular collection systems revenues, which primarily represent sales of our Oragene ® product line, increased 17% to $23.8 million in 2014 from $20.4 million in 2013. Sales of Oragene ® in the commercial market increased approximately 9% in 2014, primarily as a result of overall market growth and increased use of our +Oragene ® product in pharmacogenomics testing. Sales of Oragene ® in the academic market increased 35% largely due to orders placed by +two new international customers as well as higher sales to one of the Company’s larger existing academic customers. Sales to DNAG’s largest commercial customer decreased approximately $3.4 million in 2014. Sales to DNAG’s other +customers grew 48% in the current year and substantially offset the lower sales to this large customer. +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 63% in 2014 compared to 59% in 2013. This increase was largely due to the $7.6 million of other +revenues associated with our AbbVie agreement, as well as a more favorable product mix driven largely by increased DNAG sales to higher margin customers. +Consolidated operating loss decreased by $7.4 million to $4.8 million in 2014, compared $12.2 million in 2013. The lower operating loss was +primarily due to the higher licensing and product development revenues and lower HIV OTC sales and marketing expenses in 2014, partially offset by a $2.8 million reduction in contract termination payments received from Roche during 2014. +OPERATING INCOME (LOSS) BY SEGMENT +OSUR Segment +OSUR’s gross margin was 60% in 2014 compared to 57% in 2013. OSUR’s 2014 margin was positively impacted by an increase in other +revenues recorded during 2014. +Research and development expenses increased 13% to $9.4 million in 2014 from $8.4 million in 2013 largely +due to increased lab supply costs partially offset by lower clinical trial and staffing expenses. +Sales and marketing expenses decreased +16% to $33.1 million in 2014 from $39.5 million in 2013, primarily as a result of lower advertising and promotional costs for our OraQuick ® In-Home HIV test which totaled $8.5 million in 2014, +as compared to $18.8 million in 2013. This reduction in spending was the result of our decision to focus our marketing and promotional efforts at the retail outlet level and transition away from broad-based consumer advertising in June 2014. +Partially offsetting this decrease were higher sales and marketing costs associated with our OraQuick ® HCV co-promotion agreement with AbbVie. +General and administrative expenses increased 13% to $20.6 million in 2014 from $18.2 million in 2013 due to higher legal, staffing and +consulting expenses. +All of the above, along with the $5.5 million contract termination payment from Roche, contributed to OSUR’s +operating loss of $8.3 million for 2014, which included non-cash charges of $3.3 million for depreciation and amortization and $5.3 million for stock-based compensation. +DNAG Segment +DNAG’s gross margin was 73% in 2014 compared to 67% in 2013. This improvement was primarily attributable to an increased volume of higher +margin sales experienced in 2014 when compared to 2013. +69 +Table of Contents +DNAG operating expenses rose to $13.7 million in 2014 from $13.0 million in 2013. Research and +development expenses remained relatively flat at $2.6 million in 2014 and 2013. Sales and marketing expenses increased 14% to $8.0 million in 2014 from $7.0 million in 2013 largely due to higher staffing and consulting costs. General and +administrative expenses decreased 9% to $3.1 million in 2014 from $3.4 million in 2013 largely due to lower legal fees. +All of the above +contributed to DNAG’s operating income of $3.5 million for 2014, which included non-cash charges of $3.1 million for depreciation and amortization and $432,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against OSUR’s total U.S. deferred tax asset is appropriate as +the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax benefit was recorded for OSUR’s pre-tax loss in 2014 or 2013. For the year ended December 31, 2014, we recorded Canadian income tax +expense of $343,000. For the year ended December 31, 2013, we recorded a Canadian income tax benefit of $772,000 which was associated with certain Canadian research and development and investment tax credits. The Canadian income tax benefit was +considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG. +Liquidity +and Capital Resources +December 31, +2015 +2014 +(In thousands) +Cash +$ +94,094 +$ +92,867 +Short-term investments +7,225 +5,000 +Working capital +111,480 +104,752 +Our cash and short-term investment balances increased to $101.3 million at December 31, 2015 from $97.9 +million at December 31, 2014. Our working capital increased to $111.5 million at December 31, 2015 from $104.8 million at December 31, 2014. +During 2015, we generated $15.8 million in cash from our operating activities. Our net income of $8.2 million was increased by non-cash +stock-based compensation expense of $6.0 million, depreciation and amortization expense of $5.7 million, and other non-cash charges of $605,000. A $2.3 million decrease in inventory balances largely associated with our OraQuick ® HCV product also contributed to cash generated in 2015. Also contributing to cash provided by operations in 2015 was a net increase in deferred revenue of $1.7 million, which represents the +receipt of cash payments from AbbVie reduced by the amounts ratably recognized in revenue during the period. Uses of cash in operating activities during 2015 included a $3.7 million increase in accounts receivable resulting from a higher level of +product orders placed near the end of the year; a $2.6 million decrease in accounts payable largely associated with a decrease in expenses related to the AbbVie agreement; a $1.4 million increase in prepaid expenses and other assets largely +associated with the new Canadian office lease and the buy-out of our royalty obligation under one of our license agreements; and a $992,000 decrease in accrued expenses and other liabilities largely associated with a decrease in our royalty +obligations. +We used a net amount of $6.7 million in investing activities during 2015 to purchase $26.9 million in short-term investments +and $3.7 million to acquire property and equipment. These payments were offset by proceeds received from the maturities of short-term investments of $23.9 million. During the year ending December 31, 2016, we expect to invest approximately $5.3 +million in capital expenditures, primarily to purchase additional manufacturing equipment, upgrade certain older equipment and make improvements to our facilities. +70 +Table of Contents +Net cash used in financing activities was $5.7 million in 2015, which resulted from the use of +$4.9 million to repurchase shares under our stock repurchase plan and $1.2 million for the repurchase of common stock for withholding taxes related to the vesting of restricted shares. These uses of cash were partially offset by $404,000 in proceeds +received from the exercise of stock options. +Our current cash balance is expected to be sufficient to fund our current operating and +capital needs through at least the next twelve months. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress +of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and +cost of obtaining regulatory approvals, the timing and cost of future stock repurchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing +activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. +Contractual Obligations and Commercial Commitments +The following sets forth our approximate aggregate obligations as of December 31, 2015 (in thousands) for future payments under contracts +and other contingent commitments, for the year 2016 and beyond: +Payments due by December 31, +Contractual Obligations +Total +2016 +2017 +2018 +2019 +2020 +Thereafter +Operating leases 1 +$ +2,488 +$ +362 +$ +355 +$ +351 +$ +334 +$ +362 +$ +724 +Employment contracts 2 +1,957 +1,957 +— +— +— +— +— +Purchase obligations 3 +4,488 +4,488 +— +— +— +— +— +Minimum commitments under contracts 4 +1,292 +500 +500 +292 +— +— +— +Total contractual obligations +$ +10,225 +$ +7,307 +$ +855 +$ +643 +$ +334 +$ +362 +$ +724 +1 +Represents payments required under our operating leases. See Note 11 of the Notes to the consolidated financial statements included herein. +2 +Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 11 of the Notes to the +consolidated financial statements included herein. +3 +Represents payments required by non-cancellable purchase orders related to inventory, capital expenditures and other goods or services. See Note 11 +of the Notes to the consolidated financial statements included herein. +4 +Represents payments required pursuant to certain licensing agreements executed by the Company. These agreements are cancellable within a specified +number of days after communication by the Company of its intent to terminate. See Note 11 of the Notes to the consolidated financial statements included herein. +Off-Balance Sheet Arrangements . We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation +S-K under the Securities Exchange Act of 1934, as amended. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial +statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported +amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our +judgments and estimates, including those related to bad debts, customer sales returns, inventories, intangible assets, income taxes, revenue recognition, +71 +Table of Contents +contingencies and litigation. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of +which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of +this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the +uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . We recognize +product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. +Other than for our OraQuick ® In-Home HIV test, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from +warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We began selling our OraQuick ® In-Home HIV test in the third quarter of 2012. From launch through November 2013, our revenue practices with respect to the OraQuick ® +In-Home HIV test were different than those customarily used in the consumer package goods industry. Under U.S. generally accepted accounting principles, product revenue cannot be recognized unless the amount of future returns can be reasonably +estimated. Because our OraQuick ® In-Home HIV test was a new product for which we did not have a historical record of returns, we did not believe we could reasonably determine a return rate. As +a result we initially did not recognize revenue when we shipped to the retail trade. For these product shipments, we invoiced the retailer or distributor, recorded deferred revenue at the gross invoice sales price, and classified the cost basis of +the product held by the retailer or distributor as a component of inventory. We then recognized revenue upon the consummation of a sale to the retail customer either in a store or over the internet. With the passage of time, however, we concluded +that we had sufficient data and visibility into our distribution channel to develop a reasonable estimate of the level of expected returns. As such, commencing in December 2013, we recognized previously deferred revenue and its related cost of goods +sold, and began to recognize revenue for this product upon shipment to the retailers or distributors. +Our net revenues recorded on sales +of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and +chargebacks. Some of these allowances are estimates established by management, based upon currently available information, and are adjusted to reflect known changes in the factors that impact those estimates. These allowances are recorded as a +reduction of gross revenue when recognized in our statement of operations. +Royalty income from the grant of license rights is recognized +during the period in which the revenue is earned and the amount is determinable from the licensee. It is recorded as other revenue in our statements of operations. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes +assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we +entered into a Master Program Services and Co-Promotion Agreement with AbbVie, to co-promote our OraQuick ® HCV test in the United States. The product is used to test individuals at-risk for +HCV. We are responsible for manufacturing and selling the product into all markets covered by this agreement. +Pursuant to the +Co-Promotion Agreement, we have granted exclusive co-promotion rights for the OraQuick ® HCV test in certain markets to AbbVie and we have agreed to develop, implement, administer and maintain +a +72 +Table of Contents +patient care database for the exclusive use of AbbVie. This patient care database is being used to compile patient information regarding new individuals who have tested positive for HCV using our +OraQuick ® HCV test. We have also jointly agreed with AbbVie to co-promote our OraQuick ® HCV test in certain market segments. +Under the terms of this agreement, which runs through December 31, 2019, we are eligible to receive up to $75.0 million in aggregate +payments. We are recognizing these payments ratably on a monthly basis over the term of the agreement. In addition, if certain performance-based milestones are achieved, we may be eligible to receive additional milestone payments. These payments +would be based upon the aggregate number of new patients enrolled in the patient care database, in a given calendar year, after exceeding a baseline threshold, and could range from $3.5 million to $55.5 million annually over the term of the +agreement. The first performance-based milestone period ended on December 31, 2015 and we did not achieve this milestone during this period. The agreement also contains certain termination, indemnification and other provisions, typical of +agreements of this type. Under certain circumstances, either party may terminate the agreement before its expiration and such a termination could occur as early as December 31, 2016. Amounts related to this agreement are recorded as other +revenue in our statements of operations. +On June 12, 2015, we entered into a contract for up to $10.4 million in total funding from +BARDA related to the development of our OraQuick ® Ebola Rapid Antigen test. The three-year, multi-phased contract includes an initial commitment of $1.8 million and options for up to an +additional $8.6 million to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million in additional funding for our OraQuick ® Ebola +Rapid Antigen test. Amounts related to this contract are recorded as other revenue in our statement of operations as the activities are being performed and the related costs are incurred. During 2015, $1.8 million was recognized in connection with +this contract. +Customer Sales Returns and Allowances. We do not grant product return rights to our customers for any product, +except for our OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross +OraQuick ® In-Home HIV product revenues in our consolidated statement of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail +factors, and is reviewed regularly to ensure that it reflects potential product returns. As of December 31, 2015 and 2014, the reserve for sales returns and allowances was $310,000 and $437,000, respectively. While product returns have been +within our expectations and the allowance provided, if actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain +retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected. +Allowance for Uncollectible Accounts Receivable . Accounts receivable are reduced by an estimated allowance for amounts that may become +uncollectible in the future. On an ongoing basis, we perform credit evaluations of our customers and adjust credit limits based upon the customer’s payment history and creditworthiness, as determined by a review of their current credit +information. We also continuously monitor collections and payments from our customers. +Based upon historical experience and any specific +customer collection issues that are identified, we use our judgment to establish and evaluate the adequacy of our allowance for estimated credit losses, which was $798,000 as of December 31, 2015. While credit losses have been within our +expectations and the allowance provided, these losses can vary from period to period. Furthermore, there is no assurance that we will experience credit losses at the same rates as we have in the past. The current economic environment could adversely +affect the operations, cash flows and financial condition of our customers. These circumstances may adversely impact the liquidity or financial position of our customers and could have a material impact on the collectability of our accounts +receivable and future operating results. +Deferred Revenue . We record deferred revenue when funds are received prior to the +recognition of the associated revenue. Deferred revenue as of December 31, 2015 and 2014 includes customer prepayments of $784,000 and +73 +Table of Contents +$613,000, respectively. Deferred revenue as of December 31, 2015 and 2014 also includes $8.9 million and $7.4 million, respectively, from AbbVie, which represents the excess of the payments +received from AbbVie over the amounts earned and recognized ratably in our consolidated statement of operations. +Inventories . Our +inventories are valued at the lower of cost or market, determined on a first-in first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate +quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories based primarily on the estimated forecast of product sales. When, in the opinion of management, factors indicate that +impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. During 2015, we wrote-off inventory which had a cost of +$2.6 million. In 2014 and 2013, we wrote-off inventory which had a cost of $1.8 million and $1.3 million, respectively. These write-offs were a result of quality, scrap and product expiration issues. Although we make every effort to ensure the +accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Stock-Based Compensation . We recognize the fair value of equity-based awards as compensation expense in our statement of operations. +The fair value of our stock option awards is estimated using a Black-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the expected stock price volatility and the estimated +life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the option. The fair value of our restricted shares is +based on the market value of the shares at the date of grant and is recognized on a straight-line basis over the related vesting period of the award. +Long-Lived and Intangible Assets. Our long-lived assets are comprised of property and equipment, intangible assets and goodwill. +Together, these assets had a net book value of $50.9 million, or 27% of our total assets, as of December 31, 2015. Property and equipment and intangible assets are depreciated or amortized on a straight-line basis over their estimated useful +lives, which we determine based upon our estimate of the period of time over which each asset will generate revenues. An impairment of long-lived or intangible assets could occur whenever events or changes in circumstances indicate that the net book +value of our assets may not be recoverable. Events which could trigger asset impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of an asset or in +our overall business strategy, significant negative industry or economic trends, and shortening of product life-cycles or changes in technology. If we believe impairment of an asset has occurred, we measure the amount of such impairment by comparing +the net book value of the affected assets to the fair value of these assets, which is generally determined based upon the present value of the expected cash flows associated with the use of these assets. If the net book value exceeds the fair value +of the impaired assets, we would incur an impairment expense equal to this difference. +We currently believe the future cash flows to be +received from all remaining long-lived and intangible assets as of December 31, 2015 will exceed their book value. We did not recognize any impairment losses for the years ended December 31, 2015, 2014, or 2013. Any unanticipated +significant impairment in the future, however, could have a material adverse impact to our balance sheet and future operating results. +Goodwill. Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable +intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. +generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying +amount, then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair +value of the +74 +Table of Contents +applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, we perform the second +step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit’s goodwill and intangible assets with their +respective carrying values. +We performed our annual impairment assessment as of July 31, 2015 utilizing a qualitative +evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting +unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the +fiscal third quarter, or sooner if a triggering event occurs. +Deferred Tax Assets and Liabilities . At December 31, +2015, we had federal Net Operating Loss (“NOL”) carryforwards of $63.0 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $39.4 million at December 31, +2015. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon +the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future +taxable income and tax planning strategies in making this assessment. +We currently have a full valuation allowance recorded against our +total U.S. deferred tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax asset in the immediate future. Each year, we continue to reevaluate our valuation +allowance position and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized in the immediate future. As such, we maintain a full valuation allowance as of December 31, 2015 and 2014 against our +deferred tax assets associated with the operations subject to income tax in the U.S. +Our ability to use our federal NOL carryforwards to +offset future federal income tax obligations could be limited by changes in the ownership of our stock. Internal Revenue Code (“IRC”) Section 382 contains provisions that limit the amount of federal NOL carryforwards that can be used +in any given year in the event of specified occurrences, including significant ownership changes. During 2005, the Company completed an analysis, with the assistance of independent tax specialists, to determine if any IRC Section 382 ownership +changes had occurred that would limit the amount of NOLs that could be utilized to offset future taxable income. As a result of this analysis, the Company concluded that prior period ownership changes may impose a limitation on the amount of NOLs +that can be utilized in a given year. The Company does not believe, however, that this limitation will impair our future ability to utilize NOLs to offset our future taxable income. The Company continues to review ownership changes on an annual +basis and we do not believe we have had a subsequent ownership change that would impact the NOLs. +In connection with the DNAG acquisition +in August 2011, a deferred tax liability was recorded to reflect the tax effects of basis differences of intangible assets and inventories for financial reporting and Canadian income tax purposes. For the year ended December 31, 2015 and 2014, +we recorded Canadian income tax expense of $665,000 and $343,000, respectively. For the years ended December 31, 2013, we recorded a Canadian income tax benefit of $772,000 associated with certain Canadian research and development and +investment tax credits and DNAG’s loss before income taxes in that year. The income tax benefit associated with DNAG was considered realizable based upon the scheduled reversal of the deferred tax liabilities recorded in connection with the +acquisition of DNAG. +Contingencies. In the ordinary course of business, we have entered into various contractual relationships +with strategic corporate partners, customers, distributors, research laboratories and universities, licensors, licensees, +75 +Table of Contents +suppliers, vendors and other parties. As such, we could be subject to litigation, claims or assessments arising from any or all of these relationships. We record a loss contingency when +information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably +estimated. Accounting for contingencies arising from contractual or legal proceedings requires that we use our best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss +contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for in our financial statements +could have a material adverse impact on our operating results for the period in which such actual loss becomes known. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +We do not hold any amounts +of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of December 31, 2015, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency +cash flows. Sales denominated in foreign currencies comprised 5.4% of our total revenues for the year ended December 31, 2015. We do have foreign currency exchange risk related to our operating subsidiary in Canada. While the majority of their +revenues are recorded in U.S. dollars, almost all of their operating expenses are denominated in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar could affect year-to-year comparability of operating +results and cash flows. Our Canadian subsidiary had net assets of $58.0 million CDN ($41.9 million USD), which are included in the Company’s consolidated balance sheet as of December 31, 2015. A 10% unfavorable change in the +Canadian-to-U.S. dollar exchange rate would reduce our comprehensive income by $4.2 million, resulting in a comprehensive loss of $3.8 million. +ITEM 8. +Consolidated Financial Statements and Supplementary Data. +Information with respect to +this Item is contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. +Controls a nd Procedures. +(a) Evaluation of Disclosure +Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief +Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2015. Based on that evaluation, +the Company’s management, including such officers, concluded that as of December 31, 2015 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the +Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions +regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting . +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term +is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal +76 +Table of Contents +executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal +Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial +reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of +December 31, 2015. +The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited +by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +Because of its +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of +changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +(c) Changes in Internal +Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter +ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, Inc.: +We +have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of +Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal +control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based +on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). +Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of +internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such +other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of +financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +77 +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or +procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control +over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated +balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years +in the three-year period ended December 31, 2015, and our report dated March 14, 2016 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 14, 2016 +ITEM 9B. +Other Information. +Not applicable. +78 +Table of Contents +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2015 Annual Meeting of Stockholders +(the “Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by this Item is incorporated by reference to the information under the captions “Proposal No. 1. +Election of Directors,” “Corporate Governance—Governance Guidelines and Code of Conduct,” “Corporate Governance – Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial +Ownership Reporting Compliance” in the Proxy Statement. +Our Board of Directors has adopted a Code of Business Conduct and Ethics +that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is +available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on +our website. +ITEM 11. +Exe cutive Compensation. +The information required by this Item +is incorporated by reference to the information under the captions “Compensation Committee Matters,” “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and Potential Payments Upon +Termination or Change in Control,” and “Director Compensation” in the Proxy Statement. +ITEM 12. +Security Ownership of Cer tain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item with respect to the securities ownership of certain beneficial owners and management, and equity +compensation plan information, is incorporated by reference to the information under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item is incorporated by reference to the information under the captions “Transactions with Related +Persons” and “Corporate Governance—Director Independence” in the Proxy Statement. +ITEM 14. +Principal Accountant Fee s and Services. +The information +required by this Item is incorporated by reference to the information under the caption “Audit Committee Matters” in the Proxy Statement. +79 +Table of Contents +PART IV +ITEM 15. +Exhibits and Consolidated Finan cial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, +see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the +consolidated financial statements or related notes thereto. +(a)(3). Exhibits . See Index to Exhibits following the consolidated financial +statements in this Annual Report. +80 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to +be signed on its behalf by the undersigned, thereunto duly authorized, on March 14, 2016. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Douglas A. Michels +Douglas A. Michels +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on +March 14, 2016, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Douglas A. Michels +President, Chief Executive Officer and Director +Douglas A. Michels +(Principal Executive Officer) +/s/ Ronald H. Spair +Chief Operating Officer, Chief Financial Officer and Director +Ronald H. Spair +(Principal Financial Officer) +/s/ Mark L. Kuna +Senior Vice President, Finance and Controller +Mark L. Kuna +(Principal Accounting Officer) +*MICHAEL CELANO +Director +Michael Celano +*RONNY B. LANCASTER +Director +Ronny B. Lancaster +*CHARLES W. PATRICK +Director +Charles W. Patrick +*ROGER L. PRINGLE +Director +Roger L. Pringle +*STEPHEN S. TANG +Director +Stephen S. Tang +*DOUGLAS G. WATSON +Director +Douglas G. Watson +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +81 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations +F-4 +Consolidated Statements of Comprehensive Income (Loss) +F-5 +Consolidated Statements of Stockholders’ Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to the Consolidated Financial Statements +F-8 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders +OraSure Technologies, +Inc.: +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, +2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial +statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards +require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the +financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable +basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, +the financial position of OraSure Technologies, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in +conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public +Company Accounting Oversight Board (United States), OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework +(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over +financial reporting. +/s/ KPMG LLP +Philadelphia, +Pennsylvania +March 14, 2016 +F-2 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, +2015 +2014 +ASSETS +CURRENT ASSETS: +Cash +$ +94,094 +$ +92,867 +Short-term investments +7,225 +5,000 +Accounts receivable, net of allowance for doubtful accounts of $798 and $533 +19,265 +16,138 +Inventories +13,242 +15,763 +Prepaid expenses +1,533 +1,140 +Other current assets +1,355 +306 +Total current assets +136,714 +131,214 +PROPERTY AND EQUIPMENT, net +20,083 +17,934 +INTANGIBLE ASSETS, net +12,591 +17,505 +GOODWILL +18,250 +21,734 +OTHER ASSETS +1,683 +1,246 +$ +189,321 +$ +189,633 +LIABILITIES AND STOCKHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +5,087 +$ +7,148 +Deferred revenue +9,735 +8,043 +Deferred income taxes +— +139 +Accrued expenses +10,412 +11,132 +Total current liabilities +25,234 +26,462 +OTHER LIABILITIES +1,768 +1,234 +DEFERRED INCOME TAXES +2,883 +3,236 +COMMITMENTS AND CONTINGENCIES (Note 11) +STOCKHOLDERS’ EQUITY +Preferred stock, par value $.000001, 25,000 shares authorized, none issued +— +— +Common stock, par value $.000001, 120,000 shares authorized, 55,705 and 56,187 shares issued and outstanding +— +— +Additional paid-in capital +345,253 +344,894 +Accumulated other comprehensive loss +(15,639 +) +(7,848 +) +Accumulated deficit +(170,178 +) +(178,345 +) +Total stockholders’ equity +159,436 +158,701 +$ +189,321 +$ +189,633 +See accompanying notes to the consolidated financial statements. +F-3 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2015 +2014 +2013 +NET REVENUES: +Product +$ +104,458 +$ +98,894 +$ +98,317 +Other +15,261 +7,570 +623 +119,719 +106,464 +98,940 +COST OF PRODUCTS SOLD +39,426 +39,840 +40,351 +Gross profit +80,293 +66,624 +58,589 +OPERATING EXPENSES: +Research and development +11,654 +12,058 +10,932 +Sales and marketing +35,088 +41,118 +46,465 +General and administrative +25,493 +23,750 +21,654 +Gain on contract termination settlement +— +(5,500 +) +(8,300 +) +72,235 +71,426 +70,751 +Operating income (loss) +8,058 +(4,802 +) +(12,162 +) +OTHER INCOME +774 +531 +200 +Income (loss) before income taxes +8,832 +(4,271 +) +(11,962 +) +INCOME TAX EXPENSE (BENEFIT) +665 +343 +(772 +) +NET INCOME (LOSS) +$ +8,167 +$ +(4,614 +) +$ +(11,190 +) +EARNINGS (LOSS) PER SHARE: +BASIC +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +DILUTED +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE: +BASIC +56,397 +55,949 +55,555 +DILUTED +56,846 +55,949 +55,555 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the years ended December 31, +2015 +2014 +2013 +NET INCOME (LOSS) +$ +8,167 +$ +(4,614 +) +$ +(11,190 +) +OTHER COMPEHENSIVE LOSS +Currency translation adjustments +(7,791 +) +(4,051 +) +(3,131 +) +COMPREHENSIVE INCOME (LOSS) +$ +376 +$ +(8,665 +) +$ +(14,321 +) +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2015, 2014 and 2013 +(in thousands) +Common Stock +Additional Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Accumulated +Deficit +Total +Shares +Amount +Balance at January 1, 2013 +55,281 +$ +— +$ +333,522 +$ +(666 +) +$ +(162,541 +) +$ +170,315 +Common stock issued upon exercise of options +80 +— +409 +— +— +409 +Vesting of restricted stock +395 +— +— +— +— +— +Purchase and retirement of common shares +(124 +) +— +(829 +) +— +— +(829 +) +Compensation cost for restricted stock +— +— +2,878 +— +— +2,878 +Compensation cost for stock option grants +— +— +2,694 +— +— +2,694 +Net loss +— +— +— +(11,190 +) +(11,190 +) +Currency translation adjustments +— +— +— +(3,131 +) +— +(3,131 +) +Balance at December 31, 2013 +55,632 +— +338,674 +(3,797 +) +(173,731 +) +161,146 +Common stock issued upon exercise of options +249 +— +1,115 +— +— +1,115 +Vesting of restricted stock +428 +— +— +— +— +— +Purchase and retirement of common shares +(122 +) +— +(639 +) +— +— +(639 +) +Compensation cost for restricted stock +— +— +2,663 +— +— +2,663 +Compensation cost for stock option grants +— +— +3,081 +— +— +3,081 +Net loss +— +— +— +— +(4,614 +) +(4,614 +) +Currency translation adjustments +— +— +— +(4,051 +) +— +(4,051 +) +Balance at December 31, 2014 +56,187 +— +344,894 +(7,848 +) +(178,345 +) +158,701 +Common stock issued upon exercise of options +74 +— +404 +— +— +404 +Vesting of restricted stock +354 +— +— +— +— +— +Purchase and retirement of common shares +(910 +) +— +(6,090 +) +— +— +(6,090 +) +Compensation cost for restricted stock +— +— +2,642 +— +— +2,642 +Compensation cost for stock option grants +— +— +3,403 +— +— +3,403 +Net income +— +— +— +— +8,167 +8,167 +Currency translation adjustments +— +— +— +(7,791 +) +— +(7,791 +) +Balance at December 31, 2015 +55,705 +$ +— +$ +345,253 +$ +(15,639 +) +$ +(170,178 +) +$ +159,436 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2015 +2014 +2013 +OPERATING ACTIVITIES: +Net income (loss) +$ +8,167 +$ +(4,614 +) +$ +(11,190 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Stock-based compensation +6,045 +5,744 +5,572 +Depreciation and amortization +5,696 +6,307 +6,552 +Deferred rent +110 +— +— +Unrealized foreign currency (gain) loss +367 +(305 +) +49 +Loss on sale of fixed assets +80 +— +— +Deferred income taxes +48 +294 +(772 +) +Changes in assets and liabilities +Accounts receivable +(3,739 +) +(3,381 +) +4,337 +Inventories +2,348 +(4,401 +) +1,268 +Prepaid expenses and other assets +(1,415 +) +475 +51 +Accounts payable +(2,648 +) +2,194 +1,510 +Deferred revenue +1,706 +6,943 +(4,365 +) +Accrued expenses and other liabilities +(992 +) +(1,730 +) +5,373 +Net cash provided by operating activities +15,773 +7,526 +8,385 +INVESTING ACTIVITIES: +Purchases of short-term investments +(26,895 +) +(9,407 +) +— +Proceeds from maturities of short-term investments +23,934 +4,432 +— +Purchases of property and equipment +(3,744 +) +(3,005 +) +(2,462 +) +Net cash used in investing activities +(6,705 +) +(7,980 +) +(2,462 +) +FINANCING ACTIVITIES: +Proceeds from exercise of stock options +404 +1,115 +409 +Repurchase of common stock +(6,090 +) +(639 +) +(829 +) +Net cash provided by (used in) financing activities +(5,686 +) +476 +(420 +) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +(2,155 +) +(346 +) +(200 +) +NET INCREASE (DECREASE) IN CASH +1,227 +(324 +) +5,303 +CASH, BEGINNING OF PERIOD +92,867 +93,191 +87,888 +CASH, END OF PERIOD +$ +94,094 +$ +92,867 +$ +93,191 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +We develop, manufacture, market and sell diagnostic products and specimen collection devices using our proprietary +technologies, as well as other diagnostic products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the +point-of-care, tests that are processed in a laboratory, and a rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter (“OTC”) market. We also manufacture and sell oral fluid collection devices +used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, animal genetics, and microbiome markets. Lastly, +we manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based +organizations, public health organizations, research and academic institutions, distributors, government agencies, physicians’ offices, commercial and industrial entities, retail pharmacies and mass merchandisers, and to consumers over the +internet. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, +DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiary, +unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of +America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported +amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to contingencies and +accruals, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which +management believes to be reasonable under the circumstances, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity and foreign currency +markets, reductions in government funding, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results +could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +In +2015, 2014 and 2013, we paid income taxes of $719, $31 and $27, respectively. +In 2015, 2014 and 2013, we recorded through the +consolidated statements of operations an increase in our allowance for doubtful accounts of $341, $253 and $18, respectively, and we had no material write-offs against the allowance for doubtful account in 2015, 2014, or 2013. +F-8 +Table of Contents +As of December 31, 2015 and 2014, we had accruals for purchases of property and equipment of $1,370 and +$217, respectively. We had no accruals for purchases of property and equipment as of December 31, 2013. +Short-Term Investments +We consider all short-term investments to be available-for-sale securities. These securities are comprised of guaranteed investment +certificates with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component +of accumulated other comprehensive income (loss). +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated +allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories +are stated at the lower of cost or market determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on +hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based primarily on the estimated forecast of product sales. When factors indicate that impairment has occurred, either a reserve +is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we +also reserve for unidentified scrap or spoilage under a fixed-formula methodology. +Property and Equipment +Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. +Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture +and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss +is recorded in the consolidated statement of operations. +Intangible Assets +Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights +consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of one to fifteen years. +Goodwill +Goodwill +represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested +annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we +conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would not be required to +F-9 +Table of Contents +perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing +the fair values of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the test to determine the +amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit’s goodwill and intangible assets with the respective carrying values. +We performed our annual impairment assessment as of July 31, 2015 utilizing a qualitative evaluation and concluded that it was more +likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not +consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a +triggering event occurs. As of December 31, 2015, we believe no indicators of impairment exist. +Impairment of Long-Lived Assets +We assess the recoverability of the our long-lived assets, which include property and equipment and intangible assets, by determining +whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such +impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. +Revenue Recognition +We +recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or +rebates. Other than for our OraQuick ® In-Home HIV test, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising +from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We began selling our +OraQuick ® In-Home HIV test in the third quarter of 2012. From launch through November 2013, our revenue practices with respect to the +OraQuick ® In-Home HIV test were different than those customarily used in the consumer package goods industry. Under U.S. generally accepted accounting principles, product revenue cannot be +recognized unless the amount of future returns can be reasonably estimated. Because our OraQuick ® In-Home HIV test was a new product for which we did not have a historical record of returns, +we did not believe we could reasonably determine a return rate. As a result we initially did not recognize revenue when we shipped to the retail trade. For these product shipments, we invoiced the retailer or distributor, recorded deferred revenue +at the gross invoice sales price, and classified the cost basis of the product held by the retailer or distributor as a component of inventory. We then recognized revenue upon the consummation of a sale to the retail customer either in a store or +over the internet. With the passage of time, however, we concluded that we had sufficient data and visibility into our distribution channel to develop a reasonable estimate of the level of expected returns. As such, commencing in December 2013, we +recognized previously deferred revenue and its related cost of goods sold, and began to recognize revenue for this product upon shipment to the retailers or distributors. +Our net revenues recorded on sales of the OraQuick ® In-Home HIV test represent total +gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. Some of these allowances are estimates established by management, based upon currently available +information, and are adjusted to reflect known changes in the factors that impact those estimates. These allowances are recorded as a reduction of gross revenue when recognized in our statement of operations. +F-10 +Table of Contents +Royalty income from the grant of license rights is recognized during the period in which the +revenue is earned and the amount is determinable from the licensee. It is recorded as other revenue in our statements of operations. +We +record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. The product is used to test individuals at-risk for the hepatitis C virus. We are responsible for manufacturing and selling the product into all markets covered by +this agreement. +Pursuant to the Co-Promotion Agreement, we have granted exclusive co-promotion rights for the OraQuick ® HCV test in certain markets to AbbVie and we have agreed to develop, implement, administer and maintain a patient care database for the exclusive use of AbbVie. This patient care database is +being used to compile patient information regarding new individuals who have tested positive for HCV using our OraQuick ® HCV test. We have also jointly agreed with AbbVie to co-promote our +OraQuick ® HCV test in certain market segments. +Under the terms of this +agreement, which runs through December 31, 2019, we are eligible to receive up to $75,000 in aggregate payments. We are recognizing these payments ratably on a monthly basis over the term of the agreement. In addition, if certain +performance-based milestones are achieved, we may be eligible to receive additional milestone payments. These payments would be based upon the aggregate number of new patients enrolled in the patient care database, in a given calendar year, after +exceeding a baseline threshold, and could range from $3,500 to $55,500 annually over the term of the agreement. The first performance-based milestone period ended on December 31, 2015 and we did not achieve this milestone during this period. +The agreement also contains certain termination, indemnification and other provisions, typical of agreements of this type. Under certain circumstances, either party may terminate the agreement before its expiration and such a termination could occur +as early as December 31, 2016. Amounts related to this agreement are recorded as other revenue in our statements of operations. +On +June 12, 2015, we were awarded a grant for up to $10,400 in total funding from BARDA related to the development of our OraQuick ® Ebola Rapid Antigen test. The three-year, multi-phased +grant includes an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7,200 in additional funding for the development of +our OraQuick ® Ebola Rapid Antigen test. Amounts related to this grant are recorded as other revenue in our statement of operations as the activities are being performed and the related costs +are incurred. During 2015, $1,783 was recognized in connection with this grant. +Customer Sales Returns and Allowances +We do not grant product return rights to our customers for any product, except for our +OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick ® In-Home HIV +product revenues in our consolidated statement of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product +returns. As of December 31, 2015 and 2014, the reserve for sales returns and allowances was $310 and $437, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s +distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be +materially affected. +Deferred Revenue +We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, +2015 and 2014 includes customer prepayments of $784 and $613, respectively. +F-11 +Table of Contents +Deferred revenue as of December 31, 2015 and 2014 also includes $8,951 and $7,430, respectively, from AbbVie, which represents the excess of the payments received from AbbVie over the +amounts earned and recognized ratably in our consolidated statement of operations. +Customer and Vendor Concentrations +We had no significant concentrations in accounts receivable as of December 31, 2015 and 2014. One of our customers accounted for +approximately 12% of our net consolidated revenues for the year ended December 31, 2015. We had no significant concentrations in net consolidated revenues for the years ended December 31, 2014 or 2013. +We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or +unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its +products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, +facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2015, 2014, and 2013, we incurred $623, $6,910, and $17,142, respectively, in +advertising expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock +option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. To satisfy the exercise of options or to issue restricted stock, we issue new shares rather than purchase +shares on the open market. +Income Taxes +We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized +for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit +carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and +credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative +evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several +factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +F-12 +Table of Contents +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, +and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are +included in the statement of operations in the period in which the change occurs. Net foreign exchange gains resulting from foreign currency transactions that are included in other income in our consolidated statement of operations were $1,005, +$273, and $68 for the years ended December 31, 2105, 2014, and 2013, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding +during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting +or exercise of dilutive securities, such as common stock options and unvested restricted stock, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested +restricted shares were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. +The computations of basic and diluted earnings (loss) per share are as follows: +Year ended December 31, +2015 +2014 +2013 +Net income (loss) +$ +8,167 +$ +(4,614 +) +$ +(11,190 +) +Weighted average number of common shares outstanding: +Basic +56,397 +55,949 +55,555 +Dilutive effect of stock options and restricted stock +449 +— +— +Diluted +56,846 +55,949 +55,555 +Earnings (loss) per share: +Basic +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +Diluted +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +For the years ended December 31, 2015, 2014, and 2013, outstanding common stock options and unvested +restricted stock representing 4,756, 6,447, and 5,924 shares, respectively, were excluded from the computation of diluted earnings (loss) per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive loss by their nature and disclose the accumulated balance of other comprehensive loss separately from +accumulated deficit and additional paid-in capital in the stockholders’ equity section of our balance sheet. +Our accumulated other +comprehensive loss for 2015, 2014, and 2013 consisted of foreign currency translation adjustments. +F-13 +Table of Contents +We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, +and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. The negative $7,791, $4,051 and $3,131 currency translation adjustments recorded in 2015, 2014 and 2013, respectively, are +largely the result of the translation of our Canadian operation’s financial statements into U.S. dollars. +Fair Value of Financial +Instruments +As of December 31, 2015 and 2014, the carrying values of cash, accounts receivable, and accounts payable approximate +their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are +being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: +Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: +Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the +asset or liability; and +Level 3: +Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by +little or no market activity). +Included in cash and cash equivalents at December 31, 2015 and 2014, was $65,509 +and $64,361 invested in a government money market fund. This fund has investments in government securities and is a Level I instrument. +We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the +plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The +assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 2015 and 2014 was $1,324 and $1,234, respectively, and was calculated using the quoted market price of the assets as of those +dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying +consolidated balance sheets. +Our available-for-sale securities as of December 31, 2015 and 2014 consisted of guaranteed investment +certificates with amortized cost and fair value of $7,225 and $5,000, respectively and are measured as Level 1 instruments. +Recent +Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on +recognizing revenue in contracts with customers, ASU 2014-09 Revenue from Contracts with Customers . The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is +for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The standard will +be effective for the first interim period within annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are still evaluating the effects, if any, which adoption of this guidance will have on our +consolidated financial statements. +In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory , which +requires an entity that uses the first-in, first-out method for inventory measurement to report inventory cost at the lower of cost and net realizable value versus the current measurement principle of lower of cost or market. The ASU requires +prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016. Early adoption is permitted. We are evaluating the effect that ASU 2015-11 may have on our consolidated financial statements and related +disclosures. +F-14 +Table of Contents +In November 2015, the FASB issued ASU 2015-17, which requires entities with a classified balance +sheet to present all deferred tax assets and liabilities as noncurrent. The ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company has chosen to early adopt +ASU 2015-17 and the impact is presented in the consolidated financial statements and related disclosures as of December 31, 2015. Prior years were not retrospectively adjusted. +In February 2016, the FASB issued ASU 2016-02, Leases , which requires entities to begin recording assets and liabilities from leases on +the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period within annual reporting periods +beginning after December 15, 2018, using a modified retrospective approach. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 may have on our consolidated financial statements and related disclosures. +3. INVENTORIES: +December 31, +2015 +2014 +Raw materials +$ +7,895 +$ +8,539 +Work in process +333 +898 +Finished goods +5,014 +6,326 +$ +13,242 +$ +15,763 +4. PROPERTY AND EQUIPMENT: +December 31, +2015 +2014 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +18,549 +18,168 +Machinery and equipment +21,263 +20,768 +Computer equipment and software +7,644 +7,238 +Furniture and fixtures +1,584 +1,765 +Construction in progress +2,938 +293 +53,096 +49,350 +Less accumulated depreciation +(33,013 +) +(31,416 +) +$ +20,083 +$ +17,934 +Depreciation expense was $2,992, $3,123, and $3,026 for 2015, 2014, and 2013, respectively. +5. GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2015 +2014 +Balance as of January 1 +$ +21,734 +$ +23,782 +Decrease related to foreign currency translation +(3,484 +) +(2,048 +) +Balance as of December 31 +$ +18,250 +$ +21,734 +F-15 +Table of Contents +Intangible assets consist of the following: +December 31, 2015 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,051 +$ +(3,818 +) +$ +5,233 +Patents and product rights +10 +5,400 +(3,358 +) +2,042 +Acquired technology +7 +7,030 +(4,172 +) +2,858 +Tradename +15 +3,469 +(1,011 +) +2,458 +$ +24,950 +$ +(12,359 +) +$ +12,591 +December 31, 2014 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +10,779 +$ +(3,508 +) +$ +7,271 +Patents and product rights +3-10 +10,449 +(7,957 +) +2,492 +Acquired technology +7 +8,372 +(3,833 +) +4,539 +Tradename +15 +4,132 +(929 +) +3,203 +$ +33,732 +$ +(16,227 +) +$ +17,505 +Patents and products rights are made up of the following: +December 31, +2015 +2014 +HIV-related +$ +900 +$ +1,900 +HCV-related +4,500 +4,500 +Lateral flow-related +— +1,500 +Cryosurgery-related +— +2,549 +5,400 +10,449 +Less accumulated amortization +(3,358 +) +(7,957 +) +$ +2,042 +$ +2,492 +Amortization expense for 2015, 2014, and 2013 was $2,704, $3,184, and $3,526, respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2016 +$ +2,704 +2017 +2,704 +2018 +2,701 +2019 +1,659 +2020 +1,451 +Beyond +1,372 +$ +12,591 +F-16 +Table of Contents +6. ACCRUED EXPENSES: +December 31, +2015 +2014 +Payroll and related benefits +$ +6,311 +$ +6,620 +Professional fees +1,014 +480 +Royalties +819 +2,285 +Other +2,268 +1,747 +$ +10,412 +$ +11,132 +7. INCOME TAXES: +Income (loss) before income tax expense (benefit) consists of the following: +Years Ended December 31, +2015 +2014 (1) +2013 (1) +United States +$ +5,302 +$ +(6,156 +) +$ +(10,554 +) +Canada +3,530 +1,885 +(1,408 +) +$ +8,832 +$ +(4,271 +) +$ +(11,962 +) +(1) +Prior period amounts have been reclassified to conform to current year presentation. +The components of the income tax expense (benefit) are as follows: +Years Ended December 31, +2015 +2014 +2013 +Current +Federal +$ +— +$ +— +$ +— +State +— +— +— +Canada +617 +49 +— +617 +49 +— +Deferred +Federal +1,511 +(2,248 +) +(4,280 +) +State +311 +(827 +) +(323 +) +Canada +48 +294 +(772 +) +1,870 +(2,781 +) +(5,375 +) +Increase (decrease) in valuation allowance +(1,822 +) +3,075 +4,603 +48 +294 +(772 +) +Total income tax expense (benefit) +$ +665 +$ +343 +$ +(772 +) +For the years ended December 31, 2015 and 2014, we recorded foreign tax expense of $665 and $343, +respectively. For the year ended December 31, 2013, we recorded foreign tax benefits of $772 associated with certain Canadian research and development and investment tax credits. The income tax benefit associated with DNAG was considered +realizable based upon the estimated scheduled reversal of the deferred tax liabilities recorded in connection with the acquisition of DNAG. +F-17 +Table of Contents +A reconciliation of the statutory United States federal income tax rate to our effective tax rate +for each of the years ended December 31, 2015, 2014, and 2013 is as follows: +2015 +2014 (1) +2013 (1) +Statutory U.S. federal income tax rate +34.0 +% +34.0 +% +34.0 +% +Tax effect of Canadian items +(13.1 +) +28.0 +9.0 +State income taxes, net of federal benefit +1.5 +13.5 +2.8 +Nondeductible expenses and other +5.7 +(11.5 +) +(0.9 +) +Change in valuation allowance, federal and state +(20.6 +) +(72.0 +) +(38.4 +) +Effective tax rate +7.5 +% +(8.0 +)% +6.5 +% +(1) +Prior period amounts have been reclassified to conform to current year presentation. +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial +reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2015 and 2014 are as follows: +2015 +2014 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +21,985 +$ +28,547 +Inventories +1,725 +1,758 +Capitalized research and development costs +4,803 +4,528 +Accruals and reserves currently not deductible +5,782 +2,528 +Acquired intangible assets +(2,725 +) +(3,978 +) +Depreciation and amortization +(367 +) +(485 +) +Stock-based compensation +6,371 +5,369 +Investment tax credit carryforward +(92 +) +597 +Research and development tax credit carryforward +1,885 +1,833 +Net deferred tax asset +39,367 +40,697 +Valuation allowance +(42,250 +) +(44,072 +) +Net deferred tax liability +$ +(2,883 +) +$ +(3,375 +) +In assessing the realizability of our net deferred tax asset, we consider all relevant positive and negative +evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation +of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of +December 31, 2015 and 2014 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal or state income tax benefit was recorded for the years ended December 31, 2015, 2014, or 2013. The +valuation allowance decreased by $1,822 in 2015 due to the use of net operating losses to offset U.S. taxable income. +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2018 - 2019 +$ +5,370 +2020 - 2024 +16,398 +2025 - 2031 +14,540 +2032 - 2034 +26,654 +$ +62,962 +F-18 +Table of Contents +The Tax Reform Act of 1986 contains provisions that limit the annual amount of NOLs available to +be used in any given year in the event of a significant change in ownership. On September 29, 2000, two separate companies, STC Technologies, Inc. and Epitope, Inc., merged to form OraSure. A significant change in ownership, as defined by +Section 382 of the Internal Revenue Code, occurred in connection with this merger. As such, the utilization of NOLs generated prior to September 29, 2000 is limited to approximately $13,700 per year. We do not believe that this limitation +will have a material adverse impact on the utilization of our Federal NOL carryforwards in future years. +As of December 31, 2015, +our gross unrecognized tax benefits totaled $2,088, and based upon the valuation allowance for our U.S. operations the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized +tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2015, 2014 and 2013. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our +inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2015. +A +reconciliation of our unrecognized tax benefits is as follows: +2015 +2014 +2013 +Balance as of January 1 +$ +2,073 +$ +2,051 +$ +2,011 +Additions for tax positions of prior periods +22 +25 +40 +Reductions for tax positions of prior periods +(7 +) +(3 +) +— +Balance as of December 31 +$ +2,088 +$ +2,073 +$ +2,051 +8. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended and restated (the “Stock Plan”). The +Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock +appreciation rights, restricted awards, performance awards and other stock-based awards. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite +service period of the award. To satisfy the exercise of options or to issue restricted stock, we issue new shares rather than purchase shares on the open market. +Under the terms of the Stock Plan, nonqualified options may be granted to eligible employees, including our officers at a price not less than +75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally +have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years, with one quarter of the options vesting one year after grant and the remainder +vesting on a monthly basis over the next three years. +As of December 31, 2015, 3,696 shares were available for future grants under +the Stock Plan. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model +using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2015 +2014 +2013 +Risk-free interest rate (1) +1.49 +% +2.13 +% +1.47 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +51 +% +50 +% +51 +% +Expected life of stock options (in years) (2) +7 +7 +7 +F-19 +Table of Contents +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $4.86, +$3.03 and $3.58, respectively. +Compensation expense recognized in the financial statements related to stock options was as follows: +Years Ended December 31, +2015 +2014 +2013 +Total compensation cost during the year +$ +3,403 +$ +3,081 +$ +2,694 +Amounts capitalized into inventory during the year +(153 +) +(148 +) +(128 +) +Amounts recognized in cost of products sold for amounts previously capitalized +153 +128 +99 +Amounts charged against income +$ +3,403 +$ +3,061 +$ +2,665 +The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2014, and +2013 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $329, $901, and $125, respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +(in years) +Aggregate +Intrinsic +Value +Outstanding on January 1, 2013 +4,644 +$ +7.64 +Granted +984 +6.94 +Exercised +(80 +) +5.07 +Expired +(82 +) +7.59 +Forfeited +(195 +) +7.87 +Outstanding on December 31, 2013 +5,271 +7.54 +Granted +1,202 +5.77 +Exercised +(249 +) +5.09 +Expired +(388 +) +8.38 +Forfeited +(96 +) +7.43 +Outstanding on December 31, 2014 +5,740 +7.22 +Granted +773 +9.28 +Exercised +(74 +) +5.46 +Expired +(163 +) +8.55 +Forfeited +(60 +) +8.07 +Outstanding on December 31, 2015 +6,216 +$ +7.46 +6.0 +$ +2,405 +Vested or expected to vest as of December 31, 2015 +6,179 +$ +7.45 +5.9 +$ +2,397 +Exercisable on December 31, 2015 +4,562 +$ +7.40 +5.1 +$ +1,914 +As of December 31, 2015, there was $5,519 of unrecognized compensation expense related to unvested option +awards that is expected to be recognized over a weighted-average period of 2.4 years. +F-20 +Table of Contents +Net cash proceeds from the exercise of stock options were $404, $1,115 and $409 for the years +ended December 31, 2015, 2014, and 2013, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2015: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$2.55 - $5.19 +709 +6.9 +$ +4.47 +709 +$ +4.47 +$5.47 +5 +9.7 +5.47 +— +— +$5.71 +1,119 +8.1 +5.71 +518 +5.71 +$5.72 - $6.37 +216 +6.2 +5.96 +172 +5.96 +$6.63 +670 +4.9 +6.63 +670 +6.63 +$6.67 - $6.99 +29 +8.0 +6.93 +13 +6.92 +$7.05 +753 +7.0 +7.05 +537 +7.05 +$7.33 - $8.28 +844 +2.4 +8.02 +832 +8.03 +$8.33 - $9.30 +178 +1.5 +8.91 +178 +8.91 +$9.31 - $12.14 +1,693 +6.3 +10.14 +933 +10.76 +6,216 +6.0 +$ +7.46 +4,562 +$ +7.40 +The Stock Plan also permits us to grant restricted shares of our common stock to eligible employees, including +officers, and our outside directors. Generally, these shares are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by the Compensation Committee of our Board of Directors. The market value of these +shares at the date of grant is recognized on a straight-line basis over the period during which the restrictions lapse. Compensation cost of $2,642, $2,663 and $2,878 related to restricted shares was recognized during the years ended +December 31, 2015, 2014, and 2013, respectively. +The following table summarizes restricted stock award activity under the Stock +Plan: +Shares +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2013 +670 +$ +8.19 +Granted +438 +6.30 +Vested +(395 +) +7.81 +Forfeited +(60 +) +8.27 +Issued and unvested, December 31, 2013 +653 +7.15 +Granted +506 +5.82 +Vested +(428 +) +6.65 +Forfeited +(24 +) +7.38 +Issued and unvested, December 31, 2014 +707 +6.50 +Granted +362 +8.25 +Vested +(354 +) +6.94 +Forfeited +(18 +) +8.01 +Issued and unvested, December 31, 2015 +697 +$ +7.14 +Issued and expected to vest, December 31, 2015 +697 +$ +7.14 +F-21 +Table of Contents +As of December 31, 2015, there was $2,700 of unrecognized compensation expense related to +unvested restricted stock awards that is expected to be recognized over a weighted average period of 1.6 years. +In connection with the +vesting of restricted shares and exercise of stock options during the years ended December 31, 2015, 2014 and 2013, we purchased and immediately retired 133, 122 and 124 shares with aggregate values of $1,164, $639 and $829, respectively, in +satisfaction of minimum tax withholding and exercise obligations. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 +of our outstanding common shares. During the year ended December 31, 2015, we purchased and retired 777 shares of common stock at an average price of $6.34 per share for a total cost of $4,926. No shares were purchased and retired in 2014 or +2013. +9. TERMINATION SETTLEMENT: +On November 21, 2013, we terminated our assay collaboration agreement with Roche Diagnostics (“Roche”). +Pursuant to this termination agreement, Roche paid us $8,300, which was recorded as a reduction of operating expense on our consolidated statement of operations for the quarter ended December 31, 2013. Roche agreed to provide certain +transitional product support services to us and to supply certain of the assays developed under the collaboration on a transitional basis for up to five years following the termination. We had the right to stop the supply of assays prior to the end +of this five-year period and to receive an additional payment from Roche of up to $5,500 depending on how early in that five-year period the supply obligation was ended. During the second quarter of 2014, we issued our final purchase order for +fully-automated assays previously developed under the terminated collaboration and as such, recorded $5,500 as a reduction of operating expense in our consolidated statement of operations. +10. BUSINESS SEGMENT INFORMATION: +We operate our business within two reportable segments: our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices and medical devices; and our molecular collection systems or “DNAG” business, which primarily consists of the manufacture, development and sale of oral fluid +collection devices that are used to collect, stabilize and store samples of genetic material for molecular testing. OSUR revenues are derived primarily from products sold in the United States and internationally to various clinical laboratories, +hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, commercial and industrial entities, retail pharmacies and mass merchandisers, and to consumers over the +internet. OSUR also derives other revenues, including exclusivity payments for co-promotion rights and other licensing and product development activities. DNAG revenues result primarily from products sold into the commercial market which consists of +customers engaged in consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, animal and livestock genetic testing, and microbiome testing. DNAG products are also sold into the academic research market, which consists of +research laboratories, universities and hospitals. +We organized our operating segments according to the nature of the products included +in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income +(loss). We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues. +F-22 +Table of Contents +The following table summarizes operating segment information for the years ended +December 31, 2015, 2014, and 2013, and asset information as of December 31, 2015 and 2014: +Years Ended December 31, +2015 +2014 +2013 +Net revenues: +OSUR +$ +89,795 +$ +82,686 +$ +78,559 +DNAG +29,924 +23,778 +20,381 +Total +$ +119,719 +$ +106,464 +$ +98,940 +Operating income (loss): +OSUR +$ +3,558 +$ +(8,324 +) +$ +(12,849 +) +DNAG +4,500 +3,522 +687 +Total +$ +8,058 +$ +(4,802 +) +$ +(12,162 +) +Depreciation and amortization: +OSUR +$ +3,015 +$ +3,254 +$ +3,225 +DNAG +2,681 +3,053 +3,327 +Total +$ +5,696 +$ +6,307 +$ +6,552 +Capital expenditures: +OSUR +$ +1,645 +$ +2,170 +$ +1,687 +DNAG +2,099 +835 +775 +Total +$ +3,744 +$ +3,005 +$ +2,462 +December 31, +2015 +2014 +Total assets: +OSUR +$ +137,082 +$ +136,542 +DNAG +52,239 +53,091 +Total +$ +189,321 +$ +189,633 +Our products are sold principally in the United States and Europe. +The following table represents total net revenues by geographic area, based on the location of the customer: +Years Ended December 31, +2015 +2014 +2013 +United States +$ +96,522 +$ +82,256 +$ +77,194 +Europe +13,535 +13,913 +11,081 +Other regions +9,662 +10,295 +10,665 +$ +119,719 +$ +106,464 +$ +98,940 +The following table represents total long-lived assets by geographic area: +December 31, +2015 +2014 +United States +$ +15,660 +$ +16,570 +Canada +4,415 +1,353 +Other regions +8 +11 +$ +20,083 +$ +17,934 +F-23 +Table of Contents +11. COMMITMENTS AND CONTINGENCIES: +Sublicense Agreement +In June 2004, we entered into a sublicense agreement with a third party pursuant to which we have been granted a limited, worldwide, +non-exclusive sublicense to certain HIV-2 patents held by such party. Under the terms of this sublicense agreement, we are obligated to pay royalties based on a percentage of our net sales of certain products, which incorporate the technology +covered by the licensed patents. Royalties are expensed as an element of cost of goods sold. Future minimum payments under this agreement are as follows: +2016 +$ +500 +2017 +500 +2018 +292 +$ +1,292 +Royalties from our commercial sale of products covered by the sublicense can be credited against these minimum +royalty obligations. +Leases +We lease office space for our Canadian subsidiary and domestic warehouse facilities under operating lease agreements. Future payments required +under these non-cancelable leases are as follows: +2016 +$ +362 +2017 +355 +2018 +351 +2019 +334 +2020 +362 +Thereafter +724 +$ +2,488 +Rent expense for 2015, 2014 and 2013 was $731, $648, and $600, respectively. +Purchase Commitments +As +of December 31, 2015, we had outstanding non-cancelable purchase commitments of $4,488 related to inventory, capital expenditures, and other goods or services. +Employment Agreements +Under terms of employment agreements with certain executive officers, which extend through 2016, we are required to pay each individual a base +salary for continuing employment with us. The agreements require payments totaling $1,957 in 2016. +Litigation +From time-to-time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the +outcomes of such actions are not expected to have, either individually or in the aggregate, a material adverse effect on our future financial position or results of operations. +F-24 +Table of Contents +In May 2015, our subsidiary DNAG filed a complaint in the United States District Court for the +District of Delaware against Ancestry.com DNA LLC (“Ancestry”) relating to the manufacture and sale by Ancestry of its oral fluid DNA collection device (the “Ancestry Device”). Ancestry previously purchased DNAG’s +patented oral fluid DNA collection devices. The complaint alleges that the manufacture and sale by Ancestry of the Ancestry Device infringes U.S. Patent No. 8,221,381 B2, which is owned by DNAG. In addition, the complaint alleges that +Ancestry has breached the terms of agreements under which Ancestry previously purchased DNAG products. The complaint also contains claims for conversion and trespass to chattel and includes an action to quiet title to the Ancestry Device and +related patent applications. DNAG is requesting the court to grant injunctive relief and damages. +On October 20, 2015, Ancestry +filed with the United States Patent and Trademark Office (“USPTO”) a Petition for Inter Partes Review of some, but not all, claims of U.S. Patent No. 8,221,381 B2. We expect the PTO to decide whether to initiate review of the +DNAG patent in April 2016. +In July 2015, DNAG filed a complaint in the United States District Court for the District of Delaware against +Spectrum DNA, Spectrum Solutions L.L.C. and Spectrum Packaging L.L.C. (collectively “Spectrum”) relating to the manufacture and sale by Spectrum of an oral fluid DNA collection device (the “Spectrum Device”). We believe the +Spectrum Device is the same as the Ancestry device mentioned above and that Spectrum is the manufacturer of the Ancestry Device for Ancestry. The complaint alleges that the manufacture and sale by Spectrum of the Spectrum Device infringes U.S. +patent number 8,221,381 B-2, which is owned by DNAG. DNAG is requesting the court to grant injunctive relief and damages. +12. RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the +“401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) +Plan also provides for us to match employee contributions up to $4 per year. We contributed $587, $565, and $553 to the 401(k) Plan, net of forfeitures, in 2015, 2014, and 2013, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible highly compensated employees of the +Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase +OraSure stock as an investment vehicle. As of December 31, 2015 and 2014, the value of the assets associated with this plan was $1,324 and $1,234, respectively, and is included in other assets in our consolidated balance sheet. Our obligation +related to the deferred compensation plan is included in other liabilities in our consolidated balance sheet. As of December 31, 2015 and 2014, our total obligation under this plan was $1,324 and $1,234, respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the +“RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee +contributions up to $2 per year. We contributed $134, $136, and $126 to the RRSP in 2015, 2014, and 2013, respectively. +F-25 +Table of Contents +13 . QUARTERLY DATA (Unaudited): +The following tables summarize the quarterly results of operations for each of the quarters in 2015 and 2014. These +quarterly results are unaudited, but in the opinion of management, have been prepared on the same basis as our audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair +presentation of the information set forth herein. +2015 Results +Three months ended +March 31, +2015 +June 30, +2015 +September 30, +2015 +December 31, +2015 +Net revenues +$ +27,088 +$ +30,388 +$ +29,861 +$ +32,382 +Costs and expenses +27,379 +27,667 +28,325 +28,290 +Operating income (loss) +(291 +) +2,721 +1,536 +4,092 +Other income (expense), net +409 +(95 +) +81 +379 +Income before income taxes +118 +2,626 +1,617 +4,471 +Income tax expense (benefit) +5 +658 +147 +(145 +) +Net income +$ +113 +$ +1,968 +$ +1,470 +$ +4,616 +Earnings per share +Basic +$ +0.00 +$ +0.03 +$ +0.03 +$ +0.08 +Diluted +$ +0.00 +$ +0.03 +$ +0.03 +$ +0.08 +2014 Results +Three months ended +March 31, +2014 +June 30, +2014 +September 30, +2014 +December 31, +2014 +Net revenues +$ +23,537 +$ +26,401 +$ +27,845 +$ +28,681 +Costs and expenses +29,155 +23,904 +(1) +26,963 +31,244 +Operating income (loss) +(5,618 +) +2,497 +882 +(2,563 +) +Other income (expense), net +118 +(142 +) +268 +287 +Income (loss) before income taxes +(5,500 +) +2,355 +1,150 +(2,276 +) +Income tax expense (benefit) +131 +(174 +) +10 +376 +Net income (loss) +$ +(5,631 +) +$ +2,529 +$ +1,140 +$ +(2,652 +) +Earnings (loss) per share +Basic +$ +(0.10 +) +$ +0.05 +$ +0.02 +$ +(0.05 +) +Diluted +$ +(0.10 +) +$ +0.04 +$ +0.02 +$ +(0.05 +) +(1) +Includes a $5,500 gain from the termination of the Company’s oral fluid assay collaboration with Roche Diagnostics, which was recorded as a +reduction of operating expenses in the indicated period. +F-26 +Table of Contents +INDEX TO EXHIBITS +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form +S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration +Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., amended and restated as of August 18, 2008, are incorporated by reference to Exhibit 3 to the Company’s Current +Report on Form 8-K filed August 22, 2008. +10.1 +Form of Indemnification Agreement (and list of parties to such agreement) is incorporated by reference to Exhibit 10.1 to Amendment No. 3 to the +Company’s Registration Statement on Form S-4 (No. 333-39210), filed August 30, 2000.* +10.2 +Employment Agreement, dated as of June 22, 2004, between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.3 to +the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit +10.2 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.4 +Amendment No. 2 to Employment Agreement, dated as of December 15, 2010, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit +10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.5 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Douglas A. Michels is incorporated by reference to Exhibit 99.1 +to the Company’s Current Report on Form 8-K filed March 31, 2015.* +10.6 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Ronald H. Spair, is incorporated by reference to Exhibit 10.4 to the +Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.7 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.3 +to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.8 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit +10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.9 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Ronald H. Spair is incorporated by reference to Exhibit 99.2 to +the Company’s Current Report on Form 8-K filed March 31, 2015.* +10.10 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the +Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.11 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 +to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.12 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit +10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +Table of Contents +Exhibit +Number +Exhibit +10.13 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Jack E. Jerrett is incorporated by reference to Exhibit 99.3 to +the Company’s Current Report on Form 8-K filed March 31, 2015.* +10.14 +Employment Agreement, dated as of October 2, 2006, between Mark L. Kuna and OraSure Technologies, Inc., is incorporated by reference to Exhibit 99.1 to +the Company’s Current Report on Form 8-K filed October 5, 2006.* +10.15 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit 10.7 to +the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.16 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit +10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.17 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Mark L. Kuna is incorporated by reference to Exhibit 99.4 to the +Company’s Current Report on Form 8-K filed March 31, 2015.* +10.18 +Employment Agreement, dated as of January 3, 2011, between the Company and Anthony Zezzo II is incorporated by reference to Exhibit 10.17 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.19 +Description of Non-Employee Director Compensation Policy, as amended as of November 14, 2011, is incorporated by reference to Exhibit 10.19 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.20 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for +the year ended December 31, 2002.* +10.21 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by +reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.22 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective as of February 12, 2013 is incorporated by reference to Exhibit 10.21 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2012.* +10.23 +Amendment No. 1 to the OraSure Technologies, Inc. Stock Award Plan, effective May 22, 2014 is incorporated by reference to Exhibit 10.2 to the Company’s +Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.* +10.24 +Form of Restricted Share Award Agreement (Executive Officers—Employment Agreements).* +10.25 +Form of Restricted Unit Award Agreement (Executive Officers—Employment Agreements). * +10.26 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form +10-K for the year ended December 31, 2011.* +10.27 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual +Report on Form 10-K for the year ended December 31, 2011.* +10.28 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s +Annual Report on Form 10-K for the year ended December 31, 2011.* +Table of Contents +Exhibit +Number +Exhibit +10.29 +Description of the OraSure Technologies, Inc. 2015 Management Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report +on Form 8-K filed May 14, 2015.* +10.30 +Description of the OraSure Technologies, Inc. 2016 Management Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report +on Form 8-K filed February 19, 2016.* +10.31 +Description of Long-Term Incentive Plan, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed +April 16, 2013.* +10.32 +Description of Amended Long-Term Incentive Policy is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed May 14, +2015.* +10.33 +Description of long-term incentive awards to Named Executive Officers for 2015 performance is incorporated by reference to section 5.02 to the Company’s +Current Report on Form 8-K filed on February 3, 2016.* +10.34 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed +December 21, 2011.* +10.35 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s +Current Report on Form 8-K filed December 21, 2011.* +10.36 +Master Program Services and Co-Promotion Agreement, dated as of June 10, 2014, between OraSure Technologies, Inc. and AbbVie Bahamas Ltd,. is incorporated by +reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.† +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, +2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Douglas A. Michels required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 +Certification of Ronald H. Spair required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 +Certification of Douglas A. Michels required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section +1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Ronald H. Spair required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section +1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase document +* +Management contract or compensatory plan or arrangement. +† +Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with and approved by the SEC. \ No newline at end of file diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/filing_metadata.csv b/raw/filings/0001116463/2015/0001193125-16-503534/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..0088ccebf79186f1185e45df506e176955521d3e --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2016-03-14,2015-12-31,2016-03-14T20:24:41.000Z,0001193125-16-503534,d111696d10k.htm,10-K,6049375,1,0,https://www.sec.gov/Archives/edgar/data/1116463/000119312516503534/d111696d10k.htm,https://www.sec.gov/Archives/edgar/data/1116463/000119312516503534/,2015,2015,1 diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/item1.txt b/raw/filings/0001116463/2015/0001193125-16-503534/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..8164f9a292340bc900452225652a41a269b6cb32 --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/item1.txt @@ -0,0 +1,842 @@ +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and +sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. +We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a +laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, +physicians’ offices, and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the +U.S. Food and Drug Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale +in the over-the-counter (“OTC”) or consumer retail market in the United States. More recently, we completed development and recorded initial sales of our new OraQuick ® rapid Ebola +antigen test. We also sell OTC cryosurgical products to consumers in North America, Europe, Central and South America, and Australia. +In vitro diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of +specific substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and +specificity comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid tests represent a very competitive alternative to the more traditional testing methods in the +diagnostic space. +Through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell +kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics +markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We serve customers in many +countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely +for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were +merged into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided +at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and +filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be +incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care +qualitative +test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole blood. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +World Health Organization (“WHO”) pre-qualification. +Pending +Also registered in various other countries. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various other countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +CE Mark (European Union) approved for OTC use. +Not Marketed +OraQuick ® HIV Self-Test +Rapid point of care qualitative and oral fluid HIV1/2 self-test that can be visually read in approximately 20 minutes. +Investigational use only. +Marketed +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraSure QuickFlu ® Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and +cotinine. +Marketed +Oragene ® •DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® •DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® •RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) clearance pending. +CE marked and registered as Class 1 Medical Device in the U.S. and Canada. +Registered in various other countries. +Marketed +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene• +LIVESTOCK and +Oragene ® •ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of livestock DNA from nasal samples. +Animal research use only. +Marketed +OMNIgene ® • Gut +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples +Research use only product. +CE marked and registered in certain countries. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OMNIgene ® • Sputum +Reagent for liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples +Research use only product. +CE marked and registered in certain countries. +Marketed +PrepIT ® • MAX +Reagent for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol +(“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Marketed +Assays CE marked and registered in certain countries. +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Marketed +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems - Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® +tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +Marketed +CE marked and registered in certain countries. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Marketed +Registered in Canada for warts and skin tags. +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names. +Marketed +CE marked for skin tags. +Not Marketed +In addition to the above products, we also sell certain immunoassay tests and reagents for insurance risk +assessment, substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole +blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial +containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the +collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe +and certain other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 +in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform +moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA +to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the +international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization +and this product is registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also submitted an +application for WHO pre-qualification for our export only version of this product. +We believe that the OraQuick ® device, because it is approved for detecting antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid and plasma samples, provides a competitive advantage in the +market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter version of our OraQuick +ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market and we have also received CE +7 +Table of Contents +mark authorization for sale of this product in the European Union. The In-Home test is performed in the same manner as the OraQuick +ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to +provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +We have completed development of a low cost OraQuick ® HIV self-test for use +in certain foreign countries. This product has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test. We are working with Population Services International +(“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from Malawi, Zambia and Zimbabwe to launch the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. As part of STAR, PSI is +implementing a two-year pilot program funded by UNITAID. We expect that our new OraQuick ® self-test, with labeling and instructions specifically tailored for the African marketplace, will be +used in the two-year initial phase of the program. The purpose of the STAR project is to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public +health impact of self-testing will be. Our OraQuick ® self-test was chosen for the first phase of the PSI pilot because of its quality, ease-of-use and oral fluid option. Initial shipments of +our test to PSI occurred during the first quarter of 2016. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood +specimens, making it the first rapid and only HCV test approved by the FDA for use in the United States. We have also received a CLIA waiver for use of this product in the same specimen types. The +OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe and other foreign countries. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the +OraQuick ® technology platform for the detection of Ebola antigen. This test has received an EUA from the FDA for emergency use by laboratories and facilities adequately equipped, trained and +capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and venous whole blood samples. More recently, we received an EUA for use of the product in oral fluid specimens collected from cadavers. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid +qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test +cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation and is currently sold in certain U.S. +markets. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and +confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, +8 +Table of Contents +treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that +contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 +antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device +involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for +use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +A trained health care professional then conveys test results and provides appropriate counseling to the individual who +was tested. +We believe that oral fluid testing has several significant advantages over blood-based systems for infectious disease +testing, for both health care professionals and the individuals being tested. These advantages include eliminating the risk of needle-stick accidents, providing a non-invasive collection technique, requiring minimal training to administer, providing +rapid and efficient collection in almost any setting, and reducing the cost of administration by a trained health care professional. +Molecular +Collection Systems +Our wholly-owned subsidiary, DNAG, sells a number of products that provide all-in-one systems for the collection, +stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. DNAG’s lead product is sold under the Oragene ® brand and is used to collect DNA from +human saliva. DNAG products are currently sold to thousands of academic and research customers in many countries worldwide. +DNAG products +are available in several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for +self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When +the container is closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at +ambient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal +swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended +periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +DNAG products historically have been +sold primarily as Class I medical devices for use by research and academic institutions. DNAG has received FDA 510(k) clearance for the Oragene ® •Dx product which enables the Oragene ® •Dx product to be used with other FDA-cleared or exempt molecular diagnostic applications. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested +with either an exempt or 510(k) cleared molecular tests. An application for 510(k) clearance of DNAG’s ORAcollect ® product is currently pending with the FDA. +9 +Table of Contents +DNAG has received CE mark approval for the +OMNIgene ® • GUT microbiome collection kit. This product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool +samples for gut microbiome profiling for use in clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for +weeks at room temperature. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold by us +under the name Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the +Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., +tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with +the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and +other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for +specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby +streamlining the testing process. +During 2014, we completed development of a next generation collection device, which we are marketing +under the tradename “Intercept i2 ® ” he ”. This device offers several important advantages over our original +Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample +required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® device is currently being +sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific +(“Thermo Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid +nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, +these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating +localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin +lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. In 2014, we began supplying this product on a private label basis for resale by one of our physician +office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), +under the POINTTS tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt +Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on +a private label basis for the treatment of warts in the U.S. and for the treatment of both warts and skin tags in Canada. +10 +Table of Contents +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , +to meet the specific needs of our customers. During 2014, we also began selling fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The +result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available +laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the +Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents +are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, +automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests +continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We entered into the agreement with Thermo Fisher in 2013 after terminating a similar agreement with Roche Diagnostics. Under our new +agreement, Thermo Fisher has agreed to develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® he device. Under the first phase +of this agreement, we are selling a NIDA-5 panel of assays supplied by Thermo Fisher. The parties expect to complete development of several additional assays and obtain FDA 510(k) clearance of the Intercept i2 ® he device for use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept +i2 ® he collector and Thermo Fisher assays into Europe and other foreign countries. +The assays from Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to be issued by the Substance +Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe the offering of an Intercept +i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively +against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the original +specimen collected with the OraSure ® oral fluid collection device to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit +contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device +is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +11 +Table of Contents +Products Under Development +Infectious Disease Testing +Since 2014, we +have been pursuing the development and commercialization of a rapid Ebola antigen test using our OraQuick ® technology platform. Product development is now largely complete and significant +progress has been made in preparing for the commercial manufacturing of the product and obtaining the required regulatory approvals and registrations. In July 2015, we received an EUA for our +OraQuick ® Ebola rapid antigen test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services +(“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up +to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million +to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million of this funding for our OraQuick ® Ebola test. Funding received under +this contract is recorded as other revenue in our consolidated statement of operations as the activities are being performed. +In March +2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers and we have submitted for pre-qualification of the product with the WHO. These approvals will allow expanded use of the product, particularly in Africa. +We also intend to seek 510(k) clearance of our Ebola test from the FDA in the next year to eighteen months. +In response to global +concerns regarding the Zika virus, we are evaluating the technical feasibility of developing a rapid Zika test on our OraQuick ® platform. This virus is believed to be spread primarily through +infected mosquitoes and has been linked as a possible cause of microcephaly in new born babies whose mothers are infected. There has also been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. We +expect to continue our feasibility work during 2016. +Molecular Collection Systems +The following new product initiatives are continuing at DNAG: +• +OMNIgene ® • GUT is a system for the collection, stabilization, transportation and +storage of microbial DNA in stool samples. This product is being offered to academic researchers for early-stage testing in gut microbiome studies. +• +PrepIT ® MAX for tuberculosis (“TB”) is a reagent for extraction of DNA from TB +bacteria. This product is being offered for early-stage testing by TB researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +• +OMNIgene ® • SPUTUM is a reagent for the liquefying, decontaminating, transporting and +preserving of TB bacteria in sputum samples. OMNIgene ® • SPUTUM is expected to improve laboratory and operational workflows, compared to current approaches, and improve overall test +results. This product is being offered to TB laboratories for evaluation. +These products represent potential, long-term +market opportunities that we are still developing or are in the early stages of commercializing. Much of our activities for these products are currently centered around ensuring that early versions are being provided to key opinion leaders or early +adopters in the relevant markets. We expect these products will enable researchers and other customers to improve their results through better and lower cost sample collection, stabilization and preservation. +12 +Table of Contents +Microbiome +During 2015, we received CE mark approval and completed design validation on a high-throughput automated processing system for the OMNIgene ® • GUT product. Several technical manuscripts with academic and biotech groups are also in process which will report on the ability of this product to “snapshot” microbiome +communities at the point of collection. +Tuberculosis +The OMNIgene ® • Sputum and +PrepIT ® MAX products are gaining greater interest for tuberculosis testing. Healthcare providers from more than 60 countries have expressed interest in evaluating these products and more than +20 entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their evaluations of our product offerings. Our tuberculosis products are well positioned to support the National +Action Plan for combatting multi drug-resistant tuberculosis, recently announced by the Obama Administration, by providing much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Although we are excited about the potential opportunities in this market, it will likely take some time for these products to generate +meaningful financial results. +Research and Development +In 2015, our research and development activities focused primarily on development of our next generation Intercept i2 ® collection device, our new rapid Ebola antigen test, our molecular collection product offerings for the microbiome and tuberculosis markets, and clinical and technical support for our existing +products. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +Research and development expenses were $11.7 million in 2015, $12.1 million in 2014, and $10.9 million in 2013. These expenses include our +costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our +marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order +to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues +attributable to customers in the United States were $96.5 million, $82.3 million and $77.2 million in 2015, 2014 and 2013, respectively. Consolidated net revenues attributable to international customers amounted to $23.2 million, $24.2 million and +$21.7 million, or 19%, 23% and 22% of our total revenues, in 2015, 2014 and 2013, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our consolidated +financial statements included elsewhere in this Annual Report. +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to +customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional +facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of +13 +Table of Contents +encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through +distributors into the U.S. physician office market and to retail clinics operated by pharmacies. We have engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we +distribute our OraQuick ® HIV test in Europe and certain other foreign countries. +We market the OraSure ® oral fluid collection device for HIV-1 testing, on its own and +as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged OraSure ® test kits, +with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in Europe and other countries through distributors. Under an +agreement with AbbVie, we are co-promoting our OraQuick ® HCV test in certain U.S. markets, including general practitioners and certain specialty physicians. Under this arrangement, AbbVie has +agreed to detail our OraQuick ® HCV test in the physician markets and we pay AbbVie a fee for these detailing services. In addition, we have implemented a broad-based program for training +physicians on our OraQuick ® HCV test and have developed and implemented a patient care database under this agreement. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date +has been the CDC, which has purchased the product for field testing in Africa. Our ability to expand sales of this test to other customers will likely depend on the availability of government or other funding and whether we are able to obtain FDA +510(k) clearance and pre-qualification with the WHO for our product. +We have distribution rights to an FDA 510(k) cleared rapid flu +A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. +hospital and public health markets. +Infectious Disease Testing—OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers +carrying the product include CVS, Walgreens, Rite Aid, Wal-Mart and Kroger. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is +comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. In 2014, we changed our promotional strategy by implementing a more +cost-effective promotional approach focused on retail outlets and moved away from more expensive broad-based consumer advertising. We continued this strategy in 2015. +To support individuals that purchase and use our test, we have established a toll-free customer support center that operates on a 24/7, +365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up +confirmatory testing, counseling and medical treatment. +Molecular Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some countries distributors are used, +particularly in the Asia-Pacific region. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular +science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +14 +Table of Contents +Historically, most of DNAG’s revenues have been derived from product sales into the academic +and research markets. However, sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and now account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are +derived from repeat customers, in both markets. DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of +microbes and their effect on human health. DNAG’s initial product offering, OMNIgene ® • Gut, is focused on the human gut microbiome (microbes living in human stool). In 2015, DNAG +sold in excess of $500,000 of this product to a variety of both academic and commercial research organizations. DNAG is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish +itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. +In addition, DNAG has been +working to bring to market the OMNIgene ® • Sputum and PrepIT ® • Max products. These products include a lab reagent for +liquefying, decontaminating, transporting and preserving TB bacteria in sputum samples. TB is a major global health issue, with long established relationships among public health agencies, NGO’s, and suppliers. DNAG has a focused sales and +market development team working with these key players to have its products evaluated and adopted where possible. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug +rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our +Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory +distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a +kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with +prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse +testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and +community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® +collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the +criminal justice and drug treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 T ® device for use with the NIDA-5 +assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) +cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® +collector and MICRO-PLATE assays in the drug testing market. +We distribute our +Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad +range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause +and return-to-duty testing. +15 +Table of Contents +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in +turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a +manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than +20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand +through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We also sell +OTC cryosurgical products for the removal of warts and skin tags under private label arrangements with retailers in Canada and private label OTC wart remover products to several U.S. retailers. +Insurance Risk Assessment +We currently +market the OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting +risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life +insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® +Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being +used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some +customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and +instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during +the past three years. The OraQuick ® rapid HIV testing products, the cryosurgical systems products, and our Oragene ® product line +accounted for total revenues of $34.3 million, $11.9 million and $29.4 million, respectively, in 2015, $38.9 million, $15.5 million and $23.8 million, respectively, in 2014, and $44.8 million, $14.5 million and $20.4 million, respectively, in 2013. +One of our customers accounted for approximately 12% of our net consolidated revenues in 2015. We had no individual customers who +accounted for more than 10% of our total revenues in 2014 or 2013. +16 +Table of Contents +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral +fluid collection devices that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues +consist primarily of product sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, and commercial and industrial entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG +revenues consist of product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external +customers, income and total assets, please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the +consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, Western blot HIV-1 confirmatory +test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this +location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device in order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party +provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture the OraQuick ® test on terms no less favorable than those +set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. This supplier will also assemble our OraQuick ® HIV self-test. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 confirmatory test only +from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any +of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our +ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and +sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw +materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput +oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these +products. +17 +Table of Contents +The Histofreezer ® product sold in the +U.S. is assembled by U.S. vendors and the Histofreezer ® product sold internationally was previously assembled in the Netherlands by Koninklijke, Utermöhlen, N.V. +(“Utermöhlen”), the company from which we acquired the product line in 1998. The supply agreement with Utermöhlen has expired and we have successfully transferred our supply arrangement for international versions of this product +to a vendor located in Germany. The cryosurgical wart removal products distributed in OTC markets are assembled by vendors located in the United States. We believe that additional suppliers of all of our cryosurgical products are available on terms +no less favorable than the terms of our existing supply agreements in the event that our current suppliers would be unable or unwilling to continue manufacturing these products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2015, we had 326 full-time employees (including 103 employees at our subsidiary, DNAG). Of this total, +there were 119 in sales, marketing and client services; 36 in research and development; 123 in operations, manufacturing, quality control, information systems, purchasing and shipping; 18 in quality assurance and regulatory affairs; and 30 in +administration and finance. This compares to 320 employees as of December 31, 2014. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +Important competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry +competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size +companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +18 +Table of Contents +The future market for diagnostic products is expected to be characterized by greater cost +consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better +performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. +Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and +products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United +States. We expect the number of devices competing with our OraQuick ® , OraSure ® , +Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal +competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA +waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against +laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors +in the domestic infectious disease testing market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we +charge for our products. This competition can result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in +Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is +entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand +sales of our OraQuick ® HIV and HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the +FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. +Competition for our OraQuick ® Ebola test includes government and +commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both +whole blood samples from living patients and oral fluid samples from cadavers. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +19 +Table of Contents +Our Oragene ® collection system competes +against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the +Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of +lower price competitive devices can result in lost sales and degradation in pricing and profit margin. +OMNIgene ® • Gut is being sold in the emerging microbiome market where the primary competition currently is a variety of non-standard in-house solutions developed by various researchers, including +simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few +vendors to offer a solution that fully meets these requirements. +The OMNIgene ® +• Sputum and PrepIT ® MAX products are unique and have no direct competition in terms of a comparable product. The primary competition for these products is the incumbent methodologies +that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing +market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our +products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the +United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our +Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original +Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from +“home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong +competitive pressure because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE +drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on +radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run +on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and +heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® +urine assays have declined substantially during the past several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically +paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have +received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be +substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +20 +Table of Contents +Our professional cryosurgical product is sold primarily to physicians, including family +practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private +label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain +international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the +results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new +product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States +patents generally have a maximum term of 20 years from the date an application is filed. +We have six United States patents and numerous +foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for +oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from September 2016 to December 2026. We have also applied +for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United +States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire +from March to July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held by other parties. We also have obtained a license to certain HCV patents which we use to +manufacture and sell a rapid HCV test on the OraQuick ® technology platform. We obtained these licenses through the payment of certain upfront fees and an agreement to pay ongoing royalties. We +believe these fees and royalties are comparable to those generally paid by other companies under similar arrangements. +We hold, through +our subsidiary, DNAG, seventeen United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and +other bodily fluids and tissues. These patents expire from July 2019 through March 2031. +We have two United States patent and numerous +foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain +foreign countries. These patents expire from September 2025 to August 2032. +We require our employees, consultants, outside collaborators +and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the +course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions +conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United +States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept +i2 ® , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® , PrepIT ® and AUTO-LYTE ® trademarks. We also own many of these marks and +21 +Table of Contents +others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, +New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the +issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. +Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or +enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade +secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are +regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product testing, +authorizations to market, labeling, promotion, manufacturing and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale of our +products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of action by the FDA before they can be marketed in the United States. After approval or +clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could +disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products +are regulated in the United States as medical devices. +There are several mechanisms by which regulated medical devices can be placed on +the market in the United States. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must provide a premarket notification that it +intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed product (i.e., that it has the same intended use and is as safe and effective as a legally marketed device and does not raise +different questions of safety and effectiveness). In some cases, the submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding substantial equivalence. An applicant must +submit a 510(k) application at least 90 days before marketing of the affected product commences. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed +device or because it is required by statute and the FDA’s regulations to have an approved PMA), the FDA must approve a PMA before marketing can begin. PMAs must demonstrate, among other matters, that the medical device provides a reasonable +assurance of safety and effectiveness. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies. Preparing a PMA is a detailed and time-consuming process. Once a PMA +has been submitted, the FDA is +22 +Table of Contents +required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests +for additional data and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place +restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional +clinical trials, which can delay the PMA approval process by several years. In addition, if the FDA discovers that an applicant has submitted false or misleading information, the FDA may refuse to review submissions until certain requirements are +met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory +requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any +modifications made to our marketed devices, a premarket notification or PMA may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for +modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indications for use, manufacturing process, manufacturing facility, critical components, labeling and +design. +A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials +generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed a non-significant risk study, which is eligible for an exemption from +the IDE requirements. The IDE application must be supported by appropriate data, such as laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at +the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trials support +the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way +that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject. +Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other non-medical purposes. Our molecular collection products are sold to many academic and +research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and +federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through Emergency Use Authorization, or +EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the emergency. Typically, +analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral pathogens that have +the potential to affect public health. +Every company that manufactures medical devices distributed in the United States must comply with +the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the manufacturing process, including design, manufacture, testing, release, packaging, distribution, documentation +and purchasing as well as complaint handling, corrective and preventative actions and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production and quality to ensure full +technical compliance. +23 +Table of Contents +We believe that our facilities and procedures are in material compliance with the FDA’s QSR +regulations, but the regulations are subject to change, and we cannot be sure that FDA investigators will agree with our compliance with the QSR requirements. Companies are also subject to other post-market and general requirements, including +product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping +and reporting of certain adverse reactions. Medical device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or +contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects +companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an +inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating +restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter +primarily focused on DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s +products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • Dx collection device. In addition, the warning letter requested +additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter further noted that DNAG does not currently have in +place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG has +submitted a formal response and is actively engaged and working with the FDA to address the issues referenced in the warning letter. In addition, DNAG has submitted to the FDA an application for 510(k) clearance of its ORAcollect ® device. While the warning letter still remains pending, DNAG intends to continue to sell and market all of its products. We expect no material impact to product sales or our consolidated +financial performance for the forseeable future as a result of the issues raised by the warning letter. +The Clinical Laboratory +Improvement Amendments of 1988, or CLIA, prohibit any facility that does laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, +the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this +regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick +ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. A CLIA waiver allows certain customers to use the waived products that may not have been able to use them without +complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in +the United States. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell products. +24 +Table of Contents +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission +(“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorney generals. +Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our +products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, +under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved +use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or +criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products +for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA or European regulating bodies, as applicable. In particular, international sales of medical devices manufactured +in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign +Government. To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in +compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the +FDA’s satisfaction. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain +approval from international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain +other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 +countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates +that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro +Diagnostic Directive (“IVDD”) must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these +requirements allows us to affix the CE mark to our products, without which they may not be placed on the market in the EU. +25 +Table of Contents +We have received authorization to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC +cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We +have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various +ISO requirements in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in +return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, +Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable +under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers +that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare +programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the +person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each +wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and +penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to +other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by +limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by +criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing +interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction +and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of gifts or other payments to +healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of +value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device +26 +Table of Contents +manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to +accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is +based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all +employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, +grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. +Foreign Corrupt Practices Act and +Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from +engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or +authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official +capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the +“Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. +companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain +circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, +state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in +Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, +mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of +very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our +manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities +cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial +statements and accompanying notes included in Item 15 of this Annual Report. +27 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/item13.txt b/raw/filings/0001116463/2015/0001193125-16-503534/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..207a0fad123d7a424c1fbdac9e720f2d44bd89d3 --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item is incorporated by reference to the information under the captions “Transactions with Related +Persons” and “Corporate Governance—Director Independence” in the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/item9a.txt b/raw/filings/0001116463/2015/0001193125-16-503534/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..ab4950d84152a7659a9ad772d0ff4c0cb5ff6eb3 --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/item9a.txt @@ -0,0 +1,57 @@ +ITEM 9A. +Controls a nd Procedures. +(a) Evaluation of Disclosure +Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief +Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2015. Based on that evaluation, +the Company’s management, including such officers, concluded that as of December 31, 2015 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the +Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions +regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting . +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term +is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal +76 +Table of Contents +executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal +Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial +reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of +December 31, 2015. +The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited +by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +Because of its +inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of +changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +(c) Changes in Internal +Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter +ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, Inc.: +We +have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of +Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal +control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based +on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). +Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of +internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such +other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of +financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +77 +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or +procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control +over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated +balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years +in the three-year period ended December 31, 2015, and our report dated March 14, 2016 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 14, 2016 \ No newline at end of file diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/rp_note.txt b/raw/filings/0001116463/2015/0001193125-16-503534/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2015/0001193125-16-503534/rpt_disclosure.txt b/raw/filings/0001116463/2015/0001193125-16-503534/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e7578034d9eb5e4f9653dadc6c6e9e8a31e14ab --- /dev/null +++ b/raw/filings/0001116463/2015/0001193125-16-503534/rpt_disclosure.txt @@ -0,0 +1,9 @@ +Transactions With Related Persons +Since January 1, 2015, there have been no transactions +with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party +transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in +our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +26 +Table of Contents +Information regarding employment and severance agreements between our executive +officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/filing.txt b/raw/filings/0001116463/2016/0001193125-17-082033/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..faa1c3182351fe9bf37c8dc0eb2cc4591cdb1e42 --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/filing.txt @@ -0,0 +1,5998 @@ +10-K +1 +d354040d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2016 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File +No. 001-16537 +ORASURE +TECHNOLOGIES, INC. +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer Identification No.) +220 East First Street +Bethlehem, Pennsylvania +18015 +(Address of Principal Executive Offices) +(Zip Code) +(610) 882-1820 +(Registrant’s Telephone Number, Including Area Code) +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which +Registered +Common Stock, $0.000001 par value per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. Yes ☐ No ☒ +Indicate by check mark if +the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) +of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No ☐ +Indicate by check mark +whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T +(§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, +and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this +Form 10-K. ☐ +Indicate by check mark whether the +Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting +company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of +the Exchange Act). Yes ☐ No ☒ +State the +aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business +day of the Registrant’s most recently completed second fiscal quarter (June 30, 2016): $477,838,743 +Indicate the +number of shares outstanding of each of the Registrant’s classes of common stock, as of March 9, 2017: 57,655,714 shares. +Documents +Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders are +incorporated by reference into Part III of this Annual Report. +Table of Contents +Table of Contents +PART I +Page +ITEM 1. +Business +3 +ITEM 1A. +Risk Factors +29 +ITEM 1B. +Unresolved Staff Comments +58 +ITEM 2. +Properties +58 +ITEM 3. +Legal Proceedings +58 +ITEM 4. +Mine Safety Disclosures +59 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +60 +ITEM 6. +Selected Consolidated Financial Data +62 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +63 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +80 +ITEM 8. +Consolidated Financial Statements and Supplementary Data +80 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +80 +ITEM 9A. +Controls and Procedures +81 +ITEM 9B. +Other Information +82 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +83 +ITEM 11. +Executive Compensation +83 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +83 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +83 +ITEM 14. +Principal Accountant Fees and Services +83 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +84 +ITEM 16. +Form 10-K Summary +84 +Table of Contents +This Report contains certain “forward-looking statements,” within the meaning of the +Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business +transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include +words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual +performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to +manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or +applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the FDA or other regulators; changes in +relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; failure of distributors or other customers +to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and +strategic objectives and continue to increase its revenues; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; impact of negative economic +conditions, high unemployment levels and poor credit conditions; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new +products; market acceptance of oral fluid testing or other products; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers +for Disease Control and Prevention (“CDC”) and other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole +supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; ability to maintain sustained profitability; ability to utilize net operating loss carry +forwards or other deferred tax assets; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual +property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including +the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to meet financial covenants in credit agreements; ability to +attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to +obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A, +entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are +cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to +disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or +report. Furthermore, we have a policy against issuing or +1 +Table of Contents +confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not +the responsibility of OraSure. +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References +in this Annual Report to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +2 +Table of Contents +PART I +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and +sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. +We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a +laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, +physicians’ offices, and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the +U.S. Food and Drug Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale +in the over-the-counter (“OTC”) or consumer retail market in the United States and we have commenced sales of our HIV self-test in certain foreign countries. We also sell OTC cryosurgical products to consumers in North America, Europe, +Central and South America, and Australia. More recently, we completed development and recorded initial sales of our new OraQuick ® rapid Ebola antigen test and we have substantially developed +an OraQuick ® rapid Zika antibody test. +In vitro diagnostic testing is the +process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a +significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid +tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space. +Through our subsidiary, +DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical +genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the +collection, stabilization, transportation and storage of DNA from human saliva. We have also begun selling new research use only products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome +services called “GenoFIND TM ”, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers in many countries +worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the +purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged +into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided +at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as +well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to +that website are not intended to be incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 +(“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and +plasma. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole +blood. +Marketed +World Health Organization (“WHO”) pre-qualification. +Marketed +Also registered in various other countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +CE Mark (European Union) approved for OTC use. +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care qualitative and oral fluid +HIV-1/2 self-test for investigational use only that can be visually read in approximately 20 minutes. +Investigational use only. +Registered in one African country. +Designated eligible for procurement by Global Fund. +WHO pre-qualification pending. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the +hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also +registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be +visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live +patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid +samples from cadavers. +Marketed +OraQuick ® Zika +A rapid point-of-care qualitative test for Zika antibodies that can be read in +approximately 20 minutes. +Under development. +Not Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) +Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and +cotinine in a laboratory setting. +PMA approved for detection of HIV-1 +antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® •DX +Non-invasive all-in-one system for the collection, stabilization, transportation +and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC +use. +Marketed +Oragene ® •DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, +and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® •RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® +All-in-one system for the collection, stabilization, transportation, +and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various other countries. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and +storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene• +LIVESTOCK and +Oragene ® •ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of +livestock DNA from nasal samples. +Animal research use only. +Marketed +OMNIgene ® • GUT +All-in-one system for the collection, stabilization, transportation and +storage of microbial DNA in stool samples. +Research use only product. +Marketed +CE marked and registered in certain countries. +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving +tuberculosis bacteria in sputum samples. +Research use only product. +Marketed +CE marked and registered in certain countries. +WHO endorsement pending. +PrepIT ® • MAX +Reagent for extraction of DNA from tuberculosis bacteria. +CE marked and registered in the U.S. +Marketed +OMNIgene ® • VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse +(“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with +Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and +methadone. +Nine drug assays – FDA 510(k) cleared. +Marketed +Assays CE marked and registered in certain countries. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory +setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Marketed +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo +Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems—Professional +Cryosurgical (freezing) system for the removal of warts and other benign +skin lesions, marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +Marketed +CE marked and registered in certain countries. +Marketed +Cryosurgical Systems—OTC +Cryosurgical system for the removal of common and plantar warts and +skin tags, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Marketed +Registered in Canada for warts and skin tags. +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® , POINTTS ® and CrytoTag names. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk +assessment, substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. We also offer genomics and +microbiome support services to our molecular collection customers under the GenoFIND TM trademark. +GenoFIND TM services range from package customization and study design optimization to +extraction, analysis and reporting services. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole +blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial +containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a +7 +Table of Contents +loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all +cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and +generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick +ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. +The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United +States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a +result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick +ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered in other countries. We have +distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received WHO pre-qualification for our export only version of this product. +Because of its versatility in being able to detect antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid +and plasma samples, we believe that the OraQuick ® device provides a competitive advantage in the market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our +OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark, although this product is not currently +mandated in the European Union. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for +consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +We have completed development of a low cost OraQuick ® HIV Self-Test for use in certain +foreign countries. This product has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test. We are working with Population Services International (“PSI”), a +leading global health organization, along with UNITAID, the WHO and health officials from Malawi, Zambia and Zimbabwe to launch the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. As part of STAR, PSI is using our new OraQuick ® Self-Test with labeling and instructions specifically tailored for the African marketplace, in a two-year pilot program funded by UNITAID. The purpose of the STAR project is to generate crucial +information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public health impact of self-testing will be. Our OraQuick ® +Self-Test was chosen by PSI because of its quality, ease-of-use and oral fluid option. Initial sales of our test to PSI were completed in 2016. +The OraQuick ® HIV Self-Test has been designated as eligible for procurement by +purchasing entities entitled to access funding and other resources from the Global Fund and UNITAID. This funding is available for a 12-month period. We are also seeking WHO pre-qualification for this product. +8 +Table of Contents +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and +finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with +oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the +OraQuick ® technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and +capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and venous whole blood samples collected from live patients, as well as oral fluid specimens collected from cadavers. The WHO has also +issued an Emergency Use Assessment and Listing for this product with respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected +with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured +for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. During 2016, PBM obtained a CLIA waiver for this test for use with nasal and nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and +confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The +device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection +and other analytes. +The OraSure ® collection device is FDA approved for use in +the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the +OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the +OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) +screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +A trained health care professional then +conveys test results and provides appropriate counseling to the individual who was tested. +9 +Table of Contents +Tuberculosis Products +Our wholly-owned subsidiary, DNAG, offers two infectious disease products targeting tuberculosis (“TB”). OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for +at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily +mixing and quality control. OMNIGENE ® • SPUTUM is expected to improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product +is being offered to TB laboratories for evaluation. +PrepIT ® MAX is a reagent for +extraction of DNA from TB bacteria. This product is being offered for early stage testing by TB researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +Both of the OMNIgene ® • SPUTUM and PrepIT ® • MAX products are CE marked and OMNIgene ® • SPUTUM is gaining greater interest for tuberculosis testing. Healthcare providers +from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their product +evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing much needed solutions to developing countries that are at the +highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +Through DNAG, we sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and +storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to collect DNA from human saliva. These products are currently +sold to thousands of academic and research customers in many countries worldwide. +Our molecular collection products are available in +several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted +collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is +closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature +for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We have started to market several microbiome collection products designed to collect, stabilize and transport the microbial profile from +multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time and when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and +preserves (“snapshots”) the microbiome after collection, until analysis is required. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in +clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Current methodologies +for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We have also begun marketing other microbiome collection kits for DNA or RNA collected from the vagina and +oral cavity. +10 +Table of Contents +We believe these products provide significant advantages over competing DNA and RNA collection +methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store +and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Our molecular business also offers customers our GenoFIND TM services, a suite of genomic +and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. We believe our GenoFIND TM offering will become an +increasingly valuable tool for meeting the needs of our molecular customers. +Our molecular collection products historically have been +sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® •DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our +ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® • +DNA and OMNIgene ® •GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the +OraSure ® device is sold by us under the name Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA +510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) +as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) +cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through +laboratory distributors. +We believe that the Intercept ® device has several +advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with +greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs +and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection +device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by +current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® device is currently being sold as a +forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo +Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid +nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, +these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating +localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other +11 +Table of Contents +types of benign skin lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product +on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product +through our distributor Genomma Labs (“Genomma”), under the POINTTS ® tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart +removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and +Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and +for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , +to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The +result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available +laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the +Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents +are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, +automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests +continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We entered into an agreement with Thermo Fisher in 2013, under which Thermo Fisher has agreed to develop and supply up to 12 +fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® he device. Under the first phase of this agreement, we are selling a NIDA-5 panel of assays supplied +by Thermo Fisher in the U.S. forensic market. The parties expect to complete development of several additional assays and pursue FDA 510(k) clearance of the Intercept i2 ® he device for +use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept i2 ® he collector and Thermo Fisher assays into Europe and +other foreign countries. +The assays from Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to +be issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe +the offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us +to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the +original specimen collected with the OraSure ® oral fluid collection device to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +12 +Table of Contents +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit +contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device +is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Since +2014, we have been pursuing the development and commercialization of a rapid Ebola antigen test using our OraQuick ® technology platform. Product development is now largely complete and +significant progress has been made in preparing for the commercial manufacturing of the product and obtaining the required regulatory approvals and registrations. In July 2015, we received an EUA for our OraQuick ® Ebola rapid antigen test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) +August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live +patients. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within +the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an +additional $8.6 million to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million of this funding for our OraQuick ® Ebola +test. +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. The WHO has issued an +Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the product, particularly in +Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in 2017. +In response to global concerns regarding the Zika +virus, we are developing a rapid Zika antibody test on our OraQuick ® platform. This virus is believed to be spread primarily through infected mosquitoes and has been linked as a possible cause +of microcephaly in newborn babies whose mothers are infected. There has also been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. +In August 2016, we entered into a contract with BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product +enhancements, and certain clinical and regulatory activities. +Research and Development +In 2016, our research and development activities focused primarily on development of our next generation Intercept i2 ® collection device, our new rapid Ebola and Zika tests, our molecular collection product offerings for the microbiome and tuberculosis markets, and clinical and technical support for our existing +products. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +13 +Table of Contents +Research and development expenses were $9.8 million in 2016, $11.7 million in 2015, and $12.1 +million in 2014. These expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to +reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade +shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were +$99.8 million, $96.5 million and $82.3 million in 2016, 2015 and 2014, respectively. Consolidated net revenues attributable to international customers amounted to $28.4 million, $23.2 million and $24.2 million, or 22%, 19% and 23% of our total +revenues, in 2016, 2015 and 2014, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 11 to our consolidated financial statements included elsewhere in this +Annual Report. +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to +customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional +facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV +testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by +pharmacies. We have engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we distribute our OraQuick ® HIV +test in Europe and certain other foreign countries. +Our OraQuick ® HCV test is +sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in +Europe and other countries through distributors. Under an agreement with AbbVie, we previously co-promoted our OraQuick ® HCV test in certain U.S. markets, including general practitioners and +certain specialty physicians and AbbVie agreed to detail our OraQuick ® HCV test in the physician markets. This agreement was terminated at the end of 2016. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date +has been the CDC, which has purchased the product for field testing in Africa. Our ability to expand sales of this test to other customers will likely depend on the availability of government or other funding and whether we are able to obtain FDA +510(k) clearance and pre-qualification with the WHO for our product. +We market the +OraSure ® oral fluid collection device for HIV-1 testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have +contracted a commercial laboratory to provide prepackaged OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +We have distribution rights to an +FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are +permitted to sell this product into the U.S. hospital and public health markets. +We have also been working to commercialize the OMNIgene ® • SPUTUM and PrepIT ® • MAX products. TB is a major global health issue, with long established relationships among public health +agencies, NGO’s, and +14 +Table of Contents +suppliers. Our subsidiary, DNAG, has a focused sales and market development team working with these key players to have its products evaluated and adopted where possible. +Infectious Disease Testing—OTC +We +sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase +on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who +have sex with men, African Americans and Latino Americans. +To support individuals that purchase and use our test, we have established a +toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about HIV/AIDS and the use of our test, and +refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling +our OraQuick ® HIV Self-Test to PSI (Population Services International) for use in a self-testing pilot program in three African countries, Malawi, Zambia and Zimbabwe. We expect this program +to expand and we are marketing our test in several other countries that are also planning large HIV self-test programs. Our OraQuick ® HIV Self-Test has the same diagnostic capabilities as our +OraQuick ® In-Home test and was developed for use in certain foreign countries. +Molecular +Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some +countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular science +backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to +commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. +DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of +microbes and their effect on human health. DNAG’s primary product offering, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG is +leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. +Substance Abuse Testing +Our substance +abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection +device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology +testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +15 +Table of Contents +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the +criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market +consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® +collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These +products are currently sold into the criminal justice and drug treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the NIDA-5 assay panel, +along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept +i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE +assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test +primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement +testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Cryosurgical Systems +Most of our +Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors +include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we +sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our distributor, +Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. More recently, we began selling our +product in the U.K. through another distributor, Appia, under the CrytoTag trade name. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada, for the removal of skin tags in the U.K. and for the +removal of warts in the U.S. +Insurance Risk Assessment +We currently market the OraSure ® oral fluid collection device for use in screening +life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which +in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection +16 +Table of Contents +devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in +confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. +In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers +using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and +instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during +the past three years. The OraQuick ® rapid HIV testing products, the cryosurgical systems products, and our Oragene ® product line +accounted for total revenues of $33.1 million, $13.2 million, and $31.1 million, respectively, in 2016, $34.3 million, $11.9 million and $29.4 million, respectively, in 2015, and $38.9 million, $15.5 million and $23.8 million, respectively, in +2014. In 2016, the OraQuick ® HCV testing products accounted for total revenues of $14.1 million. +One of our customers accounted for approximately 15% of our net consolidated revenues in 2016 and 12% in 2015. We had no individual customers +who accounted for more than 10% of our total revenues in 2014. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral +fluid collection devices that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues +consist primarily of product sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, and commercial and industrial entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG +revenues consist of product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external +customers, income and total assets, please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 11 to the +consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. +Supply and +Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, Western blot HIV-1 confirmatory test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We +expect to continue to manufacture these products at this location for the foreseeable future. +17 +Table of Contents +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of +one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 confirmatory test only +from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any +of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our +ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and +sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw +materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput +oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these +products. +The Histofreezer ® product and our OTC cryosurgical products are +assembled by a U.S. vendor with certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in +the event that our current suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2016, we had 325 full-time employees (including 104 employees at our subsidiary, DNAG). Of this total, +there were 113 in sales, marketing and client services; 37 in research and development; 126 in operations, manufacturing, quality control, information systems, purchasing and shipping; 22 in quality assurance and regulatory affairs; and 27 in +administration and finance. This compares to 326 employees as of December 31, 2015. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +18 +Table of Contents +Important competitive factors for our products include price, quality, performance, ease of use, +customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing +practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size +companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, +tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume +discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. +Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and +products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United +States. We expect the number of devices competing with our OraQuick ® , OraSure ® , +Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal +competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA +waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against +laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +19 +Table of Contents +Our competitors in the domestic infectious disease testing market include medical diagnostic +companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and +degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our +rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike +the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international +markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other international +markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test +approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The +OraQuick ® HIV Self-Test that we sell in certain international markets is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our OraQuick ® Ebola test includes government and +commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both +whole blood samples from living patients and oral fluid samples from cadavers. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices +used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® products. Although we believe the +Oragene ® device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit +margin. Our Oragene ® product is also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes +with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and +stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM and +PrepIT ® • MAX products are unique and have no direct competition in terms of a comparable product. The primary competition for these products is the incumbent methodologies that are +widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, +our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products +to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the +United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our +Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +20 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse +reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on +radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run +on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and +heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® +urine assays have declined substantially during the past several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically +paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have +received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be +substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This +product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our +Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the +results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new +product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States +patents generally have a maximum term of 20 years from the date an application is filed. +We have five United States patents and +numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, +containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from March 2018 to December 2026. We have +also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have +five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. +patents expire from March to July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held +by other parties. We also have obtained a license to certain HCV patents which we use to manufacture and sell a rapid HCV test on the OraQuick ® technology platform. +21 +Table of Contents +We hold, through our subsidiary, DNAG, seventeen United States patents and numerous foreign +patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2020 through +March 2031. +We have two United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of +skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to August 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of +employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and +not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the +consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary +to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , +Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® , PrepIT ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC +cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our +business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other +countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the +outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and +comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, +manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and +sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After +approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, +failure to comply with the FDA’s requirements +22 +Table of Contents +can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our +products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as medical devices. +There are several mechanisms by which regulated medical devices can be placed on the market in the United States. Some products may qualify for +clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the +product is substantially equivalent to another legally marketed predicate device t (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified +by the FDA; or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, +or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the +submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. An applicant must submit a 510(k) +application at least 90 days before commercial distribution of the affected product commences. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually +takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical +device does not qualify for the 510(k) procedure, either because it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de +novo classification or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent +predicate device exists. Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined +to be high risk and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid +scientific evidence, including the results of preclinical and clinical studies, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. +Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for +additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA +approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA +may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may refuse to +review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the +failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement may be required to be submitted +to, and cleared or approved by, the FDA, before the modified device may be +23 +Table of Contents +marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the +device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of +the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These +trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study +meets the requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. If a full IDE +is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical +study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue +the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE +supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human +subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain +clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to +obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other nonclinical or +non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA +does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Another +option for marketing a product in the U.S. is through Emergency Use Authorization, or EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of +certain in vitro diagnostic devices to aid in addressing the emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite +development of diagnostic tools to aid in the diagnosis of viral pathogens that have the potential to affect public health. +Most medical +devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including +design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend +time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance. +Companies are also +subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed +products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Medical device reporting regulations +24 +Table of Contents +require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or +serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine +compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an +investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or +partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with +the FDA’s OSR regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter +primarily focused on DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s +products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • DX collection device. In addition, the warning letter requested +additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter further noted that DNAG does not currently have in +place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG has +submitted a formal response to the FDA to address the issues referenced in the warning letter. In addition, DNAG received 510(k) clearance of its ORAcollect ® device on April 18, 2016. +While the warning letter still remains pending, DNAG intends to continue to sell and market all of its products. We expect no material impact to product sales or our consolidated financial performance for the foreseeable future as a result of the +issues raised by the warning letter. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts +laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility +a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. +We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid +HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for +certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products +that may not have been able to use them without complying with applicable quality control and other requirements. +Certain of our products +may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove +any restrictions affecting our ability to sell products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission +(“FTC”) and by other federal and state regulatory and enforcement authorities, +25 +Table of Contents +including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or +approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham +Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that +we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC +enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is +brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the +FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are +subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also +called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and +that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such +certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to +regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval from international public health agencies, such as the World Health Organization, in order to sell products in certain +countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only +in those countries that we believe have a significant market opportunity. +The International Organization for Standardization +(“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to +facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and +distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive +(“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are +accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO +certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment +26 +Table of Contents +procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +We have completed the applicable conformity assessment procedures and obtained the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC +cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We +have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various +ISO requirements in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in +return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or +services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering +of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products +are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or +other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the +person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each +wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and +penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to +other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by +limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by +criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing +interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction +and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical +27 +Table of Contents +device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to +new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are +required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions +with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with +applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, +support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear +and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain +or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to +any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and +will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and +receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom +generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the +nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, +effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous +Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In +addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our +products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes +included in Item 15 of this Annual Report. +28 +Table of Contents +ITEM 1A. +Risk Factors +You should carefully consider the risks and uncertainties described +below, together with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and +uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of +operations. +Regulatory Risks +The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies. In +particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. +The process of obtaining required approvals, clearances or premarket authorizations can involve lengthy and detailed laboratory testing, human +clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances and other premarket authorizations can require the submission of a large amount of clinical data which can be expensive and may require +significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory +authority does not guarantee that an authorization to market or import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, or other premarket authorization that may include +significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another +agency. Delays in receipt or failure to receive such approvals, clearances or other premarket authorization could have a material adverse effect on our business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential +requirements of the IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those +marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE +mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our distributors are often required to obtain premarket authorization with foreign governments or regulatory bodies before +we can import and sell our products in foreign countries. We may have difficulty obtaining such authorizations and, if obtained, such authorizations may contain restrictions that limit our ability to market and sell our products in the relevant +country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute +a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign +regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, +29 +Table of Contents +adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with +QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and +ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require +post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. +Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously +unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative +or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of product registrations, +marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to +be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for +clinical diagnostic use and they are labeled “For Research Use Only”, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or +approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance +with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure +or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products +could have a material adverse effect on our business. +Our Ability to Respond to Changes in Regulatory Requirements Could Adversely +Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, and +ISO requirements, but the regulations regarding the manufacture and sale of our products and the QSR and ISO requirements may be unclear and are subject to change. In the EU, for example, legislators are in the process of adopting a new regulation +on in vitro diagnostic medical devices that would replace the IVDD and could impose additional regulatory requirements for our current or future products, such as increasing the involvement of notified bodies in the review process. Newly promulgated +regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory +authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion +of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more +difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or +warrants such authorization. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +30 +Table of Contents +Our Inability to Manufacture Products in Accordance With Applicable Specifications, +Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture +our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a +result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in +materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims +or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, +quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our +Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our +ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, +fire hazard control, disposal of hazardous substances and labor or employment practices. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws +and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures +associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure To Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +The Company believes it is neither a covered entity nor a business associate of a covered entity and is not responsible for complying with the +Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). However, the Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ +personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach +reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In +addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex +compliance issues. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive. +Many laws and regulations impose obligations on public companies, which have increased the scope, complexity and cost of corporate governance, +reporting and disclosure practices. Examples include the Sarbanes-Oxley Act +31 +Table of Contents +of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s requirements for public companies to provide financial +statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”), and the International Financial Reporting Standards conversion requirements. Our implementation of certain aspects of these laws and +regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually evaluate and monitor developments with respect to new and +proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and regulations are also subject to varying interpretations, in many cases due to their lack of specificity, +and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing +revisions to disclosure and governance practices. Although we are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against +us, which may adversely affect our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For +Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform +diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by +high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by FDA under the agency’s +medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In +mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. However, on November 18, 2016, the FDA +announced that it would not finalize the proposed guidance prior to the end of the Obama administration. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a +possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies the new administration will adopt with respect to +regulating LDTs. +Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. +The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could reduce demand for DNAG’s products and +adversely impact our revenues. +Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could +Affect Our Molecular Collection Systems Business. +The adoption of genetic testing is occurring within the broader context of a myriad +of decisions related to genetic patenting and genotyping. Issues associated with regulatory requirements, health insurance, data access and privacy, intellectual property protection, national and international legislative initiatives and other +variables impact the widespread adoption of genetic testing or specific segments or tests within the genetic testing market. These developments could impact sales of our molecular collection systems products. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of +Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including +anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices +32 +Table of Contents +by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices and +laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from +participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements are new and have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until +we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of +these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial +condition and results of operations. +Our International Sales Create Potential Exposure Under Anti-Corruption Laws. +In 2016, approximately $28.4 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These +international activities subject us to the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political +parties by business entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in countries known to experience corruption. Further international expansion may create increased +exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the +FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the +FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for +which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of +operations and financial condition. +Risks Relating to Our Industry, Business and Strategy +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and +become more widely known, and as new products reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products enter the market, our products may become obsolete +or a competitor’s products may be more effective or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products that would render +our technologies and products obsolete or otherwise commercially unattractive, or introduce or commercialize such products, before we can do so. If we fail to convince our customers of the advantages and economic value of our products or otherwise +maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition +and results of operations. +We also face competition from products that are sold at a lower price. Where this occurs, customers may choose +to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to +increase our marketing efforts in order to compete effectively, which would increase our costs. +33 +Table of Contents +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and +Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, +competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed +pricing pressure on medical device suppliers. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or +Successful Products. +In order to remain competitive, we must regularly commit substantial resources to research and development and +the commercialization of new or enhanced products. The research and development process generally takes a significant amount of time from product inception to commercial launch. This process is conducted in various stages. During each stage there is +a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. +During 2016, 2015 and 2014, we incurred $9.8 million, $11.7 million and $12.1 million, respectively, in research and development expenses. We +expect to continue to incur significant costs related to our research and development activities. +Successful products require significant +development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional +development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition approval. Even +if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources, such +as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on advertising or other activities and fail to develop a market for the product. Other factors that could affect the success of our efforts +include our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. +Accordingly, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or +a greater number of successful new products, customers may decide not to purchase our products or may purchase and use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, +cash flow and business. +Failure to Successfully Commercialize Rapid Point–of-Care Ebola and Zika Tests Could Adversely Affect Our +Results of Operations and Business Prospects. +We have completed development of a rapid, Ebola antigen test using our OraQuick ® technology platform. In 2015 and 2016, under an EUA (Emergency Use Authorization) received from the FDA, we sold $2.5 million of product to the CDC for field testing. Despite this initial +progress, there is no assurance that our Ebola test will perform at a level necessary to receive all of the regulatory approvals required for its use. In addition, it is possible that the FDA may revoke our EUA if it is determined that Ebola is no +longer an emergency warranting that authorization. Such action would negatively affect our ability to sell the product. +34 +Table of Contents +It is also uncertain whether, and to what degree, we will be successful in obtaining sustainable +purchase commitments for our Ebola test. Significant efforts are under way to develop a vaccine for the Ebola virus. If a vaccine is developed and widely deployed in the countries at risk for Ebola, the need for testing could be reduced as could the +demand for our product. Failure to successfully obtain the required regulatory approvals or receive sustainable and significant purchase commitments for our Ebola test could adversely affect our revenues and results of operations. +During 2016, we substantially completed development of a rapid Zika antibody test, also using our OraQuick ® technology platform. Once development is complete and a prototype test is finalized, we intend to seek EUA approval for this product. There is no assurance that we will be able to obtain EUA or +other necessary regulatory approvals required to commercialize this product or, if such approvals are received, that we will obtain sustainable purchase commitments for our Zika test. Our failure to successfully complete development, obtain the +required regulatory approvals or receive substantial purchase commitments for our Zika test could adversely affect our revenues and results of operations. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in +implementing our financial and strategic objectives, including our efforts to increase sales of our products or continue growing our molecular collection systems business. In addition, the funds for research, clinical development and other projects +have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. +Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not +correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material +adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as +Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, +management and sales, marketing, operations and scientific staff. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products and +other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We +generally do not enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to +attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic +partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel +from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. +35 +Table of Contents +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our +Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +We may pursue strategic +acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are +satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial +resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be +affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, +information technology systems, accounting policies and practices, products and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +An acquisition and subsequent integration activities may require greater capital and other resources than +originally anticipated at the time of acquisition; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our +earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, +distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign +currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected +from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if +end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private +healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and +other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse +36 +Table of Contents +all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare +industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be +available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be +decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the +availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare +coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care +Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare +reform initiatives and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of any healthcare reform legislation and its resulting impact on us are impossible to predict. If +significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +The Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many medical devices, which includes +domestic sales of certain of our products. This new tax became effective in January 2013. However, the Consolidated Appropriations Act of 2016, which was enacted late 2015, suspended the tax beginning January 1, 2016, with the suspension ending +December 31, 2017. It is unclear whether and to what extent this tax will impact our business if and when the suspension is lifted. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention (“CDC”) issue diagnostic testing +guidelines or recommendations, which can affect the usage of our HIV and HCV testing products. For example, domestic professional OraQuick ® HIV sales decreased 17% from 2014 to 2015, and 14% +from 2015 to 2016, in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the +future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied +by healthcare practitioners, could impact the degree to which our OraQuick ® rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of +people tested, the frequency of testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited +capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the public health market which consists of state, county and other governmental public health agencies, community based organizations, service +37 +Table of Contents +organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental +agencies to run their operations including programs that use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, +government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors +including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Any reduction or delay in government funding as a result of legislative or +regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products. +The New U.S. +Presidential Administration Could Have An Effect On Us. +On January 20, 2017, Donald J. Trump was inaugurated as the President of +the United States. President Trump has promised to repeal and replace the Affordable Care Act, has expressed concerns with respect to existing trade agreements such as the North American Free Trade Agreement, or NAFTA, and has indicated a desire to +make other regulatory changes and implement tax reform during his administration. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, taxes, manufacturing, and development in the United States could +impact our business. For example, changes in the level of reimbursement or the availability of funding for health care could create uncertainty for our business and negatively impact our revenues and results of operations. Similarly, over fifty +percent (50%) of DNAG’s 2016 revenues represented sales of product into the United States. The imposition of tariffs or other changes in the trade relationship between Canada and the United States could negatively impact DNAG’s +performance. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis. +Developments Related To The U.K.’s Referendum On Membership in The E.U. Could Adversely Affect Us. +On June 23, 2016, the United Kingdom (“U.K.”) held a referendum and voted in favor of exiting the European Union, or E.U. This +“Brexit” referendum has created political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for years. Until the precise terms and timing of the U.K.’s exit from the E.U. are determined, it will +be difficult to predict the impact of the Brexit referendum. Our business in the U.K., the E.U. and world-wide could be affected during this period of uncertainty, and perhaps longer, by the impact of the Brexit referendum. The U.K.’s decision +to exit the E.U. could cause volatility in global financial markets, including in global currency exchange rates, resulting in a slow-down in economic activity in the U.K., Europe or globally, negatively impact new trade agreements between the U.K +and other countries, including the United States, and result in significant regulatory changes and uncertainty. One or more of these events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and +negatively affect our revenues and results of operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or +all of which could negatively impact our business. +Increases in Demand for Our Products Could Require Us to Expend Considerable +Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand. +If we experience significant or unexpected +increases in the demand for our products, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could +38 +Table of Contents +involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be unable or unwilling to +expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or +are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. +If we or our +suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our sales could be adversely affected. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or +production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a +material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain +additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply +agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely +delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain +alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the +industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our +Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, +including for management of inventory, purchase orders, invoices, shipping, interactions with our third-party logistics provider, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. +Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends +significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate +effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to +remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm +Our Reputation and Business . +In the ordinary course of our business, we collect and store sensitive data, including intellectual +property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and +transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing +this sensitive date. +39 +Table of Contents +Computer hackers may attempt to penetrate our computer systems or our third party IT service +provider’s systems and, if successful, misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and +may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more +sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) +which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. Even the most well +protected IT networks, systems, and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are +designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, +could result in legal claims proceedings, liability under laws to protect, privacy of personal information, and regulatory penalties, disrupt our operations, require significant management attention and resources to remedy any damages that result, +damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business. +Risks +Relating to Collaborators +The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could +Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other +third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure +QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by +sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third party suppliers. +In addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of its products, including its Oragene ® line of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a +component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find +such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or +manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or +other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing +so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +40 +Table of Contents +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, +May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and +distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market +and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness +of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation +between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements +with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill +their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, +a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for development and commercialization of +products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, +including: +• +We may be required to transfer material rights to such strategic collaborators, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of +our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely +manner; +• +Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or +become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +41 +Table of Contents +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative +agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an +economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be +controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such +arrangements. +Actions of Third-Party Inventory Management and Logistics Providers Could Adversely Affect Our Ability to Supply +Products to Our Customers. +We use third-party logistics providers to store and manage our finished goods inventory and ship finished +product to our customers. We have selected highly reputable providers with extensive experience in the logistics field for these services. However, in the event any of our providers lose or damage our products, experience a casualty or catastrophic +event at a warehouse or otherwise fail to provide safe storage and timely handling and delivery of our products, we could incur additional costs, experience difficulty in supplying our products to our customers or suffer damage to our reputation in +the industry. These events could, in turn, reduce our revenues and adversely affect our results of operations. +Risks Relating to +Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property +rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in +other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other +technologies may not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain +patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to +the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our +intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a +“first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the +enforcement or defense of our issued patents. +We also rely on trade secrets, know-how and continuing technological advancements to +protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring +that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +42 +Table of Contents +We cannot guarantee that the process of filing patents, the laws governing trade secrets and +proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, employees, consultants and others who participate in +the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some +foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection +outside of the U.S. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that +are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. +Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage +and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. +We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any +inventions or technical information derived from our collaboration with them. +To facilitate development and commercialization of a +proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain +these types of licenses, our product development and commercialization efforts may be delayed or precluded. +We May Become Involved in +Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large +number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of +other intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that +license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, +there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover +technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third +party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +43 +Table of Contents +Our involvement in litigation or other legal proceedings with respect to patents or other +intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial +resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response +to claims by another party or that the third-party patent claims are valid and infringed by our products; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form +of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current +products or other products we may develop or acquire; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or +terminate purchases of our products; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current +or future products. +We may indemnify some customers and strategic partners under our agreements with such parties if +our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or +customers, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the +event that an infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes +regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. +Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under the AIA, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings +permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent +rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +The +Sales Potential for Our OraQuick ® Products Could be Affected by Our Ability to Obtain Certain Licenses and by Future Litigation. +Our OraQuick ® test platform is a lateral flow assay that tests for specific +antibodies or other substances. The term “lateral flow” generally refers to a test strip through which a sample flows and which provides a test result on a portion of the strip downstream from where the sample is applied. There are +numerous patents in the United States and other countries which claim lateral flow assay methods and devices. There are also patents that cover the type of antigen or antibody (i.e., HIV-1, HIV-2, HCV, Ebola, etc.) which our OraQuick ® test is designed to detect. Some of these patents may broadly cover aspects of our OraQuick ® test and are in force in the United States +and other countries. We may not be able to make or sell the OraQuick ® test in the United States or other countries where these patents are in force. +We have obtained licenses under several lateral flow patents, and patents covering assays directed at specific analytes, which we believe are +sufficient to permit the manufacturing and sale of our OraQuick ® products as +44 +Table of Contents +currently contemplated. However, licenses under additional patents may be required and it is possible that a third party could seek to enforce one or more patents against us. +If we are unable to successfully defend against or resolve patent infringement litigation or it is determined that a license is required and +it is not possible to negotiate or otherwise obtain a license agreement on reasonable terms under a necessary patent, our ability to manufacture and sell OraQuick ® products and develop and +commercialize new applications using the same technology could be limited and we may incur increased costs or damages. In such case, we may be able to modify an OraQuick ® product to avoid the +claim of infringement or the need for a license. However, this alternative could preclude or limit our ability to sell the OraQuick ® product in the United States and other markets, which would +adversely affect our results of operations, cash flow and business. +Risks Relating to Products, Marketing and Sales +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products. +Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick ® HCV test, OraQuick ® In-Home HIV test, OraQuick ® HIV Self-Test, OraQuick ® Ebola test, OraQuick ® Zika test, OMNIgene ® • GUT and OMNIgene ® • SPUTUM product offerings, and other new products or technologies that may be developed or acquired. To achieve market acceptance, we and/or our distributors will likely be required to +undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these products. In addition, governmental funding for the purchase of our products may be +needed to help create market acceptance and expand the use of our products. +There may be limited evidence on which to evaluate the market +reaction to products that may be developed and our marketing efforts for new products may not be successful. It is also possible that governmental funding may be limited for new products, such as our OraQuick ® HCV and Ebola tests or the new sample collection and stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant market +acceptance and fill the market need that is perceived to exist on a timely basis, or at all. +If Acceptance and Adoption of Oral Fluid +Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining +acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, +has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the +adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +Our Customers May Resist Adoption of Rapid Point-of-Care Diagnostic Testing. +Sales of our rapid point-of-care diagnostic products, such as our OraQuick +ADVANCE ® HIV-1/2, OraQuick ® HCV and OraQuick ® In-Home HIV tests, are an +important part of our business. Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central +laboratories and can help ensure that test results are delivered to the individuals being tested. +However, clinical reference +laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets +45 +Table of Contents +such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care +testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to compete vigorously +against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to +rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on +our future sales growth. +We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection +Products. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is +particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test. In addition, the Oragene ® product line sold by our +subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may +have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we +have. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors’ products take market share from our products through +more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or +acquire their own sample collection devices and use those devices in place of our products in order to reduce costs. +Sales of Our +OraSure QuickFlu ® Test May be Affected by Factors Beyond Our Control. +We +sell a rapid flu test under the tradename OraSure QuickFlu ® , primarily in the U.S. hospital and public health markets. A number of factors that are beyond our control could affect sales of +this product, including: +• +Variability in the timing of the onset, length and severity of the flu season, which typically occurs from +November of one year to May of the following year; +• +Competition from other rapid flu tests in the markets we serve; +• +Deficiencies in the manufacture, design or performance of the product or failure by the manufacturer to meet +applicable quality and regulatory standards; +• +The inability of our supplier to provide sufficient quantities of the product; +• +Changes in the types or strains of influenza during a particular flu season; and +• +Lower than expected market penetration of the OraSure +QuickFlu ® test. +Our Inability to Carry Out Certain of Our +Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain Our Business. +We have implemented in the past, and we +intend to implement in the future, an aggressive sales and marketing plan to expand sales of our products. Specifically, we will continue to expand the impact of our direct field sales force, use third-party distributors and manufacturers’ +sales representatives, and implement other sales and marketing programs. If we are unable to successfully implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our +business could suffer. +46 +Table of Contents +Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability +and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which +makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, +may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For +example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of +HCV testing, especially in the public health market. More recently, we have sold large quantities of our OraQuick ® HCV test to foreign governments and agencies for use in broad-based or +country-wide HCV elimination programs. There can be no assurance that purchases or funding from these agencies will occur or continue, especially if current negative economic conditions continue or intensify. As a result, we may expend considerable +resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes +injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Regardless of +merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling cryosurgical products in the consumer or OTC market in the United States and certain countries and we may expand OTC sales of +these products into other countries. We also sell the OraQuick ® In-Home HIV test in the United States OTC market, and we offer HIV self-tests to consumers internationally. We believe the sale +of products in the OTC market increases our potential exposure to product liability and other claims. +The Insurance We Purchase to +Cover Our Potential Business Risks May be Inadequate. +Although we believe that our present product liability and other insurance +coverage is sufficient to cover our current estimated exposures, we cannot be sure that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate coverage in +the future, there is no assurance that we will be able to do so at acceptable costs. +We Could Suffer Monetary Damages, Incur +Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal Proceedings. +We have been, +and in the future may become, involved in various legal proceedings arising out of our businesses. These may include commercial disputes, negligence claims or various other lawsuits arising in the ordinary +47 +Table of Contents +course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include +claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or otherwise have a material adverse +effect on our sales, operations or financial performance. +Performance of Our Products May Affect Our Revenues, Stock Price and +Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other +regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a +false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product +performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label +claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be +required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse +effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Ability To +Expand International Sales Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to +substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large self-testing programs in +certain African countries and elsewhere. In addition, we recently entered into a large product supply agreement with a foreign government, primarily in support of a country-wide HCV elimination program. We are also pursuing large supply arrangements +for similar programs in other countries. While we believe international sales of our HIV self-test and HCV product represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will +continue or increase. Among other factors, competition from other cheaper products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not continue or +increase or if we are otherwise unable to expand international sales of our other products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing +in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins +will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or +other sources. If we are unable to obtain this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $28.4 million or 22% of +consolidated net revenues in 2016, $23.2 million or 19% of consolidated net +48 +Table of Contents +revenues in 2015, and $24.2 million or 23% of consolidated net revenues in 2014. In addition, our molecular collection systems business, which accounted for $32.2 million or 25% of consolidated +net revenues in 2016, is operated in Canada. +A number of factors could adversely affect the performance of our business and/or cause us +to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, +sell and gain acceptance of our products; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign +operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on +international distributors or representatives; +• +Regulatory requirements (including compliance with applicable customs regulations) and the need for +reimbursement approvals; +• +Trade protection measures, trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to obtain or maintain regulatory approvals or registrations for our products; +• +Our inability to identify international distributors and negotiate acceptable terms for distribution +agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product +registrations or approvals for use by a replacement distributor; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts +receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, +war and natural disasters in foreign countries; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental +agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our +products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign +countries. +49 +Table of Contents +In addition, we have contracted with a third party in Thailand for the manufacture of a portion +of our OraQuick ® HIV-1/2 tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other +products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of +the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the +costs of manufacturing our products in foreign countries. +Our Increased Reliance on U.S. Government Contracts Adds Uncertainty and +Imposes Additional Requirements and Risks. +We are receiving funding from the U.S. government related to our OraQuick ® Ebola rapid antigen test and our OraQuick ® Zika rapid antibody test and we sell some of our products to the federal government. +Our reliance on U.S. government funding for certain of our products has increased. This adds uncertainty to our research and commercialization +efforts with respect to those programs and may impose requirements that increase the costs of commercialization and production of products developed under those government-funded programs. There can be no assurances that we can enter into new +contracts with the U.S. government related to our products. The process of obtaining U.S. government contracts is lengthy and uncertain. The U.S. government’s determination to award any contracts or potentially exercise options under these +contracts may be challenged by an interested party, such as another bidder, at the relevant agency, at the U.S. Government Accountability Office (“GAO”) or in federal court. If such a challenge is successful, a contract award or option +exercise may be re-evaluated and terminated. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our +Risk and Liability. +As a result of our U.S. government funding, we must comply with laws and regulations relating to the award, +administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and +additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which +purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as +well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a +narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely +affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on +cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of +impropriety related to such contracts are made against us. +Our U.S. Government Contracts May Affect our Intellectual Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, +and may in the future be funded, by the U.S. government, including our contracts with +50 +Table of Contents +BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing +the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use our patented technology. The +government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet +requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in +such inventions may be subject to certain requirements to manufacture products in the United States. +Our U.S. Government Contracts Are +Subject to Future Orders, the Government’s Choice to Exercise Options, and May be Terminated for the Government’s Convenience. +In addition, our contracts with the U.S. government are subject to future funding and are subject to the right of the government to terminate +the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the government’s convenience of our contracts could negatively affect our +financial results. +For U.S. government contracts that include options, such as our BARDA contracts, the U.S. government generally has the +unilateral right not to exercise such options and may not exercise an option if the agency is not satisfied with our performance under the contract or does not receive funding to continue the program, among other reasons. If levels of U.S. +government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options +under its contracts with us, our business, revenue and operating results would suffer. +Our U.S. Government Contracts Are Subject To +Numerous Requirements in Order to be Reimbursed by the Federal Government. +Our current contracts with BARDA are cost plus fixed fee +contracts and potential future contracts with the U.S. government may also be structured this way. Under our cost plus fixed fee contracts, we are allowed to recover our approved costs plus a fixed fee. The total price on a cost plus fixed fee +contract is based primarily on allowable costs incurred, but generally is subject to contract funding limitations. U.S. government regulations require us to notify our customer of any cost overruns or underruns on a cost plus contract. If we incur +costs in excess of the funding limitation specified in the contract we may not be able to recover those cost overruns. +Our U.S. +Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government +contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and +policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific +government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a +material adverse effect on our business, financial condition, results of operations and prospects. +Moreover, if any administrative +process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely +51 +Table of Contents +affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect +our results of operations. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption Could Adversely Affect Our Results of Operations, Cash Flow and Financial Condition or Those of +Our Customers and Suppliers. +Volatile economic conditions may occur again or continue in the future. These conditions could adversely +affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other +discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions. These circumstances +may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it +may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery. +We Have Experienced Losses in the Recent Past and May Not Be Able to Maintain Profitable Operations. +We experienced annual net losses during the five years prior to 2015. In addition, as of December 31, 2016, the Company had an +accumulated deficit of $150.4 million. Even though we achieved profitability in 2015 and 2016, there can be no assurance that we will be able to sustain this profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the +following: +• +Our ability to increase sales of our OraQuick ® HCV +test and expand the use of this product internationally, particularly in HCV elimination programs implemented by foreign countries; +• +Our ability to mitigate declining sales of our OraQuick +ADVANCE ® HIV-1/2 test in the United States and expand sales of our OraQuick ® HIV Self-Test internationally; +• +Our ability to continue growing our molecular collection systems business; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and +successfully commercialize our new products; +• +Our ability to successfully commercialize our +OraQuick ® Ebola and Zika tests and other new products. +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the +acquisition of rights to those products; +• +The degree to which our major distributors comply with their contractual obligations, including minimum +purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our +new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more +attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced +demand, inflation and currency fluctuations; +52 +Table of Contents +• +Failure to achieve our revenue growth targets; +• +Changes in distributor buying patterns or a buildup of significant quantities in our distributors’ +inventories or distribution channels; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or +against us. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance +to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other +customers may fall short of expectations because of lower than estimated customer demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, reduced governmental funding and other +circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. +Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their +fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our +operating results. +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results +could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts +could adversely affect our reputation and the price of our Common Stock. +Our Estimates or Judgments Relating to Critical Accounting +Policies Are Based on Assumptions That Can Change or Prove to be Incorrect. +Our discussion and analysis of financial condition and +results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted +accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial +statements, including those related to: +• +Revenue recognition; +• +Potential impairment of long-lived and intangible assets including goodwill; +• +Customer sales returns and allowances; +• +Allowance for uncollectible accounts receivable; +• +Reserve for inventory write-downs; +• +Stock-based compensation; +• +Income taxes; and +• +Contingencies. +53 +Table of Contents +We base our estimates on historical experience and on various other assumptions that we believe +to be reasonable under the circumstances, as provided in our discussion and analysis of financial condition and results of operations, the results of which form the basis for making judgments about the carrying values of assets and liabilities that +are not readily apparent from other sources. Actual results may differ from these and other estimates if our assumptions change or if actual circumstances differ from those in our assumptions. If our operating results fall below the expectations of +securities analysts and investors, the price of our Common Stock may decline. +Changes in Foreign Currency Exchange Rates Could +Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our +international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values +of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general +economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars +and certain of its international sales are denominated in local currencies, including the Euro, British Pound and Australian Dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting +our consolidated financial results. Our expectation is that the DNAG business will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect DNAG’s revenues and expenses and the translation of DNAG’s financial results into U.S. +dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of +operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange +rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated +financial results may be adversely impacted. +Changes in Tax Laws or Their Application Could Adversely Affect Our Results of +Operations. +Changes in tax laws or their application could increase our costs and adversely affect our results of operations. Such +changes could affect applicable tax rates, utilization of tax loss carryforwards, and treatment of inter-company debt and interest payments. +Our Revolving Credit Facility Contains Certain Financial Covenants Which, if Not Satisfied, Could Limit Our Ability to Borrow in the Future +or Result in the Acceleration of the Amounts Borrowed Under This Facility. +Our revolving credit facility with a commercial bank +contains various financial and other covenants with which we must comply on an ongoing or periodic basis. If we enter into new or additional credit facilities or loan agreements, we would expect those arrangements would contain similar types of +covenants. Although we do not expect to violate these covenants and obligations, if such a violation were to occur, our ability to borrow funds in the future may be adversely affected. To the extent we borrow funds and a subsequent violation occurs, +the outstanding debt under our credit facility or other arrangement could become immediately due and payable and our lender(s) could proceed against any collateral securing such indebtedness. +54 +Table of Contents +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the +following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products; +• +The costs and timing of the expansion of our manufacturing capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments; +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There +can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks or Natural Disasters May Adversely Affect Our Business. +Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions +could adversely affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ +ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. +Although we have +business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including +earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities and computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have +difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial +declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HIV, HCV and molecular collection systems products and our OraQuick ® In-Home HIV test and HIV Self-Test; +55 +Table of Contents +• +Future announcements concerning us and our products, including with respect to significant acquisitions, +strategic collaborations and joint ventures; +• +Clinical results with respect to our products or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or +one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products; +• +Legislative developments and industry or competitive trends; +• +Regulatory, economic or other actions undertaken by the Trump Administration and resulting uncertainty related +to these actions. +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, +including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about +us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +The relatively low trading volume for our Common Stock; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters. +• +Regulatory or economic actions undertaken by the Trump administration and related uncertainty regarding these +actions. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have +affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is +affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation +has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our management’s attention and resources, each of which could have +a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +56 +Table of Contents +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors +Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common +Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public +market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We +have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market +price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or +pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Investor Confidence and Share Value May be Adversely Impacted if We and/or Our Independent Registered Public Accounting Firm Conclude That +Our Internal Control Over Financial Reporting is Not Effective. +As directed by Section 404 of the Sarbanes-Oxley Act of 2002, +the SEC adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our +independent registered public accounting firm must report on the effectiveness of these internal controls. +We expect that our internal +controls will continue to evolve as our business activities change. Although we seek to diligently and vigorously review our internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any +control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal +control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business. +If, during any year, our independent registered public accounting firm is not satisfied with our internal control over financial reporting or +the level at which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report that +is qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our +financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock +Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our +business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our +Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +57 +Table of Contents +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could +Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it +more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could +limit the price investors might be willing to pay in the future for shares of our Common Stock. +Future Sales of Shares of Our Common +Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future +sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could +impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for +future sale will have on the trading price of our Common Stock. +ITEM 1B. +Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary +corporate office and manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for +manufacturing activities. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis. In addition, our subsidiary, DNAG, leases a 35,883 square foot facility in Ottawa, Canada, which +is used as its primary corporate office and houses sales and marketing, research and development, and regulatory and quality operations. +We believe that +the facilities described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings +From time to time, we are involved in certain legal actions arising +in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +In May 2015, our subsidiary, DNAG, filed a complaint in the United States District Court for the District of Delaware against +Ancestry.com DNA LLC (“Ancestry”) relating to the manufacture and sale by Ancestry of its oral fluid DNA collection device (the “Ancestry Device”). Ancestry previously purchased DNAG’s patented oral fluid DNA collection +devices. The complaint alleged that the manufacture and sale by Ancestry of the Ancestry Device infringes U.S. Patent No. 8,221,381 B2, which is owned by DNAG. In addition, the complaint alleged that Ancestry has breached the terms of +agreements under which Ancestry previously purchased DNAG products. The complaint also included an action to quiet title to the Ancestry Device and related patent applications. DNAG requested the court to grant injunctive relief and +damages. +On October 20, 2015, Ancestry filed with the United States Patent and Trademark Office (“USPTO”) a Petition for +Inter Partes Review (“IPR”) of some, but not all, claims of U.S. Patent No. 8,221,381 B2. On April 8, 2016, the USPTO instituted an IPR of some, but not all, of the claims raised in Ancestry’s petition. On +June 3, 2016, Ancestry filed a second Petition for IPR of some, but not all, of the claims of U.S. Patent No. 8,221,381 B2. +58 +Table of Contents +In July 2015, DNAG filed a complaint in the United States District Court for the District of +Delaware against Spectrum DNA, Spectrum Solutions L.L.C. and Spectrum Packaging L.L.C. (collectively “Spectrum”) relating to the manufacture and sale by Spectrum of an oral fluid DNA collection device (the “Spectrum Device”). The +Spectrum Device is the same as the Ancestry device mentioned above and Spectrum is the manufacturer of the Ancestry Device for Ancestry. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum Device infringes U.S. patent +number 8,221,381 B-2, which is owned by DNAG. DNAG is requesting the court to grant injunctive relief and damages. Spectrum filed a motion to dismiss this lawsuit on the grounds that the Delaware District Court lacked jurisdiction over +Spectrum. The Court granted Spectrum’s motion to dismiss for lack of personal jurisdiction. +On June 20, 2016, DNAG filed a +complaint in the United States District Court for the Southern District of California against Spectrum relating to the manufacture and sale of the Spectrum Device. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum +Device infringes U.S. Patent No. 9,207,164, which is owned by DNAG. DNAG requested the court to grant injunctive relief and damages. On June 21, 2016, DNAG filed a motion for preliminary injunction. On July 21, 2016, +Spectrum filed a motion to stay the case pending resolution by the PTO of a Petition for IPR of U.S. Patent No. 9,207,164, which was filed by Ancestry in July 2016. On October 6, 2016, the Court issued an order denying DNAG’s +motion for preliminary injunction and on October 7, 2016, the Court issued an order staying the case pending resolution of the IPR of U.S. Patent No. 9,207,164. +Effective February 6, 2017, DNAG settled the foregoing litigation with Ancestry and Spectrum. Under a Settlement and License Agreement +executed by the parties, Ancestry agreed to pay DNAG a settlement fee of $12.5 million. This settlement amount will be recorded as a separate line item and a reduction of our operating expenses in our statements of income in 2017. In addition, DNAG +granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used +as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. The Settlement and License Agreement also provides DNAG with a royalty-free, non-exclusive +license to patents related to Ancestry’s existing saliva DNA collection kit and certain modifications thereto. +The parties have each +agreed to a mutual release of claims and other provisions typical for settlement agreements of this type. Pursuant to the terms of the Settlement and License Agreement, the pending federal lawsuits in the District of Delaware and the Southern +District of California have been dismissed and the IPR proceedings before the USPTO involving the DNAG patents asserted in the litigation have been terminated. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +59 +Table of Contents +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is +listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol OSUR. High and low sales prices reported by NASDAQ during the periods indicated are shown below. +Year ended December 31, +Year ended December 31, +2016 +2015 +High +Low +High +Low +First Quarter +$ +7.39 +$ +5.09 +$ +10.62 +$ +6.10 +Second Quarter +$ +7.99 +$ +5.81 +$ +7.64 +$ +4.42 +Third Quarter +$ +9.05 +$ +5.57 +$ +5.95 +$ +4.39 +Fourth Quarter +$ +9.53 +$ +7.09 +$ +6.99 +$ +4.40 +On March 2, 2017, there were 392 holders of record and approximately 12,134 holders in street name of our +Common Stock, and the closing price of our Common Stock was $11.83 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend +to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number +of shares +purchased +Average price +paid per +Share +Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar +value) of shares that +may yet be repurchased +under the plans or +programs (2, 3) +October 1, 2016—October 31, 2016 +254 +(1) +$ +7.73 +N/A +$ +11,984,720 +November 1, 2016—November 30, 2016 +— +— +— +11,984,720 +December 1, 2016—December 31, 2016 +14,902 +(1) +8.79 +N/A +11,984,720 +15,156 +— +(1) +Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted +shares, these shares were retired to satisfy minimum tax withholdings. +(2) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are +permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(3) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the +period indicated. We have made no commitment to purchase any shares under this plan. +60 +Table of Contents +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of +Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the +Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the NASDAQ Composite Index and the +NASDAQ Biotechnology Index for the period from December 31, 2011 through December 31, 2016. The graph assumes that $100 was invested on December 31, 2011 in the Company’s Common Stock and in each of the above-mentioned indices, +and that all dividends, if any, were reinvested. +The NASDAQ Composite Index was chosen because it is a broad index of companies whose +equity securities are traded on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be +representative of the returns for any other past or future period. +12/11 +12/12 +12/13 +12/14 +12/15 +12/16 +OraSure Technologies, Inc. +100.00 +78.81 +69.05 +111.31 +70.69 +96.38 +NASDAQ Composite +100.00 +116.41 +165.47 +188.69 +200.32 +216.54 +NASDAQ Biotechnology +100.00 +134.68 +232.37 +307.67 +328.76 +262.08 +61 +Table of Contents +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, +“Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +ITEM 6. +Selected Consolidated Financial Data +The following table sets forth selected +consolidated financial data of the Company. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 15 and the information set forth in Item 7, “Management’s +Discussion and Analysis of Financial Condition and Results of Operations.” +Selected Consolidated Financial Data +(In thousands, except per share data) +Years ended December 31, +2016 +2015 +2014 +2013 +2012 +Operating Results: +Net revenues +$ +128,198 +(1) +$ +119,719 +$ +106,464 +$ +98,940 +(3) +$ +87,820 +Costs and expenses +107,933 +111,661 +111,266 +(2) +111,102 +(4) +104,090 +Operating income (loss) +20,265 +8,058 +(4,802 +) +(12,162 +) +(16,270 +) +Other income (expense), net +58 +774 +531 +200 +(242 +) +Income tax expense (benefit) +603 +665 +343 +(772 +) +(1,397 +) +Net income (loss) +19,720 +8,167 +(4,614 +) +(11,190 +) +(15,115 +) +Earnings (loss) per share +Basic and Diluted +$ +0.35 +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +$ +(0.29 +) +Shares used in computing earnings (loss) per share +Basic +55,615 +56,397 +55,949 +55,555 +51,457 +Diluted +56,513 +56,846 +55,949 +55,555 +51,457 +Cash Flow: +Cash flows provided by (used in) operating activities +$ +22,767 +$ +15,773 +$ +7,526 +(2) +$ +8,385 +(4) +$ +(5,373 +) +December 31, +2016 +2015 +2014 +2013 +2012 +Financial Position: +Cash, cash equivalents, and short-term investments +$ +120,950 +$ +101,319 +$ +97,867 +$ +93,191 +$ +87,888 +Working capital +139,106 +111,480 +104,752 +100,590 +103,483 +Total assets +207,935 +189,321 +189,633 +184,245 +191,439 +Accumulated deficit +(150,458 +) +(170,178 +) +(178,345 +) +(173,731 +) +(162,541 +) +Stockholders’ equity +185,850 +159,436 +158,701 +161,146 +170,315 +(1) +Includes an additional $5.4 million of exclusivity +payments recognized in other revenues as a result of the early termination of our HCV co-promotion agreement with AbbVie, bringing total exclusivity payments recognized in 2016 to $18.9 million. +(2) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay agreement with Roche +Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +(3) +Includes a non-recurring net favorable $2.5 million adjustment to account for a change in the Company’s +revenue recognition policy related to its OraQuick ® In-Home HIV test. +(4) +Includes an $8.3 million gain from the termination of the Company’s oral fluid assay agreement with Roche +Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +62 +Table of Contents +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private +Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled +“Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned +not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, +along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. +Overview +We develop, manufacture, market and sell diagnostic products and specimen collection devices using our proprietary technologies, as well as +other diagnostic products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point-of-care, tests that are +processed in a laboratory, and a rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter (“OTC”) market. We also manufacture and sell devices used to collect, stabilize, transport and store samples +of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Lastly, we manufacture and sell medical devices used for the +removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, research and +academic institutions, distributors, government agencies, physicians’ offices, commercial and industrial entities, retail pharmacies and mass merchandisers, and to consumers over the internet. +Current Consolidated Financial Results +For the year ended December 31, 2016, our consolidated net revenues were $128.2 million, an increase of 7% compared to $119.7 million for +the year ended December 31, 2015. Net product revenues for 2016 increased 2% to $106.9 million when compared to 2015, primarily as a result of higher international sales of our OraQuick ® +HIV and HCV tests and higher sales of our molecular collection systems and cryosurgical system products. These increases were partially offset by lower domestic sales of our OraQuick ® HIV test +and by lower sales of our Ebola product. Consolidated other revenues for 2016 were $21.3 million, of which $18.9 million represents the recognition of payments for exclusive co-promotion rights and certain services provided under our HCV +co-promotion agreement with AbbVie, and $2.3 million represents revenue recognized in connection with funding from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical +Advanced Research and Development Authority (“BARDA”) for our Ebola and Zika products. Total exclusivity revenues in 2016 included an additional $5.4 million which was accelerated and recognized due to the early termination of our +agreement with AbbVie as of December 31, 2016. Other revenues in 2015 of $15.3 million represent $13.5 million of AbbVie exclusivity payments and $1.8 million of funding received from BARDA for our Ebola product. +Our consolidated net income for the year ended December 31, 2016 was $19.7 million, or $0.35 per share on a fully-diluted basis, compared +to consolidated net income of $8.2 million, or $0.14 per share on a fully-diluted basis, for the year ended December 31, 2015. Our consolidated net income for the current period reflects the increase in product and other revenues, lower +detailing costs associated with the AbbVie HCV co-promotion agreement and reduced research and development expenses as a result of a payment received to settle a claim against one of our raw material suppliers. These improvements to the bottom line +were partially offset by higher legal fees, severance costs, consulting fees and staffing-related expenses in 2016 as compared to 2015. +63 +Table of Contents +Cash provided by operating activities for the year ended December 31, 2016 was $22.8 +million, compared to $15.8 million for the year ended December 31, 2015. As of December 31, 2016, we had $120.9 million in cash, cash equivalents, and short term investments, compared to $101.3 million at December 31, 2015. +Recent Developments +HCV Co-Promotion Agreement +On June 10, 2014, we entered into an agreement with AbbVie to co-promote our +OraQuick ® HCV test in the United States. Pursuant to the agreement, we granted exclusive co-promotion rights for the OraQuick ® HCV test +in certain markets to AbbVie and we agreed to develop, implement, administer and maintain a patient care database for the exclusive use of AbbVie. This patient care database was used to compile patient information regarding new individuals who have +tested positive for HCV using our OraQuick ® HCV test. We also jointly agreed with AbbVie to co-promote our OraQuick ® HCV test in +certain market segments. +On June 30, 2016, we mutually agreed to an early termination of this agreement with AbbVie effective +December 31, 2016. Following the termination of the agreement, AbbVie was relieved of its co-promotion obligations, including its obligation to detail the OraQuick ® HCV test into +physician offices, and has no further financial obligations to us. We are no longer obligated to compensate AbbVie for product detailing activities and are free to pursue arrangements with other pharmaceutical companies to market and promote our +OraQuick ® HCV test in the U.S. As a result of the shortened term, the remaining associated deferred revenue of $12.2 million at June 30, 2016, which represented a portion of the +exclusivity payments received from AbbVie, was recognized as other revenue over the remaining six months of 2016 as we have no substantive on-going obligations after December 31, 2016. During 2016 and 2015, $18.9 million and $13.5 million, +respectively, in exclusivity revenues were recognized and recorded as other revenues in our consolidated statements of operations. +Rapid Zika Test +In August 2016, we were awarded a contract for up to $16.6 million in total funding from BARDA related to our rapid Zika test. The +six-year, multi-phased contract includes an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and clinical and regulatory activities. Funding received under +this contract is recorded as other revenue in our consolidated statement of operations as the activities are performed and the related costs are incurred. During 2016, $616,000 was recognized in connection with funding under this contract as other +revenues in our consolidated statement of operations. +New Genomics Contract +In November 2016, Helix, a personal genomics company, selected our +Oragene ® • DX device to provide self-collection of DNA samples to be used in a genetic information discovery service offered by Helix for consumers. We will supply the Oragene ® • DX device and also provide kit fulfillment and logistic services for Helix through our GenoFIND TM offering. Helix provides a +secure and affordable means for consumers to access data and information about their DNA, through uniquely personalized applications created by Helix partners. The Oragene ® • DX +collector will be used to collect saliva samples from consumers and those samples will be sequenced in Helix’s lab. Customers will then be able to access DNA-powered insights in products and experiences created by Helix partners, including +well-known clinical and consumer brands, in the areas of health, fitness, genealogy, family planning, lifestyle, and nutrition. +New HCV Foreign Supply +Contract +In November 2016, we executed and began fulfilling a contract to supply a foreign government with $18.0 million of +product, primarily to support a nationwide HCV testing and treatment program with the goal of +64 +Table of Contents +eliminating HCV infection across the country. The contract calls for the purchase of $16.0 million of our OraQuick ® HCV tests and $2.0 +million of our OraQuick ® HIV-1/2 tests. The contract provides for product deliveries over a 12-month period beginning in 2016 and continuing through late 2017. The contract also includes an +option for 2017/2018 under which the government may make an additional purchase of up to 100% of the original quantities of product on the same terms and conditions as provided in the contract. During 2016, we recognized $1.9 million in product +revenues related to this contract. +Litigation Settlement +Effective February 6, 2017, we settled our on-going litigation with Ancestry and Spectrum. Under a Settlement and License Agreement +executed by the parties, Ancestry agreed to a settlement fee of $12.5 million which was paid to us in the first quarter of 2017. In addition, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent +applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of +collection kits outside of Ancestry’s business. The Settlement and License Agreement also provides us with a royalty-free, non-exclusive license to patents related to Ancestry’s existing saliva DNA collection kit and certain modifications +thereto. +Business Segments +We +operate our business within two reportable segments: our “OSUR” business, which consists of the development, manufacture and sale of diagnostic products, specimen collection devices, and medical devices, and our “DNAG” or +molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices that are used to collect, stabilize, transport, and store samples of genetic material for molecular testing. +OSUR revenues are derived primarily from products sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, +physicians’ offices, commercial and industrial entities, retail pharmacies, mass merchandisers and consumers over the internet. DNAG revenues result primarily from products sold into the commercial market, which consists of customers engaged in +consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetic testing, as well as products sold into the academic research market which consists of research laboratories, universities and +hospitals. +Results of Operations +YEAR ENDED +DECEMBER 31, 2016 COMPARED TO DECEMBER 31, 2015 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +2016 +2015 +% +Change +2016 +2015 +OSUR +$ +74,710 +$ +74,534 +0 +% +58 +% +62 +% +DNAG +32,214 +29,924 +8 +25 +25 +Net product revenues +106,924 +104,458 +2 +83 +87 +Other +21,274 +15,261 +39 +17 +13 +Net revenues +$ +128,198 +$ +119,719 +7 +% +100 +% +100 +% +65 +Table of Contents +Consolidated net product revenues increased 2% to $106.9 million in 2016 from $104.5 million in +2015, primarily as a result of higher international sales of our OraQuick ® HIV and HCV tests and higher sales of our molecular collection systems and cryosurgical system product. These +increases were partially offset by lower domestic sales of our OraQuick ® HIV test and lower sales of our Ebola products. Other revenues in 2016 increased 39% to $21.3 million compared to $15.3 +million during 2015, largely due to higher exclusivity revenue recognized under our HCV co-promotion agreement with AbbVie as a result of an additional $5.4 million recognized in the current year due to the early termination of the contract. +Consolidated net revenues derived from products sold to customers outside the U.S. were $28.4 million and $23.2 million, or 22% and 19% of +total consolidated net revenues during the years ended December 31, 2016 and 2015, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not +material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The +table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +Market +2016 +2015 +% +Change +2016 +2015 +Infectious disease testing +$ +48,408 +$ +49,129 +(1 +)% +50 +% +55 +% +Risk assessment testing +13,068 +13,485 +(3 +) +14 +15 +Cryosurgical systems +13,234 +11,920 +11 +14 +13 +Net product revenues +74,710 +74,534 +0 +78 +83 +Other +21,274 +15,261 +39 +22 +17 +Net revenues +$ +95,984 +$ +89,795 +7 +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market decreased 1% to $48.4 million in 2016 from $49.1 million in 2015, primarily due to lower +domestic sales of our OraQuick ® HIV product , and lower sales of our OraQuick ® Ebola and In-Home HIV tests, partially offset by higher +international sales of our OraQuick ® HIV and HCV tests. +The table below shows a +breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2016 and 2015. +Year Ended December 31, +Market +2016 +2015 +% +Change +Domestic HIV +$ +21,499 +$ +24,956 +(14 +)% +International HIV +5,248 +2,410 +118 +Domestic OTC HIV +6,320 +6,992 +(10 +) +Net HIV revenues +33,067 +34,358 +(4 +) +Domestic HCV +7,436 +7,502 +(1 +) +International HCV +6,630 +3,884 +71 +Net HCV revenues +14,066 +11,386 +24 +Net OraQuick ® revenues +$ +47,133 +$ +45,744 +3 +% +66 +Table of Contents +Domestic OraQuick ® HIV sales decreased +14% to $21.5 million for the year ended December 31, 2016 from $24.9 million for the year ended December 31, 2015. This decrease was primarily the result of the continued loss of sales to competing fourth generation automated HIV +immunoassays performed in a laboratory, as recommended under testing guidelines issued by the Centers for Disease Control and Prevention (“CDC”), the loss of sales to point-of-care HIV tests perceived to be more sensitive, reduced program +funding, and the timing of orders placed by our customers. We anticipate that future domestic sales of our professional HIV product will continue to be negatively affected as a result of the CDC’s testing guidelines, changes in government +funding and continued product and price competition. International sales of our OraQuick ® HIV test in 2016 increased 118% to $5.2 million from $2.4 million in 2015. This increase is largely +due to the shipment of product in support of a new HIV self-testing program in Africa, new shipments into the Middle East, higher sales in Europe as a result of the addition of a new distributor in Russia, and increased sales in Asia due to a new +military testing project. +Sales of our OraQuick ® In-Home HIV test decreased 10% +to $6.3 million in 2016 from $7.0 million in 2015. This decline was primarily the result of a reduction in promotions run in 2016 as compared to 2015 and a fourth quarter 2015 sales increase immediately following a celebrity’s announcement that +he had tested positive for the HIV virus, a comparable event did not occur in 2016. The decline in sales was partially offset by the positive impact of a price increase implemented in the third quarter of 2015. +Domestic OraQuick ® HCV sales decreased 1% to $7.4 million in 2016 from $7.5 million +in 2015, largely due to the inclusion in 2015 of a $1.3 million order for a U.S. government HCV testing program that did not recur in 2016, offset by the expansion of existing HCV testing programs and the addition of new programs in the public +health market. International OraQuick ® HCV sales increased 71% to $6.6 million in 2016 from $3.9 million in 2015, largely due the first shipments of $1.4 million of product to a foreign +government to support a nationwide HCV testing and treatment program, the expansion of our business in Asia, and increased sales in Africa. +We believe our OraQuick ® HCV product represents an opportunity for future sales +growth given the FDA approval of several new drug therapies for treating HCV. However, demand for our HCV product, particularly in the U.S. public health marketplace, may be somewhat tempered by the limited availability of government funding +allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid HCV testing. Sales to physicians can also be adversely affected by the level of reimbursement available from insurance providers and +competition from laboratory-based HCV tests. These and other factors could limit the future growth of our HCV business. +International +orders for both our HIV and HCV products can be sporadic in nature and are often predicated upon the availability of governmental funding, the impact of competition and other factors. As such, there is no assurance that such sales will continue at +the same levels in future periods. +Risk Assessment Market +Commencing in 2016, we have combined the former substance abuse testing market and insurance risk assessment market categories under a single +category referred to as the “risk assessment market.” We combined revenues for these markets because they are similar in nature and testing modalities. Revenues for 2015 have been combined in a similar manner for presentation purposes. +Sales to the risk assessment market decreased 3% to $13.1 million for the year ended December 31, 2016 from $13.5 million for the +year ended December 31, 2015, primarily as a result of lower sales of our OraSure ® oral fluid collection device into the domestic life insurance market. +Cryosurgical Systems Market +Sales of our +cryosurgical systems products (which includes both the physicians’ office and OTC markets) increased 11% to $13.2 million in 2016 from $11.9 million in 2015. +67 +Table of Contents +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in +thousands) generated in each market during 2016 and 2015. +Year Ended December 31, +Market +2016 +2015 +% +Change +Domestic professional +$ +5,545 +$ +4,311 +29 +% +International professional +771 +916 +(16 +) +Domestic OTC +1,350 +390 +246 +International OTC +5,568 +6,303 +(12 +) +Net cryosurgical systems revenues +$ +13,234 +$ +11,920 +11 +% +Sales of our Histofreezer ® product to +physicians’ offices in the United States increased 29% to $5.5 million in 2016 from $4.3 million in 2015, primarily due to the recovery of business previously lost to competition from private label brands, the initiation of a distributor +expansion strategy, and the timing of orders by certain customers. International sales of Histofreezer ® decreased 16% to $771,000 in 2016 from $916,000 in the same period of the prior year, +primarily due to lower sales in Asia. +Sales of our domestic OTC wart removal products in the U.S. retail market increased to $1.4 million +in 2016 from $390,000 in 2015, due to the launch of private-label products in two additional large pharmacy chains earlier this year. +Sales of our international OTC cryosurgical products during 2016 decreased 12% to $5.6 million compared to $6.3 million in 2015, largely due +to lower sales into Europe partially offset by higher sales in Latin America. +Other revenues +Other revenues in 2016 increased 39% to $21.3 million from $15.3 million in 2015. AbbVie exclusivity revenues increased to $18.9 million in +2016 from $13.5 million in 2015 due to the early termination of our co-promotion agreement with AbbVie which we agreed to as of June 30, 2016. The agreement terminated December 31, 2016, and as a result of the shortened term, an additional +$5.4 million of associated deferred revenue which existed as of June 30, 2016 was recognized into revenue over the remaining six months of 2016. Following the termination of our HCV co-promotion agreement with AbbVie on December 31, 2016, +AbbVie has no further financial obligations to us. Also included in other revenues for 2016 was $2.3 million in BARDA funding, a 30% increase from the $1.8 million in BARDA funding in 2015. This increase was due to new funding for related to funding +for our new Zika product. We expect BARDA-related revenue to increase in 2017 as we will likely receive funding for both of our Ebola and Zika products. +DNAG Segment +Molecular +Collection Systems +Net molecular collection systems revenues increased 8% to $32.2 million in 2016 from $29.9 million in 2015. Sales +of our Oragene ® product in the commercial market increased 6% in 2016 compared to 2015, primarily as a result of sales to new customers and ordering patterns of existing customers, partially +offset by the loss of two U.S. customers that previously filed for bankruptcy protection in 2015. These customers contributed approximately $2.9 million in sales during 2015. The Company has no unreserved collection exposure related to these two +customers. Sales of our Oragene ® product in the academic market rose 6% in 2016 compared to 2015, due to the shipment of product to support a study on autism. Sales in 2016 also included $1.1 +million in sales of our gut microbiome product compared to $539,000 in the same period of 2015. We believe interest in our microbiome product offering continues to grow with both new and existing customers. +68 +Table of Contents +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 69% for the year ended December 31, 2016 compared to 67% for the comparable period of 2015. Gross margin +for 2016 increased primarily due to the higher AbbVie exclusivity revenues. +Consolidated operating income in 2016 was $20.3 million, a +$12.2 million increase from the $8.1 million of operating income reported in 2015. The current period operating income benefited as compared to the prior year from higher revenues, improved gross margins and lower sales and marketing and research +and development costs, partially offset by higher general and administrative expenses in the current period. +OPERATING INCOME BY +SEGMENT +OSUR Segment +OSUR’s gross margin was 69% in 2016 compared to 66% in 2015. OSUR’s margin was positively impacted by the increase in other revenues +and lower scrap and spoilage costs during 2016. +Research and development expenses decreased 21% to $7.0 million in 2016 from $8.9 million +in 2015, largely as a result of a $1.4 million payment received to settle a claim against one of our raw material suppliers. This settlement was recorded as a reduction in research and development expense in 2016. +Sales and marketing expenses decreased 20% to $21.3 million in 2016 from $26.6 million in 2015, primarily as a result of lower detailing and +other expenses associated with our OraQuick ® HCV co-promotion agreement with AbbVie, as well as lower staffing costs. +General and administrative expenses increased 12% to $22.6 million in 2015 from $20.1 million in 2015 due increased consulting, severance, and +other staffing-related costs. +All of the above contributed to OSUR’s operating income of $15.6 million for 2016, which included +non-cash charges of $2.7 million for depreciation and amortization and $5.6 million for stock-based compensation. +DNAG Segment +DNAG’s gross margin was 67% in 2016 compared to 70% in 2015. This decrease was attributable to a higher volume of lower +margin sales experienced in 2016 when compared to 2015 coupled with the inclusion of severance costs in DNAG’s costs of goods sold in 2016. +Research +and development expenses remained flat at $2.7 million in 2016 and 2015. +Sales and marketing expenses decreased 1% to $8.3 million in +2016 compared to $8.4 million in 2015 due to lower bad debt expense. +General and administrative expenses increased 7% to $5.7 million in +2016 compared to $5.3 million in 2015, largely due to higher legal costs. +All of the above contributed to DNAG’s operating income of +$4.6 million for 2016, which included non-cash charges of $3.0 million for depreciation and amortization and $467,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts +and circumstances necessitating the allowance have not changed. For the year ended December 31, 2016, state income tax expense of $250,000 was recorded compared to $0 in 2015. Canadian income tax expense of $353,000 and $665,000 was recorded in +2016 and 2015, respectively. +69 +Table of Contents +YEAR ENDED DECEMBER 31, 2015 COMPARED TO DECEMBER 31, 2014 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +2015 +2014 +% +Change +2015 +2014 +OSUR +$ +74,534 +$ +75,116 +(1 +)% +62 +% +71 +% +DNAG +29,924 +23,778 +26 +25 +22 +Net product revenues +104,458 +98,894 +6 +87 +93 +Other +15,261 +7,570 +102 +13 +7 +Net revenues +$ +119,719 +$ +106,464 +12 +% +100 +% +100 +% +Consolidated net product revenues increased 6% to $104.5 million in 2015 from $98.9 million in 2014, primarily +as a result of higher sales of our molecular collection systems, OraQuick ® HCV and Intercept ® products. These increases were partially +offset by lower sales of our OraQuick ® professional HIV and cryosurgical systems products. Other revenues were $15.3 million in 2015, of which $13.5 million represents exclusivity payments +received under our HCV co-promotion agreement with AbbVie and $1.8 million represents Ebola-related funding from BARDA. Other revenues were $7.6 million in 2014, all which represent exclusivity payments from AbbVie. +Consolidated net revenues derived from products sold to customers outside the U.S. were $23.2 million and $24.2 million, or 19% and 23% of +total consolidated net revenues during the years ended December 31, 2015 and 2014, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not +material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The +table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +Market +2015 +2014 +% +Change +2015 +2014 +Infectious disease testing +$ +49,129 +$ +47,515 +3 +% +55 +% +58 +% +Risk assessment testing +13,485 +12,096 +11 +15 +14 +Cryosurgical systems +11,920 +15,505 +(23 +) +13 +19 +Net product revenues +74,534 +75,116 +(1 +) +83 +91 +Other +15,261 +7,570 +102 +17 +9 +Net revenues +$ +89,795 +$ +82,686 +9 +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market increased 3% to $49.1 million in 2015 from $47.5 million in 2014, primarily due to higher sales +of our OraQuick ® HCV and In-Home HIV tests, partially offset by lower sales of +70 +Table of Contents +our OraQuick ® HIV professional product. In addition, 2015 net infectious disease testing revenues included $2.3 million in initial sales +of our OraQuick ® Ebola rapid antigen test to the CDC for field testing in Africa. There were no Ebola product sales in 2014. +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product +revenues (dollars in thousands) during 2015 and 2014. +Year Ended December 31, +Market +2015 +2014 +% +Change +Domestic HIV +$ +24,956 +$ +29,933 +(17 +)% +International HIV +2,410 +2,483 +(3 +) +Domestic OTC HIV +6,992 +6,493 +8 +Net HIV revenues +34,358 +38,909 +(12 +) +Domestic HCV +7,502 +4,220 +78 +International HCV +3,884 +3,048 +27 +Net HCV revenues +11,386 +7,268 +57 +Net OraQuick ® revenues +$ +45,744 +$ +46,177 +(1 +)% +Domestic OraQuick ® HIV sales decreased 17% to $24.9 +million in 2015 from $29.9 million in 2014. This decrease was primarily the result of the migration of some customers to fourth generation automated HIV immunoassays performed in a laboratory or at the point-of-care, as recommended under testing +guidelines issued by the CDC, or to competitive point-of-care HIV tests perceived to be more sensitive. International sales of our OraQuick ® HIV test decreased 3% during 2015 to $2.4 million +from $2.5 million in 2014 primarily due to lower sales in Africa and Europe partially offset by higher sales in Asia. +Sales of our +OraQuick ® In-Home HIV test increased 8% to $7.0 million in 2015 from $6.5 million in 2014 largely due to a price increase implemented in August 2015 and an increase in sales volume in the +fourth quarter of 2015 immediately following a celebrity’s announcement that he had tested positive for the HIV virus. These increases in the latter half of 2015 were partially offset by a decline in sales in the first quarter of the year which +was primarily the result of our decision to transition away from broad-based consumer advertising and focus our marketing and promotional efforts at the retail outlet level in the second half of 2014. +Domestic OraQuick ® HCV sales increased 78% to $7.5 million in 2015 from $4.2 million +in 2014, primarily due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV testing programs. International OraQuick ® HCV sales increased 27% +to $3.9 million in 2015 from $3.0 million in 2014, primarily due to the expansion of our business into Asia. +Risk Assessment Market +Commencing in 2016, we have combined the former substance abuse testing market and insurance risk assessment market categories under a single +category referred to as the “risk assessment market.” We combined revenues for these markets because they are similar in nature and testing modalities. Revenues for 2015 and 2014 have been combined in a similar manner for presentation +purposes. +Sales to the risk assessment market increased 11% to $13.5 million in 2015 from $12.1 million in 2014, primarily as a result of +higher sales of our Intercept ® drug testing system partially offset by lower sales for our OraSure ® collection device and assays to +insurance customers. Domestic Intercept ® sales in 2015 increased to $7.8 million compared to $6.1 million in 2014 largely due to the recovery of customers previously lost to competition, +improved domestic employment conditions, and the addition of customers who we believe recognize the +71 +Table of Contents +advantages of oral fluid testing in identifying recent drug use. Sales to insurance customers decreased 12% to $3.2 million in 2015 from $3.7 million in 2014, as a result of reduced demand in the +domestic life insurance market, as well as the continued adoption by some underwriters of a “Simplified Issue” policy. Where such a policy is issued, applicants are required to respond to a questionnaire about their behaviors rather than +undergoing lab-based tests. +Cryosurgical Systems Market +Sales of our cryosurgical systems products (which includes both the physicians’ office and OTC markets) decreased 23% to $11.9 million in +2015 from $15.5 million in 2014. +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) +generated in each market during 2015 and 2014. +Year Ended December 31, +Market +2015 +2014 +% +Change +Domestic professional +$ +4,311 +$ +6,750 +(36 +)% +International professional +916 +693 +32 +Domestic OTC +390 +108 +261 +International OTC +6,303 +7,954 +(21 +) +Net cryosurgical systems revenues +$ +11,920 +$ +15,505 +(23 +)% +Sales of our Histofreezer ® product in the domestic +professional market decreased 36% to $4.3 million in 2015, compared to $6.8 million in 2014 largely as a result of distributor consolidation and competition from new private-label brands. During 2015, international sales of Histofreezer ® increased to $916,000, compared to $693,000 in the prior year, primarily due to higher sales in Asia. +In the fourth quarter of 2014, we re-launched our OTC wart removal product in the U.S. retail market through private labeling with a large +pharmacy chain. Sales related to this product were $390,000 for the full year of 2015 compared to $108,000 in 2014. +Sales of our +international OTC cryosurgical products during 2015 decreased 21% to $6.3 million, compared to $8.0 million in 2014, largely due to lower sales to our Latin American distributor. Sales to this distributor decreased to $1.3 million, compared to $3.0 +million in 2014, due to challenges in the local markets, including declining economic conditions in Argentina, a restructuring of our distributor’s business operations in Mexico, and overall customer ordering patterns. +Other revenues +Other revenues were $15.3 +million in 2015, of which $13.5 million represent the recognition of exclusivity revenues under our HCV co-promotion agreement with AbbVie, and $1.8 million represented Ebola-related funding from BARDA. Other revenues in 2014 were $7.6 million and +represented the recognition of exclusivity revenues from AbbVie. +DNAG Segment +Molecular Collection Systems +Net +molecular collection systems revenues, which consist primarily of sales of our Oragene ® product line, increased 26% to $29.9 million in 2015 from $23.8 million in 2014. Sales of Oragene ® in the commercial market increased approximately 41% in 2015, primarily due to increased orders from DNAG’s largest existing U.S. +72 +Table of Contents +customer and incremental revenues from new customers, partially offset by lower sales to other existing U.S. customers who experienced regulatory and reimbursement challenges during 2015 and +eventually filed for bankruptcy protection. Sales in the academic market were flat at $9.8 million in both 2015 and 2014. +CONSOLIDATED +OPERATING RESULTS +Consolidated gross margin was 67% in 2015 compared to 63% in 2014. This increase was largely due to the +$7.7 million increase in other revenues, a reduction in royalty expense and a favorable change in the exchange rate between the Canadian and U.S. dollar. +Consolidated operating income increased by $12.9 million to $8.1 million in 2015, compared to an operating loss of $4.8 million in 2014. The +improved operating performance reflects the increase in product and other revenues, the impact of a favorable change in the Canadian to U.S. dollar exchange rate, and lower advertising and promotional expenses associated with our OraQuick ® In-Home HIV test. These improvements were partially offset by the absence of a $5.5 million payment received in 2014 due to the termination of our oral fluid assay development agreement with +Roche Diagnostics (which was reflected as a reduction in operating expenses), as well as higher legal costs and increased expenses under our HCV co-promotion agreement with AbbVie. +OPERATING INCOME BY SEGMENT +OSUR Segment +OSUR’s gross margin was 66% in 2015 compared to 60% in 2014. OSUR’s margin was positively impacted by the increase in other revenues +and a reduction in royalty expense during 2015. +Research and development expenses decreased 5% to $8.9 million in 2015 from $9.4 million +in 2014, largely due to lower lab supply costs, partially offset by higher study and program costs related to the fully-automated high-throughput drugs-of-abuse assays we are jointly developing with Thermo Fisher. +Sales and marketing expenses decreased 20% to $26.6 million in 2015 from $33.1 million in 2014, primarily as a result of lower advertising and +promotional costs for our OraQuick ® In-Home HIV test which totaled $1.8 million in 2015, as compared to $8.5 million in 2014, partially offset by higher sales and marketing costs +associated with our OraQuick ® HCV co-promotion agreement with AbbVie. +General +and administrative expenses decreased 2% to $20.1 million in 2015 from $20.6 million in 2014 due to lower staffing expenses. +In 2014, we +received a $5.5 million payment due to the termination of our oral fluid assay development agreement with Roche Diagnostics which was treated as a reduction in operating expenses. This payment did not recur in 2015. +All of the above contributed to OSUR’s operating income of $3.6 million for 2015, which included non-cash charges of $3.0 million for +depreciation and amortization and $5.5 million for stock-based compensation. +DNAG Segment +DNAG’s gross margin was 70% in 2015 compared to 73% in 2014. This decrease was attributable to an increased volume of lower margin sales +experienced in 2015 when compared to 2014, partially offset by a favorable change in the U.S./Canadian dollar exchange rate of approximately $849,000 as compared to approximately $430,000 in 2014. +73 +Table of Contents +Research and development expenses increased 4% to $2.7 million in 2015 compared to $2.6 million +in 2014 due to increased spending on our gut microbiome product and the new product initiatives, partially offset by a favorable change in the U.S./Canadian dollar exchange rate of approximately $357,000 in 2015 as compared to approximately $179,000 +in 2014. +Sales and marketing expenses increased 6% to $8.4 million in 2015 from $8.0 million in 2014 due to higher commission and +staffing costs, partially offset by a favorable change in the U.S./Canadian dollar exchange rate of $1.1 million in 2015 as compared to approximately $508,000 in 2014. +General and administrative expenses increased 68% to $5.3 million in 2015 compared to $3.1 million in 2014, largely due to higher litigation +costs partially offset by a favorable change in the U.S./Canadian dollar exchange rate of $464,000 as compared to approximately $218,000 in 2014. +All of the above contributed to DNAG’s operating income of $4.5 million for 2015, which included non-cash charges of $2.7 million for +depreciation and amortization and $566,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts +and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax expense was recorded for our pre-tax income in 2015 and no income tax benefit was recorded for our pre-tax loss in 2014. For the year ended +December 31, 2015 and 2014, we recorded Canadian income tax expense of $665,000 and $343,000, respectively. +Liquidity and Capital Resources +December 31, +2016 +2015 +(In thousands) +Cash and cash equivalents +$ +109,790 +$ +94,094 +Short-term investments +11,160 +7,225 +Working capital +139,106 +111,480 +Our cash and short-term investment balances increased to $120.9 million at December 31, 2016 from +$101.3 million at December 31, 2015. Our working capital increased to $139.1 million at December 31, 2016 from $111.5 million at December 31, 2015. +During 2016, we generated $22.8 million in cash from operating activities. Our net income of $19.7 million included non-cash stock-based +compensation expense of $6.1 million and depreciation and amortization expense of $5.7 million, partially offset by a net reduction of other non-cash charges of $482,000. Additional sources of operating cash flow included an increase in accrued +expenses and other liabilities of $1.7 million largely as a result of accrued severance costs and higher year-end accruals for management incentive bonuses and a decrease in inventory balances of $1.5 million largely related to lower raw material +costs. Uses of operating cash flow during 2016 included a decrease in deferred revenues of $8.3 million related to the recognition into revenue of previously deferred exclusivity payments received from AbbVie, an increase in our restricted cash +balance of $1.8 million associated with the purchase of certificates of deposit to collateralize standby letters of credit and an increase in prepaid expenses and other assets of $652,000 resulting from the recording of a $1.4 million receivable +related to the settlement of a claim from one of our raw material suppliers, partially offset by cash received for a leasehold improvement receivable recorded at the end of 2015 associated with the new Canadian office lease, and an increase in +accounts receivable of $576,000 resulting from a higher level of product revenues recorded at the end of the year. +We used a net amount +of $8.1 million in investing activities in 2016 to purchase $34.1 million of short-term investments and $4.4 million to acquire property and equipment, partially offset by proceeds from the maturities +74 +Table of Contents +of short-term investments of $30.4 million. During the year ending December 31, 2017, we expect to incur approximately $5.8 million in capital expenditures, primarily to purchase additional +manufacturing equipment, upgrade certain older equipment and make improvements to our facilities. +Net cash used in financing activities +was $1.2 million in 2016, which resulted from the use of $2.7 million to repurchase shares under our previously authorized stock repurchase plan, $784,000 to repurchase common stock to satisfy withholding taxes related to the vesting of restricted +shares, and $367,000 for debt issue costs associated with our new credit facility, partially offset by $2.7 million in proceeds received from the exercise of stock options. +On September 30, 2016, we entered into a credit agreement (the “Credit Agreement”) with a commercial bank, National Association. The +Credit Agreement provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit sub-facility of $2,500), with an option to request, prior to the second anniversary of the closing date, +that the lender, at its election, provide up to $5,000 of additional revolving commitments. Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our +subsidiary, DNAG, and certain related assets. There were no borrowings under the facility from September 30, 2016 through December 31, 2016. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. +Interest under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement is subject to an unused line fee of 0.375% per year on +the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to +1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2016, we were in compliance with all applicable covenants in the Credit Agreement. +Our current cash balance and available borrowing under our revolving credit facility are expected to be sufficient to fund our current +operating and capital needs for the foreseeable future. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the +progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the +timing and cost of obtaining regulatory approvals, the timing and cost of future stock repurchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and +marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. +Contractual Obligations and Commercial Commitments +The following sets forth our approximate aggregate obligations as of December 31, 2016 (in thousands) for future payments under contracts +and other contingent commitments, for the year 2017 and beyond: +Payments due by December 31, +Contractual Obligations +Total +2017 +2018 +2019 +2020 +2021 +Thereafter +Operating leases 1 +$ +2,001 +$ +339 +$ +334 +$ +317 +$ +341 +$ +335 +$ +335 +Employment contracts 2 +3,367 +1,775 +1,275 +317 +— +— +— +Purchase obligations 3 +11,272 +7,418 +3,088 +383 +383 +— +— +Minimum commitments under contracts 4 +792 +500 +292 +— +— +— +— +Total contractual obligations 5 +$ +17,432 +$ +10,032 +$ +4,989 +$ +1,017 +$ +724 +$ +335 +$ +335 +75 +Table of Contents +1 +Represents payments required under our operating leases. See Note 12 of the Notes to the consolidated +financial statements included herein. +2 +Represents salary payments payable under the terms of employment agreements executed by us with certain +executives. See Note 12 of the Notes to the consolidated financial statements included herein. +3 +Represents payments required by non-cancellable purchase orders or supply agreements related to inventory, +supplies, capital expenditures and other goods or services. The supply agreements are cancellable within a specified number of days of written notice to the supplier. See Note 12 of the Notes to the consolidated financial statements included +herein. +4 +Represents payments required pursuant to certain licensing agreements executed by the Company. These +agreements are cancellable within a specified number of days after communication by the Company of its intent to terminate. See Note 12 of the Notes to the consolidated financial statements included herein. +5 +Does not include any obligations under our revolving credit facility which was undrawn as of December 31, +2016. See Note 7 of the Notes to the consolidated financial statements included herein. +Off-Balance Sheet +Arrangements . We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial +statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported +amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our +judgments and estimates, including those related to bad debts, customer sales returns, inventories, intangible assets, income taxes, revenue recognition, contingencies and litigation. We base our judgments and estimates on historical experience and +on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual +results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in +Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the +more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . We recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or +determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. Other than for sales of our OraQuick ® In-Home +HIV test to the retail trade, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense +warranty returns as incurred. +Our net revenues recorded on sales of the +OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The +allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual +rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of operations. +76 +Table of Contents +We record shipping and handling charges billed to our customers as product revenue and the +related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie, to co-promote our OraQuick ® HCV test in the United States. Pursuant to the agreement, we had granted exclusive co-promotion rights for the OraQuick ® HCV test in +certain markets to AbbVie and we agreed to develop, implement, administer and maintain a patient care database for the exclusive use of AbbVie. This patient care database was used to compile patient information regarding new individuals who have +tested positive for HCV using our OraQuick ® HCV test. We also jointly agreed with AbbVie to co-promote our OraQuick ® HCV test in +certain market segments. +Under the terms of this agreement, we were eligible to receive up to $75.0 million in aggregate payments. We +were recognizing this revenue ratably on a monthly basis over the term of the agreement, which was to terminate on December 31, 2019. +On June 30, 2016, we mutually agreed that our agreement with AbbVie would terminate on December 31, 2016. Following the termination +of the agreement, AbbVie was relieved of its co-promotion obligations, including its obligation to detail the OraQuick ® HCV test into physician offices, and has no further financial +obligations to us. We are no longer obligated to compensate AbbVie for product detailing activities and are free to pursue arrangements with other pharmaceutical companies to market and promote our OraQuick ® HCV test in the U.S. As a result of the shortened term, the remaining associated deferred exclusivity revenue has been recognized ratably as other revenue over the last six months of 2016 as +there are no substantive on-going obligations remaining beyond December 31, 2016. During 2016 and 2015, $18.9 million and $13.5 million, respectively, in exclusivity revenues were recognized and recorded as other revenue in our consolidated +statements of operations. +On June 12, 2015, we were awarded a grant for up to $10.4 million in total funding from BARDA related to +our OraQuick ® Ebola Rapid Antigen test. The three-year, multi-phased grant includes an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain +clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million in additional funding for the development of our OraQuick ® Ebola Rapid Antigen test. +Funding received under this contract is recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred. During 2016 and 2015, $1.7 million and $1.8 million, +respectively, were recognized in connection with this grant as other revenue in our consolidated statements of operations. +In August +2016, we were awarded a contract for up to $16.6 million in total funding from BARDA related to our rapid Zika test. The six-year, multi-phased contract includes an initial commitment of $7.0 million and options for up to an additional $9.6 million +to fund the evaluation of additional product enhancements, and clinical and regulatory activities. Funding received under this contract is recorded as other revenue in our consolidated statements of operations as the activities are being performed +and the related costs are incurred. During 2016, $616,000 was recognized in connection with this grant as other revenue in our consolidated statements of operations. +Customer Sales Returns and Allowances. We do not grant product return rights to our customers for any product, except for our OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick ® In-Home HIV product +revenues in our consolidated statement of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. +As of December 31, 2016 and 2015, the reserve for sales returns and allowances was $217,000 and $310,000, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s +distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be +materially affected. +77 +Table of Contents +Allowance for Uncollectible Accounts Receivable . Accounts receivable are reduced by an +estimated allowance for amounts that may become uncollectible in the future. On an ongoing basis, we perform credit evaluations of our customers and adjust credit limits based upon the customer’s payment history and creditworthiness, as +determined by a review of their current credit information. We also continuously monitor collections and payments from our customers. +Based upon historical experience and any specific customer collection issues that are identified, we use our judgment to establish and +evaluate the adequacy of our allowance for estimated credit losses, which was $484,000 as of December 31, 2016. While credit losses have been within our expectations and the allowance provided, these losses can vary from period to period. +Furthermore, there is no assurance that we will experience credit losses at the same rates as we have in the past. During 2016 we had $369,000 in write-offs against the allowance for doubtful accounts. We had no material write-offs in 2015 and 2014. +Deferred Revenue . We record deferred revenue when funds are received prior to the recognition of the associated revenue. +Deferred revenue as of December 31, 2016 and 2015 includes customer prepayments of $1.4 million and $784,000, respectively. Deferred revenue as of December 31, 2015 also includes $8.9 million from AbbVie, which represents the excess +of the payments received from AbbVie over the amounts earned and recognized ratably in our consolidated statements of operations. +Inventories . Our inventories are valued at the lower of cost or market, determined on a first-in first-out basis, and include the cost +of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete +inventories based primarily on the estimated forecast of product sales. When, in the opinion of management, factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the +inventories are completely written off, as in the case of lapsing expiration dates. During 2016, 2015, and 2014 we wrote-off inventory which had a cost of $739,000, $2.6 million and $1.8 million, respectively. These write-offs were a result of +quality, scrap and product expiration issues. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of +our inventories and reported operating results. +Stock-Based Compensation . We recognize the fair value of equity-based awards as +compensation expense in our statement of operations. The fair value of our stock option awards is estimated using a Black-Scholes option valuation model. This valuation model’s computations incorporate highly subjective assumptions, such as the +expected stock price volatility and the estimated life of each award. The fair value of the options, after considering the effect of expected forfeitures, is then amortized, generally on a straight-line basis, over the related vesting period of the +option. The fair value of our restricted shares is based on the market value of the shares at the date of grant and is recognized on a straight-line basis over the related vesting period of the award. +Commencing in 2016, we granted to certain executives performance-based restricted stock units (“PSUs”). Vesting of these PSUs is +dependent upon achievement of performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metrics, the executive must also remain in our service for three years, commencing +with the grant date. Performance during the one-year period will be based on a one-year earnings per share target. Upon achievement of the one-year target, the PSUs will then vest three years from grant date. Performance during the three-year period +will be based on achievement of a three-year compound annual growth rate for consolidated product revenues. Upon achievement of the three-year target, the corresponding PSUs will vest in full. PSUs are converted into shares of our common stock once +vested. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts +compensation expense related to these awards, as appropriate. +Long-Lived and Intangible Assets . Our long-lived assets are +comprised of property and equipment, intangible assets and goodwill. Together, these assets had a net book value of $49.2 million, or 24% of our total assets, as of +78 +Table of Contents +December 31, 2016. Property and equipment and intangible assets are depreciated or amortized on a straight-line basis over their estimated useful lives, which we determine based upon our +estimate of the period of time over which each asset will generate revenues. An impairment of long-lived or intangible assets could occur whenever events or changes in circumstances indicate that the net book value of our assets may not be +recoverable. Events which could trigger asset impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of an asset or in our overall business strategy, +significant negative industry or economic trends, and shortening of product life-cycles or changes in technology. If we believe impairment of an asset has occurred, we measure the amount of such impairment by comparing the net book value of the +affected assets to the fair value of these assets, which is generally determined based upon the present value of the expected cash flows associated with the use of these assets. If the net book value exceeds the fair value of the impaired assets, we +would incur an impairment expense equal to this difference. +We currently believe the future cash flows to be received from all remaining +long-lived and intangible assets as of December 31, 2016 will exceed their book value. We did not recognize any impairment losses for the years ended December 31, 2016, 2015, or 2014. Any unanticipated significant impairment in the future, +however, could have a material adverse impact to our balance sheet and future operating results. +Goodwill . Goodwill +represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested +annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we +conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment +test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair value of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit +exceeds the reporting unit’s fair value, we perform the second step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected +reporting unit’s goodwill and intangible assets with their respective carrying values. +We performed our annual impairment assessment +as of July 31, 2016 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and +assumptions to calculate the fair value of our reporting unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future +impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. +Deferred Tax Assets and Liabilities . At December 31, 2016, we had federal Net Operating Loss (“NOL”) carryforwards +of $50.9 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $32.7 million at December 31, 2016. Net operating losses will begin to expire in 2021. In assessing +the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of +future taxable income during the period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and +tax planning strategies in making this assessment. +We currently have a full valuation allowance recorded against our total U.S. deferred +tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax asset in the immediate future. Each year, we continue to reevaluate our valuation allowance position +79 +Table of Contents +and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized in the immediate future. As such, we maintain a full valuation allowance as of +December 31, 2016 and 2015 against our deferred tax assets associated with the operations subject to income tax in the U.S. +The Tax +Reform Act of 1986 contains provisions that limit the annual amount of NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal +income tax obligations could be limited by changes in the ownership of our stock. Internal Revenue Code (“IRC”) Section 382 contains provisions that limit the amount of federal and state NOL carryforwards that can be used in any given +year in the event of specified occurrences, including significant ownership changes. The Company does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable +income. The Company continues to review ownership changes on an annual basis and we do not believe we have had a subsequent ownership change that would impact the NOLs. +Contingencies . In the ordinary course of business, we have entered into various contractual relationships with strategic corporate +partners, customers, distributors, research laboratories and universities, licensors, licensees, suppliers, vendors and other parties. As such, we could be subject to litigation, claims or assessments arising from any or all of these relationships. +We record a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the +amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires that we use our best judgment when estimating an accrual related to such contingencies. As additional information +becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount +accrued for in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +We do not hold any +amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of December 31, 2016, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency +cash flows. Sales denominated in foreign currencies comprised 4.6% of our total revenues for the year ended December 31, 2016. We do have foreign currency exchange risk related to our operating subsidiary in Canada. While the majority of their +revenues are recorded in U.S. dollars, almost all of their operating expenses are denominated in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar could affect year-to-year comparability of operating +results and cash flows. Our Canadian subsidiary had net assets, subject to translation, of $62.6 million Canadian dollars ($46.6 million USD), which are included in the Company’s consolidated balance sheet as of December 31, 2016. A 10% +unfavorable change in the Canadian-to-U.S. dollar exchange rate would have decreased our comprehensive income by $4.7 million in 2016. +ITEM 8. +Consolidated Financial Statements and Supplementary Data. +Information with respect to +this Item is contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +80 +Table of Contents +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has +evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2016. Based on that evaluation, the Company’s +management, including such officers, concluded that as of December 31, 2016 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the +reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding +required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term +is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s +management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated +Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2016. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of +any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent +registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial +Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, +2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, Inc.: +We have audited +OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations +of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial +reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. +81 +Table of Contents +We conducted our audit in accordance with the standards of the Public Company Accounting +Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included +obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit +also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of +financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of +any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of +December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated +balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years +in the three-year period ended December 31, 2016, and our report dated March 14, 2017 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 14, 2017 +ITEM 9B. +Other Information. +Not applicable. +82 +Table of Contents +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2017 Annual Meeting of Stockholders +(the “Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by +this Item is incorporated by reference to the information under the captions “Proposal No. 1. Election of Directors,” “Corporate Governance— Governance Guidelines and Code of Conduct,” “Corporate Governance – +Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. +Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial +officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy +the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. +Executive Compensation. +The information required by this Item is incorporated by +reference to the information under the captions “Compensation Committee Matters,” “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and Potential Payments Upon Termination or +Change in Control,” and “Director Compensation” in the Proxy Statement. +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item with respect to the securities ownership of certain beneficial owners and +management, and equity compensation plan information, is incorporated by reference to the information under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in +the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The +information required by this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance—Director Independence” in the Proxy Statement. +ITEM 14. +Principal Accountant Fees and Services. +The information required by this Item is +incorporated by reference to the information under the caption “Audit Committee Matters” in the Proxy Statement. +83 +Table of Contents +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). +Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are +included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . See Index to Exhibits following the consolidated financial statements in this Annual Report. +ITEM 16. +Form 10-K Summary +None. +84 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to +be signed on its behalf by the undersigned, thereunto duly authorized, on March 14, 2017. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Douglas A. Michels +Douglas A. Michels +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on +March 14, 2017, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Douglas A. Michels +Douglas A. Michels +President, Chief Executive Officer and Director +(Principal Executive Officer) +/s/ Ronald H. Spair +Ronald H. Spair +Chief Operating Officer, Chief Financial Officer and Director +(Principal Financial Officer) +/s/ Mark L. Kuna +Mark L. Kuna +Senior Vice President, Finance and Controller +(Principal Accounting Officer) +*MICHAEL CELANO +Michael Celano +Director +*EAMONN P. HOBBS +Eamonn P. Hobbs +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*CHARLES W. PATRICK +Charles W. Patrick +Director +*ROGER L. PRINGLE +Roger L. Pringle +Director +*STEPHEN S. TANG +Stephen S. Tang +Director +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +85 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations +F-4 +Consolidated Statements of Comprehensive Income (Loss) +F-5 +Consolidated Statements of Stockholders’ Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to the Consolidated Financial Statements +F-8 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders OraSure Technologies, Inc.: +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2016 and +2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements +are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards +require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the +financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable +basis for our opinion. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, +the financial position of OraSure Technologies, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in +conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public +Company Accounting Oversight Board (United States), OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework +(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial +reporting. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 14, 2017 +F-2 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2016 +December 31, 2015 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ +107,959 +$ +94,094 +Restricted cash +1,831 +— +Short-term investments +11,160 +7,225 +Accounts receivable, net of allowance for doubtful accounts of $484 and $798 +19,827 +19,265 +Inventories +11,799 +13,242 +Prepaid expenses +1,722 +1,533 +Other current assets +2,143 +1,355 +Total current assets +156,441 +136,714 +PROPERTY AND EQUIPMENT, net +20,033 +20,083 +INTANGIBLE ASSETS, net +10,337 +12,591 +GOODWILL +18,793 +18,250 +OTHER ASSETS +2,331 +1,683 +$ +207,935 +$ +189,321 +LIABILITIES AND STOCKHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +4,633 +$ +5,087 +Deferred revenue +1,388 +9,735 +Accrued expenses +11,314 +10,412 +Total current liabilities +17,335 +25,234 +OTHER LIABILITIES +2,304 +1,768 +DEFERRED INCOME TAXES +2,446 +2,883 +COMMITMENTS AND CONTINGENCIES (Note 12) +STOCKHOLDERS’ EQUITY +Preferred stock, par value $.000001, 25,000 shares authorized, none issued +— +— +Common stock, par value $.000001, 120,000 shares authorized, 56,001 and 55,705 shares issued and +outstanding +— +— +Additional paid-in capital +350,528 +345,253 +Accumulated other comprehensive loss +(14,220 +) +(15,639 +) +Accumulated deficit +(150,458 +) +(170,178 +) +Total stockholders’ equity +185,850 +159,436 +$ +207,935 +$ +189,321 +See accompanying notes to the +consolidated financial statements. +F-3 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2016 +2015 +2014 +NET REVENUES: +Product +$ +106,924 +$ +104,458 +$ +98,894 +Other +21,274 +15,261 +7,570 +128,198 +119,719 +106,464 +COST OF PRODUCTS SOLD +40,171 +39,426 +39,840 +Gross profit +88,027 +80,293 +66,624 +OPERATING EXPENSES: +Research and development +9,754 +11,654 +12,058 +Sales and marketing +29,652 +35,088 +41,118 +General and administrative +28,356 +25,493 +23,750 +Gain on contract termination settlement +— +— +(5,500 +) +67,762 +72,235 +71,426 +Operating income (loss) +20,265 +8,058 +(4,802 +) +OTHER INCOME +58 +774 +531 +Income (loss) before income taxes +20,323 +8,832 +(4,271 +) +INCOME TAX EXPENSE +603 +665 +343 +NET INCOME (LOSS) +$ +19,720 +$ +8,167 +$ +(4,614 +) +EARNINGS (LOSS) PER SHARE: +BASIC +$ +0.35 +$ +0.14 +$ +(0.08 +) +DILUTED +$ +0.35 +$ +0.14 +$ +(0.08 +) +SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE: +BASIC +55,615 +56,397 +55,949 +DILUTED +56,513 +56,846 +55,949 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the years ended December 31, +2016 +2015 +2014 +NET INCOME (LOSS) +$ +19,720 +$ +8,167 +$ +(4,614 +) +OTHER COMPEHENSIVE INCOME (LOSS) +Currency translation adjustments +1,419 +(7,791 +) +(4,051 +) +COMPREHENSIVE INCOME (LOSS) +$ +21,139 +$ +376 +$ +(8,665 +) +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2016, 2015 and 2014 +(in thousands) +Common Stock +Additional +Paid-in +Accumulated +Other +Comprehensive +Accumulated +Shares +Amount +Capital +Loss +Deficit +Total +Balance at January 1, 2014 +55,632 +$ +— +$ +338,674 +$ +(3,797 +) +$ +(173,731 +) +$ +161,146 +Common stock issued upon exercise of options +249 +— +1,115 +— +— +1,115 +Vesting of restricted stock +428 +— +— +— +— +— +Purchase and retirement of common shares +(122 +) +— +(639 +) +— +— +(639 +) +Compensation cost for restricted stock +— +— +2,663 +— +— +2,663 +Compensation cost for stock option grants +— +— +3,081 +— +— +3,081 +Net loss +— +— +— +— +(4,614 +) +(4,614 +) +Currency translation adjustments +— +— +— +(4,051 +) +— +(4,051 +) +Balance at December 31, 2014 +56,187 +— +344,894 +(7,848 +) +(178,345 +) +158,701 +Common stock issued upon exercise of options +74 +— +404 +— +— +404 +Vesting of restricted stock +354 +— +— +— +— +— +Purchase and retirement of common shares +(910 +) +— +(6,090 +) +— +— +(6,090 +) +Compensation cost for restricted stock +— +— +2,642 +— +— +2,642 +Compensation cost for stock option grants +— +— +3,403 +— +— +3,403 +Net income +— +— +— +— +8,167 +8,167 +Currency translation adjustments +— +— +— +(7,791 +) +— +(7,791 +) +Balance at December 31, 2015 +55,705 +— +345,253 +(15,639 +) +(170,178 +) +159,436 +Common stock issued upon exercise of options +405 +— +2,656 +— +— +2,656 +Vesting of restricted stock +446 +— +— +— +— +— +Purchase and retirement of common shares +(555 +) +— +(3,444 +) +— +— +(3,444 +) +Compensation cost for restricted stock +— +— +2,861 +— +— +2,861 +Compensation cost for stock option grants +— +— +2,691 +— +— +2,691 +Compensation cost for performance stock units +— +— +511 +— +— +511 +Net income +— +— +— +— +19,720 +19,720 +Currency translation adjustments +— +— +— +1,419 +— +1,419 +Balance at December 31, 2016 +56,001 +$ +— +$ +350,528 +$ +(14,220 +) +$ +(150,458 +) +$ +185,850 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2016 +2015 +2014 +OPERATING ACTIVITIES: +Net income (loss) +$ +19,720 +$ +8,167 +$ +(4,614 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Stock-based compensation +6,063 +6,045 +5,744 +Depreciation and amortization +5,687 +5,696 +6,307 +Amortization of lease incentives +(78 +) +110 +— +Amortization of debt issue costs +31 +— +— +Unrealized foreign currency (gain) loss +122 +367 +(305 +) +Loss (gain) on sale of fixed assets +(28 +) +80 +— +Deferred income taxes +(529 +) +48 +294 +Changes in assets and liabilities +Restricted cash +(1,831 +) +— +— +Accounts receivable +(576 +) +(3,739 +) +(3,381 +) +Inventories +1,476 +2,348 +(4,401 +) +Prepaid expenses and other assets +(652 +) +(1,415 +) +475 +Accounts payable +46 +(2,648 +) +2,194 +Deferred revenue +(8,350 +) +1,706 +6,943 +Accrued expenses and other liabilities +1,666 +(992 +) +(1,730 +) +Net cash provided by operating activities +22,767 +15,773 +7,526 +INVESTING ACTIVITIES: +Purchases of short-term investments +(34,133 +) +(26,895 +) +(9,407 +) +Proceeds from maturities of short-term investments +30,421 +23,934 +4,432 +Purchases of property and equipment +(4,353 +) +(3,744 +) +(3,005 +) +Net cash used in investing activities +(8,065 +) +(6,705 +) +(7,980 +) +FINANCING ACTIVITIES: +Payments for debt issue costs +(367 +) +— +— +Proceeds from exercise of stock options +2,656 +404 +1,115 +Repurchase of common stock +(3,444 +) +(6,090 +) +(639 +) +Net cash (used in) provided by financing activities +(1,155 +) +(5,686 +) +476 +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS +318 +(2,155 +) +(346 +) +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS +13,865 +1,227 +(324 +) +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD +94,094 +92,867 +93,191 +CASH AND CASH EQUIVALENTS, END OF PERIOD +$ +107,959 +$ +94,094 +$ +92,867 +See accompanying notes to the +consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +We develop, manufacture, +market and sell diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products, including immunoassays and other in vitro diagnostic tests that are used on other specimen types. +Our diagnostic products include tests that are performed on a rapid basis at the point-of-care, tests that are processed in a laboratory, and a rapid point-of-care HIV test approved for use in the domestic consumer retail or over-the-counter +(“OTC”) market. We also manufacture and sell devices used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomic, +personalized medicine, microbiome and animal genetic markets. Lastly, we manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to +various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, research and academic institutions, distributors, government agencies, physicians’ offices, commercial and industrial entities, +retail pharmacies and mass merchandisers, and to consumers over the internet. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, +DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiary, +unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of +America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported +amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to contingencies and +accruals, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which +management believes to be reasonable under the circumstances, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity and foreign currency +markets, reductions in government funding, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results +could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +In +2016, 2015 and 2014, we paid income taxes of $1,123, $719 and $31, respectively. +In 2016, 2015 and 2014, we recorded through the +consolidated statements of operations an increase in our allowance for doubtful accounts of $40, $341 and $253, respectively. We had $369 in write-offs against the allowance for doubtful accounts in 2016. We had no material write-offs against the +allowance for doubtful accounts in 2015 and 2014. +F-8 +Table of Contents +As of December 31, 2016, 2015 and 2014, we had accruals for purchases of property and +equipment of $302, $1,256 and $217, respectively. +Short-Term Investments +We consider all short-term investments to be available-for-sale securities. These securities are comprised of guaranteed investment +certificates with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component +of accumulated other comprehensive loss. +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated +allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories +are stated at the lower of cost or market determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on +hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based primarily on the estimated forecast of product sales. When factors indicate that impairment has occurred, either a reserve +is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we +also reserve for unidentified scrap or spoilage under a fixed-formula methodology. +Property and Equipment +Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. +Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture +and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss +is recorded in the consolidated statements of operations. +Intangible Assets +Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights +consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of one to fifteen years. +Impairment of Long-Lived Assets +We assess the recoverability of the our long-lived assets, which include property and equipment and intangible assets, by determining whether +the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by +comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. +F-9 +Table of Contents +Goodwill +Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets +acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted +accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then we would +not be required to perform the two-step quantitative impairment test. Otherwise, performing the two-step impairment test is necessary. The first step of the two-step quantitative impairment test involves comparing the fair values of the applicable +reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the test to determine the amount of the impairment loss, if +any. The second step involves measuring any impairment by comparing the implied fair values of the affected reporting unit’s goodwill and intangible assets with the respective carrying values. +We performed our annual impairment assessment as of July 31, 2016 utilizing a qualitative evaluation and concluded that it was more +likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not +consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a +triggering event occurs. As of December 31, 2016, we believe no indicators of impairment exist. +Revenue Recognition +We recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has +passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. Other than for sales of our OraQuick ® In-Home HIV test to the retail +trade, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as +incurred. +Our net revenues recorded on sales of the OraQuick ® In-Home HIV test +represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon +currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our +consolidated statements of operations. +We record shipping and handling charges billed to our customers as product revenue and the related +expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. Pursuant to the agreement, we granted exclusive co-promotion rights for the OraQuick ® HCV test in certain +markets to AbbVie and we agreed to develop, implement, administer and maintain a patient care database for the exclusive use of AbbVie. This patient care database was being used to compile patient information regarding new individuals who tested +positive for HCV using our OraQuick ® HCV test. We also jointly agreed with AbbVie to co-promote our OraQuick ® HCV test in certain +market segments. +F-10 +Table of Contents +Under the terms of this agreement, we were eligible to receive up to $75,000 in aggregate +payments. We recognized this revenue ratably on a monthly basis over the term of the agreement, which was to terminate on December 31, 2019. +On June 30, 2016, we mutually agreed to terminate our agreement with AbbVie effective December 31, 2016. Following the termination +of the agreement, AbbVie was relieved of its co-promotion obligations, including its obligation to detail the OraQuick ® HCV Rapid Test into physician offices, and has no further financial +obligations to us. We are no longer obligated to compensate AbbVie for product detailing activities and are free to pursue arrangements with other pharmaceutical companies to market and promote our OraQuick ® HCV Rapid Antibody Test in the U.S. As a result of the shortened term, the remaining associated deferred revenue has been recognized ratably as other revenue over the last six months of 2016 as +there are no substantive on-going obligations remaining beyond December 31, 2016. During 2016, 2015, and 2014, $18,951, $13,479 and $7,570, respectively, in exclusivity revenues were recognized and recorded as other revenue in our consolidated +statements of operations. +On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. Department of +Health and Human Services (“HHS”) Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® Ebola Rapid Antigen test. The three-year, multi-phased grant includes an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory +activities. In September 2015, BARDA exercised an option to provide $7,200 in additional funding for the development of our OraQuick ® Ebola Rapid Antigen test. Amounts related to this grant +are recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred. During 2016 and 2015, $1,707 and $1,783, respectively, were recognized in connection with this grant +as other revenue in our consolidated statements of operations. +In August 2016, we were awarded a contract for up to $16,600 in total +funding from BARDA related to our rapid Zika test. The six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and +regulatory activities. Funding received under this contract is recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred. During 2016, $616 was recognized in +connection with this grant as other revenue in our consolidated statements of operations. +Customer Sales Returns and Allowances +We do not grant product return rights to our customers for any product, except for our OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick ® In-Home HIV product +revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product +returns. As of December 31, 2016 and 2015, the reserve for sales returns and allowances was $217 and $310, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s +distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be +materially affected. +Deferred Revenue +We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, +2016 and 2015 includes customer prepayments of $1,388 and $784, respectively. Deferred revenue as of 2015 also includes $8,951 from AbbVie, which represents the excess of the exclusivity payments received from AbbVie over the amounts earned and +recognized ratably in our consolidated statements of operations during that period. +F-11 +Table of Contents +Customer and Vendor Concentrations +One of our customers accounted for 15% of our accounts receivable as of December 31, 2016. We had no significant concentrations in +accounts receivable as of December 31, 2015. One of our customers accounted for approximately 15% and 12% of our net consolidated revenues for the years ended December 31, 2016 and 2015, respectively. We had no significant concentrations +in net consolidated revenues for the year ended December 31, 2014. +We currently purchase certain products and critical components of +our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our +subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and +results of operations. +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, +facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2016, 2015, and 2014, we incurred $626, $623, and $6,910, respectively, in +advertising expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock +option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions +as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options or to issue +restricted stock, or redeem performance based restricted stock units, we issue new shares rather than purchase shares on the open market. +Income Taxes +We follow +the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of +existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing +jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and +liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability +of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net +deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +F-12 +Table of Contents +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, +and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are +included in our consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income (expense) in our consolidated +statements of operations were $(607), $1,005, and $273 for the years ended December 31, 2016, 2015, and 2014, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding +during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting +or exercise of dilutive securities, such as common stock options, unvested restricted stock, and performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options +were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. +The computations of basic and diluted earnings (loss) per share are as follows: +Year ended December 31, +2016 +2015 +2014 +Net income (loss) +$ +19,720 +$ +8,167 +$ +(4,614 +) +Weighted average number of common shares outstanding: +Basic +55,615 +56,397 +55,949 +Dilutive effect of stock options, restricted stock, and performance stock units +898 +449 +— +Diluted +56,513 +56,846 +55,949 +Earnings (loss) per share: +Basic +$ +0.35 +$ +0.14 +$ +(0.08 +) +Diluted +$ +0.35 +$ +0.14 +$ +(0.08 +) +For the years ended December 31, 2016, 2015, and 2014, outstanding common stock options and unvested +restricted stock representing 2,546, 4,314, and 6,447 shares, respectively, were excluded from the computation of diluted earnings (loss) per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive loss by their nature and disclose the accumulated balance of other comprehensive loss separately from +accumulated deficit and additional paid-in capital in the stockholders’ equity section of our balance sheet. +Our accumulated other +comprehensive loss for 2016, 2015, and 2014 consisted of foreign currency translation adjustments. +F-13 +Table of Contents +We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, +and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. The $1,419, $(7,791) and $(4,051) currency translation adjustments recorded in 2016, 2015 and 2014, respectively, are +largely the result of the translation of our Canadian operation’s financial statements into U.S. dollars. +Fair Value of Financial +Instruments +As of December 31, 2016 and 2015, the carrying values of cash and cash equivalents, accounts receivable, and accounts +payable approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and +liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: +Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, +unrestricted assets or liabilities; +Level 2: +Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, +for substantially the full term of the asset or liability; and +Level 3: +Prices or valuation techniques that require inputs that are both significant to the fair value measurement and +unobservable (i.e., supported by little or no market activity). +Included in cash and cash equivalents at December 31, 2016 and 2015, was $83,704 and $65,509 +invested in government money market funds. These funds have investments in government securities and are Level I instruments. +We offer a +nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for +each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, +2016 and 2015 was $1,980 and $1,324, respectively, and was calculated using the quoted market price of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value +of plan assets is included in other assets with the same amount included in other liabilities in the accompanying consolidated balance sheets. +Our available-for-sale securities as of December 31, 2016 and 2015 consisted of guaranteed investment certificates with amortized cost +and fair value of $11,160 and $7,225, respectively, and are measured as Level 1 instruments. +In 2016, we purchased certificates of +deposit (“CD”) from a commercial bank. The CDs bear interest at an annual rate ranging from 0.18% to 0.31% and mature monthly through February 28, 2018. The carrying values of the CDs approximate their fair value. These CDs serve as +collateral for certain standby letters of credit and are reported as restricted cash on the accompanying consolidated balance sheets. Also see Note 12 – Commitments and Contingencies. +Recent Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with +customers, ASU 2014-09, Revenue from Contracts with Customers . The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to recognize revenue in +a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The standard will be effective for the first interim +period within annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard. +F-14 +Table of Contents +The FASB allows two adoption methods under ASU 2014-09. We plan to adopt the standard using the +“modified retrospective method.” Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effective of the change and +providing additional disclosures comparing results to previous accounting standards. +Upon initial evaluation, we believe the key changes +in the standard that impact our revenue recognition relate to the allocation of the transaction price to performance obligations related to our device and lab services for drug testing. This revenue stream amounts to less than 1% of total +consolidated revenues. We continue to evaluate the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and related disclosures, but do not anticipate the adoption to have a material impact on our financial +results. +In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory , which requires an entity that uses +the first-in, first-out method for inventory measurement to report inventory cost at the lower of cost and net realizable value versus the current measurement principle of lower of cost or market. The ASU requires prospective adoption for inventory +measurements for fiscal years beginning after December 15, 2016. We are adopting ASU 2015-11 as of January 1, 2017. The adoption of this standard will not have a material impact on our consolidated financial statements and related +disclosures. +In February 2016, the FASB issued ASU 2016-02, Leases , which requires entities to begin recording assets and +liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period +within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 may have on our consolidated financial statements and related +disclosures. Our total lease commitments at December 31, 2016 are $2,001. Also see Note 12 – Commitments and Contingencies. +In +March 2016, the FASB issued authoritative guidance under ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting . ASU 2016-09 provides for simplification of several aspects of the +accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We will adopt ASU 2016-09 on January 1, 2017. While +we have a full valuation allowance against our net deferred tax assets, the adoption of this standard will not have a material impact on our consolidated financial statements and related disclosures. Should the full valuation allowance be reversed +in future periods the adoption of this new guidance will introduce more volatility to our effective tax rate. +In August 2016, the FASB +issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after +December 15, 2017, subject to early adoption. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classifications and we do not expect the adoption of this standard will have a material impact on our +consolidated financial statements. +3. INVENTORIES: +December 31, +2016 +2015 +Raw materials +$ +5,399 +$ +7,895 +Work in process +1,034 +333 +Finished goods +5,366 +5,014 +$ +11,799 +$ +13,242 +F-15 +Table of Contents +4. PROPERTY AND EQUIPMENT: +December 31, +2016 +2015 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +20,179 +18,549 +Machinery and equipment +22,764 +21,263 +Computer equipment and software +8,357 +7,644 +Furniture and fixtures +2,113 +1,584 +Construction in progress +1,569 +2,938 +56,100 +53,096 +Less accumulated depreciation +(36,067 +) +(33,013 +) +$ +20,033 +$ +20,083 +Depreciation expense was $3,149, $2,992, and $3,123 for 2016, 2015, and 2014, respectively. +5. GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2016 +2015 +Balance as of January 1 +$ +18,250 +$ +21,734 +Change related to foreign currency translation +543 +(3,484 +) +Balance as of December 31 +$ +18,793 +$ +18,250 +Intangible assets consist of the following: +December 31, 2016 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,321 +$ +(4,830 +) +$ +4,491 +Patents and product rights +10 +5,400 +(3,808 +) +1,592 +Acquired technology +7 +7,240 +(5,279 +) +1,961 +Tradename +15 +3,573 +(1,280 +) +2,293 +$ +25,534 +$ +(15,197 +) +$ +10,337 +December 31, 2015 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,051 +$ +(3,818 +) +$ +5,233 +Patents and product rights +10 +5,400 +(3,358 +) +2,042 +Acquired technology +7 +7,030 +(4,172 +) +2,858 +Tradename +15 +3,469 +(1,011 +) +2,458 +$ +24,950 +$ +(12,359 +) +$ +12,591 +F-16 +Table of Contents +Patents and products rights are made up of the following: +December 31, +2016 +2015 +HIV-related +$ +900 +$ +900 +HCV-related +4,500 +4,500 +5,400 +5,400 +Less accumulated amortization +(3,808 +) +(3,358 +) +$ +1,592 +$ +2,042 +Amortization expense for 2016, 2015, and 2014 was $2,538, $2,704, and $3,184, respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2017 +$ +2,538 +2018 +2,535 +2019 +1,570 +2020 +1,362 +2021 +1,118 +Beyond +1,214 +$ +10,337 +6. ACCRUED EXPENSES: +December 31, +2016 +2015 +Payroll and related benefits +$ +7,685 +$ +6,311 +Professional Fees +982 +1,014 +Royalties +715 +819 +Other +1,932 +2,268 +$ +11,314 +$ +10,412 +7. CREDIT FACILITY: +On September 30, 2016, we entered into a credit agreement (the “Credit Agreement”) with a commercial bank. The Credit Agreement +provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit sub-facility of $2,500), with an option to request, prior to the second anniversary of the closing date, that the lender, at +its election, provide up to $5,000 of additional revolving commitments. Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and +certain related assets. There were no borrowings under the facility from September 30, 2016 through December 31, 2016. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. +Interest under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement is subject to an unused line fee of +0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +F-17 +Table of Contents +In connection with the Credit Agreement, under certain circumstances, we must comply with a +minimum fixed charge coverage ratio of 1.10 to 1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2016, we were in compliance with all applicable covenants in +the Credit Agreement. +8. INCOME TAXES: +Income (loss) before income tax expense (benefit) consists of the following: +Years Ended December 31, +2016 +2015 +2014 +United States +$ +18,492 +$ +5,302 +$ +(6,156 +) +Canada +1,831 +3,530 +1,885 +$ +20,323 +$ +8,832 +$ +(4,271 +) +The components of the income tax expense (benefit) are as follows: +Years Ended December 31, +2016 +2015 +2014 +Current +Federal +$ +— +$ +— +$ +— +State +250 +— +— +Canada +882 +617 +49 +1,132 +617 +49 +Deferred +Federal +6,508 +1,511 +(2,248 +) +State +569 +311 +(827 +) +Canada +(529 +) +48 +294 +6,548 +1,870 +(2,781 +) +(Decrease) increase in valuation allowance +(7,077 +) +(1,822 +) +3,075 +(529 +) +48 +294 +Total income tax expense +$ +603 +$ +665 +$ +343 +For the years ended December 31, 2016, 2015, and 2014 we recorded foreign income tax expense of $353, +$665, and $343, respectively. +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each +of the years ended December 31, 2016, 2015, and 2014 is as follows: +2016 +2015 +2014 +Statutory U.S. federal income tax rate +34.0 +% +34.0 +% +34.0 +% +Tax effect of Canadian items +(4.9 +) +(13.1 +) +28.0 +State income taxes, net of federal benefit +2.0 +1.5 +13.5 +Nondeductible expenses and other +6.7 +5.7 +(11.5 +) +Change in valuation allowance, federal and state +(34.8 +) +(20.6 +) +(72.0 +) +Effective tax rate +3.0 +% +7.5 +% +(8.0 +)% +F-18 +Table of Contents +Deferred income taxes reflect the tax effects of temporary differences between the basis of +assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2016 and 2015 are as +follows: +2016 +2015 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +17,673 +$ +21,985 +Inventories +1,680 +1,725 +Capitalized research and development costs +4,711 +4,803 +Accruals and reserves currently not deductible +3,282 +5,782 +Acquired intangible assets +(2,268 +) +(2,725 +) +Depreciation and amortization +(212 +) +(367 +) +Stock-based compensation +6,110 +6,371 +Investment tax credit carryforward +(134 +) +(92 +) +Research and development tax credit carryforward +1,885 +1,885 +Net deferred tax asset +32,727 +39,367 +Valuation allowance +(35,173 +) +(42,250 +) +Net deferred tax liability +$ +(2,446 +) +$ +(2,883 +) +In assessing the realizability of our net deferred tax asset, we consider all relevant positive and negative +evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation +of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of +December 31, 2016 and 2015 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2016, 2015, or 2014. The valuation +allowance decreased by $7,077 in 2016 due to the use of net operating losses to offset U.S. taxable income. +Our Federal NOL carryforwards expire as +follows: +Year of Expiration +NOLs +2021 - 2025 +$ +9,494 +2026 - 2030 +14,285 +2031 - 2036 +27,077 +$ +50,856 +The Tax Reform Act of 1986 contains provisions that limit the annual amount of NOLs available to be used in +any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes in the ownership of our stock. Internal Revenue +Code (“IRC”) Section 382 contains provisions that limit the amount of federal and state NOL carryforwards that can be used in any given year in the event of specified occurrences, including significant ownership changes. The Company +does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income. The Company continues to review ownership changes on an annual basis and we do not believe we +have had a subsequent ownership change that would impact the NOLs. +As of December 31, 2016, our gross unrecognized tax benefits +totaled $2,084, and based upon the valuation allowance for our U.S. operations, the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as a component of +income tax expense. Interest +F-19 +Table of Contents +and penalties were immaterial in 2016, 2015 and 2014. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, as +well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2016. +A reconciliation of our unrecognized +tax benefits is as follows: +2016 +2015 +2014 +Balance as of January 1 +$ +2,088 +$ +2,073 +$ +2,051 +Additions for tax positions of prior periods +— +22 +25 +Reductions for tax positions of prior periods +(4 +) +(7 +) +(3 +) +Balance as of December 31 +$ +2,084 +$ +2,088 +$ +2,073 +9. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We +grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards +which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2016, 2,568 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified options may be granted to eligible employees, including our officers at a price not less than +75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally +have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years, with one quarter of the options vesting one year after grant and the remainder +vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using +the Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +2016 +2015 +2014 +Black-Scholes Option Valuation Assumptions +Risk-free interest rate (1) +1.76 +% +1.49 +% +2.13 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +46 +% +51 +% +50 +% +Expected life of stock options (in +years) (2) +7 +7 +7 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the +expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2016, 2015 and 2014 was $2.91, +$4.86 and $3.03, respectively. +F-20 +Table of Contents +Compensation expense recognized in the financial statements related to stock options was as +follows: +Years Ended December 31, +2016 +2015 +2014 +Total compensation cost during the year +$ +2,691 +$ +3,403 +$ +3,081 +Amounts capitalized into inventory during the year +(270 +) +(153 +) +(148 +) +Amounts recognized in cost of products sold for amounts previously capitalized +212 +153 +128 +Amounts charged against income +$ +2,633 +$ +3,403 +$ +3,061 +The aggregate intrinsic value of options exercised during the years ended December 31, 2016, 2015, and +2014 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $763, $329, and $901, respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +Aggregate +Intrinsic +Value +Outstanding on January 1, 2014 +5,271 +$ +7.54 +Granted +1,202 +5.77 +Exercised +(249 +) +5.09 +Expired +(388 +) +8.38 +Forfeited +(96 +) +7.43 +Outstanding on December 31, 2014 +5,740 +7.22 +Granted +773 +9.28 +Exercised +(74 +) +5.46 +Expired +(163 +) +8.55 +Forfeited +(60 +) +8.07 +Outstanding on December 31, 2015 +6,216 +7.46 +Granted +347 +6.00 +Exercised +(405 +) +6.57 +Expired +(479 +) +9.17 +Forfeited +(223 +) +7.31 +Outstanding on December 31, 2016 +5,456 +$ +7.28 +5.6 +$ +10,267 +Vested or expected to vest as of December 31, 2016 +5,426 +$ +7.29 +5.6 +$ +10,207 +Exercisable on December 31, 2016 +4,538 +$ +7.33 +5.1 +$ +8,519 +As of December 31, 2016, there was $2,965 of unrecognized compensation expense related to unvested option +awards that is expected to be recognized over a weighted-average period of 2.0 years. +Net cash proceeds from the exercise of stock +options were $2,656, $404 and $1,115 for the years ended December 31, 2016, 2015, and 2014, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for +these periods. +F-21 +Table of Contents +The following table summarizes information about stock options outstanding as of +December 31, 2016: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$2.55 - $5.19 +597 +6.5 +$ +4.41 +597 +$ +4.41 +$5.37 - $5.47 +234 +9.0 +5.37 +3 +5.42 +$5.71 +948 +6.7 +5.71 +706 +5.71 +$5.72 - $6.37 +221 +5.3 +5.97 +194 +5.96 +$6.63 +633 +3.9 +6.63 +633 +6.63 +$6.67 - $6.99 +34 +7.3 +6.92 +20 +6.93 +$7.05 +726 +5.7 +7.05 +703 +7.05 +$7.28 - $8.28 +631 +2.4 +7.93 +597 +7.96 +$8.33 - $9.30 +127 +4.4 +8.66 +88 +8.81 +$9.31 - $12.14 +1,305 +6.2 +10.32 +997 +10.64 +5,456 +5.6 +$ +7.28 +4,538 +$ +7.33 +The Stock Plan also permits us to grant restricted shares of our common stock to eligible employees, including +officers, and our outside directors. Generally, these shares are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by our Compensation Committee or Board of Directors. The market value of these +shares at the date of grant is recognized on a straight-line basis over the period during which the restrictions lapse. Compensation cost of $2,861, $2,642 and $2,663 related to restricted shares was recognized during the years ended +December 31, 2016, 2015, and 2014, respectively. +The following table summarizes restricted stock award activity under the Stock +Plan: +Shares +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2014 +653 +$ +7.15 +Granted +506 +5.82 +Vested +(428 +) +6.65 +Forfeited +(24 +) +7.38 +Issued and unvested, December 31, 2014 +707 +6.50 +Granted +362 +8.25 +Vested +(354 +) +6.94 +Forfeited +(18 +) +8.01 +Issued and unvested, December 31, 2015 +697 +7.14 +Granted +632 +5.63 +Vested +(446 +) +6.65 +Forfeited +(133 +) +6.43 +Issued and unvested, December 31, 2016 +750 +$ +6.28 +Issued and expected to vest, December 31, 2016 +750 +$ +6.28 +As of December 31, 2016, there was $2,607 of unrecognized compensation expense related to unvested +restricted stock awards that is expected to be recognized over a weighted average period of 1.7 years. +In connection with the vesting of +restricted shares and exercise of stock options during the years ended December 31, 2016, 2015 and 2014, we purchased and immediately retired 132, 133 and 122 shares with +F-22 +Table of Contents +aggregate values of $784, $1,164 and $639, respectively, in satisfaction of minimum tax withholding and exercise obligations. +Commencing in 2016, we granted to certain executives performance-based restricted stock units (“PSUs”). Vesting of these PSUs is +dependent upon achievement of performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metrics, the executive must also remain in our service for three years, commencing +with the grant date. Performance during the one-year period will be based on a one-year earnings per share target. Upon achievement of the one-year target, the PSUs will then vest three years from grant date. Performance during the three-year period +will be based on achievement of a three-year compound annual growth rate for consolidated product revenues. Upon achievement of the three-year target, the corresponding PSUs will vest in full. PSUs are converted into shares of our common stock once +vested. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts +compensation expense related to these awards, as appropriate. The 2016 one-year earnings per share target was met during the year ended December 31, 2016 and as such, one-third of the related compensation expense was recognized during the year. +As of December 31, 2016, there were 456 PSUs issued and unvested at a weighted-average grant date fair value of $5.46. Compensation +cost of $511 related to the PSUs was recognized during the year ended December 31, 2016. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 +of our outstanding common shares. During the years ended December 31, 2016 and 2015, we purchased and retired 423 and 777 shares of common stock at an average price of $6.29 and $6.34 per share for a total cost of $2,660 and $4,926, +respectively. No shares were purchased and retired in 2014. +10. TERMINATION SETTLEMENT: +On November 21, 2013, we terminated our assay development and commercialization agreement with Roche Diagnostics (“Roche”). +Pursuant to this termination agreement, Roche paid us $8,300, which was recorded as a reduction of operating expense on our consolidated statements of operations for the quarter ended December 31, 2013. Roche agreed to provide certain +transitional product support services to us and to supply certain of the assays developed under the collaboration on a transitional basis for up to five years following the termination. We had the right to stop the supply of assays prior to the end +of this five-year period and to receive an additional payment from Roche of up to $5,500 depending on how early in that five-year period the supply obligation was ended. During the second quarter of 2014, we issued our final purchase order for +assays previously developed under the terminated agreement and as such, recorded $5,500 as a reduction of operating expense in our consolidated statements of operations. +11. BUSINESS SEGMENT INFORMATION: +We +operate our business within two reportable segments: our “OSUR” business, which consists of the development, manufacture and sale of diagnostic products, specimen collection devices and medical devices; and our molecular collection systems +or “DNAG” business, which primarily consists of the manufacture, development and sale of oral fluid collection devices that are used to collect, stabilize and store samples of genetic material for molecular testing. OSUR revenues are +derived primarily from products sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, commercial and industrial entities, retail pharmacies and mass merchandisers, and to consumers over the internet. OSUR also derives other revenues, including exclusivity payments for co-promotion rights and other licensing and product +development +F-23 +Table of Contents +activities. DNAG revenues result primarily from products sold into the commercial market which consists of customers engaged in consumer genetics, clinical genetic testing, pharmacogenomics, +personalized medicine, microbiome, and animal genetic testing. DNAG products are also sold into the academic research market, which consists of research laboratories, universities and hospitals. +We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the +segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income (loss). We do not allocate interest income, interest +expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +The following table summarizes operating segment information for the years ended December 31, 2016, 2015, and 2014, and asset information +as of December 31, 2016 and 2015: +Years Ended December 31, +2016 +2015 +2014 +Net revenues: +OSUR +$ +95,984 +$ +89,795 +$ +82,686 +DNAG +32,214 +29,924 +23,778 +Total +$ +128,198 +$ +119,719 +$ +106,464 +Operating income (loss): +OSUR +$ +15,606 +$ +3,558 +$ +(8,324 +) +DNAG +4,659 +4,500 +3,522 +Total +$ +20,265 +$ +8,058 +$ +(4,802 +) +Depreciation and amortization: +OSUR +$ +2,720 +$ +3,015 +$ +3,254 +DNAG +2,967 +2,681 +3,053 +Total +$ +5,687 +$ +5,696 +$ +6,307 +Capital expenditures: +OSUR +$ +2,145 +$ +1,645 +$ +2,170 +DNAG +2,208 +2,099 +835 +Total +$ +4,353 +$ +3,744 +$ +3,005 +December 31, +2016 +2015 +Total assets: +OSUR +$ +151,719 +$ +137,082 +DNAG +56,216 +52,239 +Total +$ +207,935 +$ +189,321 +Our products are sold principally in the United States and Europe. +F-24 +Table of Contents +The following table represents total net revenues by geographic area, based on +the location of the customer: +Years Ended December 31, +2016 +2015 +2014 +United States +$ +99,758 +$ +96,522 +$ +82,256 +Europe +11,646 +13,535 +13,913 +Other regions +16,794 +9,662 +10,295 +$ +128,198 +$ +119,719 +$ +106,464 +The following table represents total long-lived assets by geographic area: +December 31, +2016 +2015 +United States +$ +15,737 +$ +15,660 +Canada +4,286 +4,415 +Other regions +10 +8 +$ +20,033 +$ +20,083 +12. COMMITMENTS AND CONTINGENCIES: +Sublicense Agreement +In +June 2004, we entered into a sublicense agreement with a third party pursuant to which we have been granted a limited, worldwide, non-exclusive sublicense to certain HIV-2 patents held by such party. Under the terms of this sublicense agreement, we +are obligated to pay royalties based on a percentage of our net sales of certain products, which incorporate the technology covered by the licensed patents. Royalties are expensed as an element of cost of goods sold. Future minimum payments under +this agreement are as follows: +2017 +$ +500 +2018 +292 +$ +792 +Royalties from our commercial sale of products covered by the sublicense can be credited against these minimum +royalty obligations. +Leases +We lease office space for our Canadian subsidiary and domestic warehouse facilities under operating lease agreements. Future payments required +under these non-cancelable leases are as follows: +2017 +$ +339 +2018 +334 +2019 +317 +2020 +341 +2021 +335 +Thereafter +335 +$ +2,001 +Rent expense for 2016, 2015 and 2014 was $715, $481, and $401, respectively. +F-25 +Table of Contents +Purchase Commitments +As of December 31, 2016, we had outstanding non-cancelable purchase commitments related to inventory, supplies, capital expenditures, and +other goods or services as follows: +2017 +$ +7,418 +2018 +3,088 +2019 +383 +2020 +383 +$ +11,272 +Certain commitments under supply agreements are cancellable within a specified number of days of written +notice to the supplier. +Employment Agreements +Under terms of employment agreements with certain employees, which extend through 2019, we are required to pay each individual a base salary +for continuing employment with us. The agreements require payments totaling $1,775, $1,275, and $317 in 2017, 2018, and 2019, respectively. +Standby Letters of Credit +In 2016, we established two standby letters of credit in the aggregate amount of $1,800, naming an international customer as the beneficiary. +These letters of credit were required as a performance guarantee of our obligations under our contract with that customer and are collateralized by certificates of deposit maintained at a commercial bank. +Litigation +From time to +time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our +future financial position or results of operations. +In May 2015, our subsidiary DNAG filed a complaint in the United States District +Court for the District of Delaware against Ancestry.com DNA LLC (“Ancestry”) relating to the manufacture and sale by Ancestry of its oral fluid DNA collection device (the “Ancestry Device”). Ancestry previously purchased +DNAG’s patented oral fluid DNA collection devices. The complaint alleged that the manufacture and sale by Ancestry of the Ancestry Device infringes U.S. Patent No. 8,221,381 B2, which is owned by DNAG. In addition, the complaint +alleged that Ancestry has breached the terms of agreements under which Ancestry previously purchased DNAG products. The complaint also included an action to quiet title to the Ancestry Device and related patent applications. DNAG requested +the court to grant injunctive relief and damages. +On October 20, 2015, Ancestry filed with the United States Patent and Trademark +Office (“USPTO”) a Petition for Inter Partes Review (“IPR”) of some, but not all, claims of U.S. Patent No. 8,221,381 B2. On April 8, 2016, the USPTO instituted an IPR of some, but not all, of the claims raised +in Ancestry’s petition. On June 3, 2016, Ancestry filed a second Petition for IPR of some, but not all, of the claims of U.S. Patent No. 8,221,381 B2. +In July 2015, DNAG filed a complaint in the United States District Court for the District of Delaware against Spectrum DNA, Spectrum Solutions +L.L.C. and Spectrum Packaging L.L.C. (collectively “Spectrum”) relating to the manufacture and sale by Spectrum of an oral fluid DNA collection device (the “Spectrum Device”). The Spectrum Device is the same as the Ancestry +device mentioned above and Spectrum is the manufacturer of the Ancestry Device for Ancestry. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum +F-26 +Table of Contents +Device infringes U.S. patent number 8,221,381 B-2, which is owned by DNAG. DNAG requested the court to grant injunctive relief and damages. Spectrum filed a motion to dismiss this lawsuit on the +grounds that the Delaware District Court lacked jurisdiction over Spectrum. The Court granted Spectrum’s motion to dismiss for lack of personal jurisdiction. +On June 20, 2016, DNAG filed a complaint in the United States District Court for the Southern District of California against Spectrum +relating to the manufacture and sale of the Spectrum Device. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum Device infringes U.S. Patent No. 9,207,164, which is owned by DNAG. DNAG requested the court +to grant injunctive relief and damages. On June 21, 2016, DNAG filed a motion for preliminary injunction. On July 21, 2016, Spectrum filed a motion to stay the case pending resolution by the PTO of a Petition for IPR of U.S. +Patent No. 9,207,164, which was filed by Ancestry in July 2016. On October 6, 2016, the Court issued an order denying DNAG’s motion for preliminary injunction and on October 7, 2016, the Court issued an order staying the +case pending resolution of the IPR of U.S. Patent No. 9,207,164. +Effective February 6, 2017, DNAG settled the foregoing +litigation with Ancestry and Spectrum. Under a Settlement and License Agreement executed by the parties, Ancestry agreed to pay DNAG a settlement fee of $12,500. This settlement amount will be recorded as a separate line item and a reduction of our +operating expenses in our statement of income in 2017. In addition, DNAG granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license +granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. The Settlement and +License Agreement also provides DNAG with a royalty-free, non-exclusive license to patents related to Ancestry’s existing saliva DNA collection kit and certain modifications thereto. +The parties have each agreed to a mutual release of claims and other provisions typical for settlement agreements of this type. Pursuant to +the terms of the Settlement and License Agreement, the pending federal lawsuits in the District of Delaware and the Southern District of California have been dismissed and the IPR proceedings before the USPTO involving the DNAG patents asserted in +the litigation have been terminated. +13. RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) +Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also +provides for us to match employee contributions up to $4 per year. We contributed $619, $587, and $565 to the 401(k) Plan, net of forfeitures, in 2016, 2015, and 2014, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible highly compensated employees of the +Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase +OraSure stock as an investment vehicle. As of December 31, 2016 and 2015, the value of the assets associated with this plan was $1,980 and $1,324, respectively, and is included in other assets in our consolidated balance sheet. Our obligation +related to the deferred compensation plan is included in other liabilities in our consolidated balance sheet. As of December 31, 2016 and 2015, our total obligation under this plan was $1,980 and $1,324, respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the +“RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee +contributions up to $2 per year. We contributed $134, $134, and $136 to the RRSP in 2016, 2015, and 2014, respectively. +F-27 +Table of Contents +14 . QUARTERLY DATA (Unaudited): +The following tables summarize the quarterly results of operations for each of the quarters in 2016 and 2015. These quarterly results are +unaudited, but in the opinion of management, have been prepared on the same basis as our audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information +set forth herein. +2016 Results +Three months ended +March 31, +2016 +June 30, +2016 +September 30, +2016 +December 31, +2016 +Net revenues +$ +29,089 +$ +31,359 +$ +32,251 +(1) +$ +35,499 +(1) +Costs and expenses +26,390 +27,010 +26,107 +28,426 +Operating income +2,699 +4,349 +6,144 +7,073 +Other income (expense), net +(192 +) +(340 +) +498 +92 +Income before income taxes +2,507 +4,009 +6,642 +7,165 +Income tax expense (benefit) +61 +173 +400 +(31 +) +Net income +$ +2,446 +$ +3,836 +$ +6,242 +$ +7,196 +Earnings per share +Basic +$ +0.04 +$ +0.07 +$ +0.11 +$ +0.13 +Diluted +$ +0.04 +$ +0.07 +$ +0.11 +$ +0.13 +2015 Results +Three months ended +March 31, +2015 +June 30, +2015 +September 30, +2015 +December 31, +2015 +Net revenues +$ +27,088 +$ +30,388 +$ +29,861 +$ +32,382 +Costs and expenses +27,379 +27,667 +28,325 +28,290 +Operating income (loss) +(291 +) +2,721 +1,536 +4,092 +Other income (expense), net +409 +(95 +) +81 +379 +Income before income taxes +118 +2,626 +1,617 +4,471 +Income tax expense (benefit) +5 +658 +147 +(145 +) +Net income +$ +113 +$ +1,968 +$ +1,470 +$ +4,616 +Earnings per share +Basic +$ +0.00 +$ +0.03 +$ +0.03 +$ +0.08 +Diluted +$ +0.00 +$ +0.03 +$ +0.03 +$ +0.08 +(1) +Revenues in the last six months of 2016 include +additional $5,436 of exclusivity payments recognized in other revenues as a result of the early termination of our HCV co-promotion agreement with AbbVie. +F-28 +Table of Contents +INDEX TO EXHIBITS +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the +Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to +Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., amended and restated as of August 18, 2008, are incorporated by reference to +Exhibit 3 to the Company’s Current Report on Form 8-K filed August 22, 2008. +10.1 +Form of Indemnification Agreement (and list of parties to such agreement) is incorporated by reference to Exhibit 10.1 to +Amendment No. 3 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed August 30, 2000.* +10.2 +Employment Agreement, dated as of June 22, 2004, between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated +by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Douglas A. Michels, is +incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.4 +Amendment No. 2 to Employment Agreement, dated as of December 15, 2010, between the Company and Douglas A. Michels, is +incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.5 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Douglas A. Michels is +incorporated by reference to Exhibit 99.1 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.6 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Ronald H. Spair, is incorporated by +reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.7 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Ronald H. Spair, is +incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.8 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Ronald H. Spair, +is incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.9 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Ronald H. Spair is +incorporated by reference to Exhibit 99.2 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.10 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by +reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.11 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is +incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +Table of Contents +Exhibit +Number +Exhibit +10.12 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, +is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.13 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Jack E. Jerrett is +incorporated by reference to Exhibit 99.3 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.14 +Employment Agreement, dated as of October 2, 2006, between Mark L. Kuna and OraSure Technologies, Inc., is incorporated by +reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 5, 2006.* +10.15 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Mark L. Kuna, is +incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.16 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Mark L. Kuna, is +incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.17 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Mark L. Kuna is incorporated +by reference to Exhibit 99.4 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.18 +Employment Agreement, dated as of January 3, 2011, between the Company and Anthony Zezzo II is incorporated by +reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.19 +Terms of Employment for Michael Reed, Senior Vice President and Chief Science Officer for OraSure Technologies, Inc., is +incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* +10.20 +Description of Non-Employee Director Compensation Policy, as amended as of November 14, 2011, is incorporated by +reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.21 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the +Company’s Current Report on Form 8-K filed February 24, 2017. * +10.22 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.23 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective +September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.24 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective as of February 12, 2013 is incorporated by +reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.* +10.25 +Amendment No. 1 to the OraSure Technologies, Inc. Stock Award Plan, effective May 22, 2014 is incorporated by +reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.* +10.26 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to +Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.27 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements). +* +Table of Contents +Exhibit +Number +Exhibit +10.28 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.29 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit +10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.30 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to +Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.31 +Description of the OraSure Technologies, Inc. 2016 Management Incentive Plan is incorporated by reference to Item 5.02 to +the Company’s Current Report on Form 8-K filed February 19, 2016.* +10.32 +Description of the OraSure Technologies, Inc. 2017 Management Incentive Plan is incorporated by reference to Item 5.02 to +the Company’s Current Report on Form 8-K filed February 24, 2017.* +10.33 +Description of Amended Long-Term Incentive Policy is incorporated by reference to Item 5.02 to the Company’s +Current Report on Form 8-K filed May 14, 2015.* +10.34 +Description of long-term incentive awards to Named Executive Officers for 2015 performance is incorporated by reference to +section 5.02 to the Company’s Current Report on Form 8-K filed on February 3, 2016.* +10.35 +Description of Long-Term Incentive Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s +Current Report on Form 8-K filed February 24, 2017.* +10.36 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the +Company’s Current Report on Form 8-K filed December 21, 2011.* +10.37 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit +99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.38 +Credit Agreement, between Wells Fargo Bank, National Association, and OraSure Technologies, Inc., is incorporated by +reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K +for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Douglas A. Michels required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, +as amended. +31.2 +Certification of Ronald H. Spair required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as +amended. +32.1 +Certification of Douglas A. Michels required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, +as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Ronald H. Spair required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as +amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS +XBRL Instance Document +Table of Contents +Exhibit +Number +Exhibit +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase document +* +Management contract or compensatory plan or arrangement. \ No newline at end of file diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/filing_metadata.csv b/raw/filings/0001116463/2016/0001193125-17-082033/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f24fa132f7c39a17bdf61bc0735916aad38fd964 --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2017-03-14,2016-12-31,2017-03-14T20:10:41.000Z,0001193125-17-082033,d354040d10k.htm,10-K,6460063,1,0,https://www.sec.gov/Archives/edgar/data/1116463/000119312517082033/d354040d10k.htm,https://www.sec.gov/Archives/edgar/data/1116463/000119312517082033/,2016,2016,1 diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/item1.txt b/raw/filings/0001116463/2016/0001193125-17-082033/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..ca8193aa8b6b3ea840990218305ded45ecb2347f --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/item1.txt @@ -0,0 +1,910 @@ +ITEM 1. +Business. +Our business principally involves the development, manufacture, marketing and +sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. +We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a +laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, +physicians’ offices, and commercial and industrial entities. One of our diagnostic products, the OraQuick ® HCV rapid antibody test, is the first and only rapid HCV test approved by the +U.S. Food and Drug Administration (“FDA”) for sale in the United States. In addition, our OraQuick ® In-Home HIV test is the first and only rapid HIV test approved by the FDA for sale +in the over-the-counter (“OTC”) or consumer retail market in the United States and we have commenced sales of our HIV self-test in certain foreign countries. We also sell OTC cryosurgical products to consumers in North America, Europe, +Central and South America, and Australia. More recently, we completed development and recorded initial sales of our new OraQuick ® rapid Ebola antigen test and we have substantially developed +an OraQuick ® rapid Zika antibody test. +In vitro diagnostic testing is the +process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific substances or markers. We have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a +significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity comparable to blood and/or urine tests. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid +tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space. +Through our subsidiary, +DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical +genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the +collection, stabilization, transportation and storage of DNA from human saliva. We have also begun selling new research use only products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome +services called “GenoFIND TM ”, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers in many countries +worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the +purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged +into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided +at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as +well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to +that website are not intended to be incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and their regulatory and commercial status: +Product +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 +(“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and +plasma. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole +blood. +Marketed +World Health Organization (“WHO”) pre-qualification. +Marketed +Also registered in various other countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +Marketed +CE Mark (European Union) approved for OTC use. +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care qualitative and oral fluid +HIV-1/2 self-test for investigational use only that can be visually read in approximately 20 minutes. +Investigational use only. +Registered in one African country. +Designated eligible for procurement by Global Fund. +WHO pre-qualification pending. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the +hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also +registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +4 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be +visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live +patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid +samples from cadavers. +Marketed +OraQuick ® Zika +A rapid point-of-care qualitative test for Zika antibodies that can be read in +approximately 20 minutes. +Under development. +Not Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) +Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +Marketed +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and +cotinine in a laboratory setting. +PMA approved for detection of HIV-1 +antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® •DX +Non-invasive all-in-one system for the collection, stabilization, transportation +and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC +use. +Marketed +Oragene ® •DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, +and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® •RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® +All-in-one system for the collection, stabilization, transportation, +and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various other countries. +Marketed +5 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and +storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene• +LIVESTOCK and +Oragene ® •ANIMAL +All-in-one systems for the collection, stabilization, transportation, and storage of +livestock DNA from nasal samples. +Animal research use only. +Marketed +OMNIgene ® • GUT +All-in-one system for the collection, stabilization, transportation and +storage of microbial DNA in stool samples. +Research use only product. +Marketed +CE marked and registered in certain countries. +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving +tuberculosis bacteria in sputum samples. +Research use only product. +Marketed +CE marked and registered in certain countries. +WHO endorsement pending. +PrepIT ® • MAX +Reagent for extraction of DNA from tuberculosis bacteria. +CE marked and registered in the U.S. +Marketed +OMNIgene ® • VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse +(“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with +Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and +methadone. +Nine drug assays – FDA 510(k) cleared. +Marketed +Assays CE marked and registered in certain countries. +Marketed +6 +Table of Contents +Product +Description +Regulatory Status +Commercial +Status +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory +setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Marketed +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo +Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems—Professional +Cryosurgical (freezing) system for the removal of warts and other benign +skin lesions, marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types of skin lesions. +Marketed +CE marked and registered in certain countries. +Marketed +Cryosurgical Systems—OTC +Cryosurgical system for the removal of common and plantar warts and +skin tags, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Marketed +Registered in Canada for warts and skin tags. +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® , POINTTS ® and CrytoTag names. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk +assessment, substance abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use of our +OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. We also offer genomics and +microbiome support services to our molecular collection customers under the GenoFIND TM trademark. +GenoFIND TM services range from package customization and study design optimization to +extraction, analysis and reporting services. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole +blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial +containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a +7 +Table of Contents +loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all +cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and +generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick +ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. +The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United +States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a +result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick +ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered in other countries. We have +distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received WHO pre-qualification for our export only version of this product. +Because of its versatility in being able to detect antibodies to both HIV-1 and HIV-2 in finger-stick and venous whole blood, oral fluid +and plasma samples, we believe that the OraQuick ® device provides a competitive advantage in the market for rapid HIV testing in the United States and elsewhere. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our +OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark, although this product is not currently +mandated in the European Union. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for +consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +We have completed development of a low cost OraQuick ® HIV Self-Test for use in certain +foreign countries. This product has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test. We are working with Population Services International (“PSI”), a +leading global health organization, along with UNITAID, the WHO and health officials from Malawi, Zambia and Zimbabwe to launch the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. As part of STAR, PSI is using our new OraQuick ® Self-Test with labeling and instructions specifically tailored for the African marketplace, in a two-year pilot program funded by UNITAID. The purpose of the STAR project is to generate crucial +information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public health impact of self-testing will be. Our OraQuick ® +Self-Test was chosen by PSI because of its quality, ease-of-use and oral fluid option. Initial sales of our test to PSI were completed in 2016. +The OraQuick ® HIV Self-Test has been designated as eligible for procurement by +purchasing entities entitled to access funding and other resources from the Global Fund and UNITAID. This funding is available for a 12-month period. We are also seeking WHO pre-qualification for this product. +8 +Table of Contents +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C +virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and +finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with +oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the +OraQuick ® technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and +capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and venous whole blood samples collected from live patients, as well as oral fluid specimens collected from cadavers. The WHO has also +issued an Emergency Use Assessment and Listing for this product with respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® rapid flu A&B test is an FDA 510(k) cleared rapid qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected +with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as ten minutes. This product is manufactured +for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. During 2016, PBM obtained a CLIA waiver for this test for use with nasal and nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and +confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The +device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection +and other analytes. +The OraSure ® collection device is FDA approved for use in +the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the +OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the +OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) +screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with our oral fluid Western blot HIV-1 confirmatory test (described below). +A trained health care professional then +conveys test results and provides appropriate counseling to the individual who was tested. +9 +Table of Contents +Tuberculosis Products +Our wholly-owned subsidiary, DNAG, offers two infectious disease products targeting tuberculosis (“TB”). OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for +at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily +mixing and quality control. OMNIGENE ® • SPUTUM is expected to improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product +is being offered to TB laboratories for evaluation. +PrepIT ® MAX is a reagent for +extraction of DNA from TB bacteria. This product is being offered for early stage testing by TB researchers, clinical laboratories, and diagnostic developers who need to extract DNA from TB bacteria for molecular analysis. +Both of the OMNIgene ® • SPUTUM and PrepIT ® • MAX products are CE marked and OMNIgene ® • SPUTUM is gaining greater interest for tuberculosis testing. Healthcare providers +from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their product +evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing much needed solutions to developing countries that are at the +highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +Through DNAG, we sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and +storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to collect DNA from human saliva. These products are currently +sold to thousands of academic and research customers in many countries worldwide. +Our molecular collection products are available in +several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted +collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is +closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature +for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We have started to market several microbiome collection products designed to collect, stabilize and transport the microbial profile from +multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time and when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and +preserves (“snapshots”) the microbiome after collection, until analysis is required. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in +clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Current methodologies +for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We have also begun marketing other microbiome collection kits for DNA or RNA collected from the vagina and +oral cavity. +10 +Table of Contents +We believe these products provide significant advantages over competing DNA and RNA collection +methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store +and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Our molecular business also offers customers our GenoFIND TM services, a suite of genomic +and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. We believe our GenoFIND TM offering will become an +increasingly valuable tool for meeting the needs of our molecular customers. +Our molecular collection products historically have been +sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® •DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our +ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® • +DNA and OMNIgene ® •GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the +OraSure ® device is sold by us under the name Intercept ® , and is used to collect OMT for oral fluid drug testing. We have received FDA +510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) +as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) +cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through +laboratory distributors. +We believe that the Intercept ® device has several +advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with +greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs +and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection +device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by +current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® device is currently being sold as a +forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo +Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid +nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, +these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating +localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other +11 +Table of Contents +types of benign skin lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product +on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product +through our distributor Genomma Labs (“Genomma”), under the POINTTS ® tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart +removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and +Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and +for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , +to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The +result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available +laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the +Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents +are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, +automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests +continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We entered into an agreement with Thermo Fisher in 2013, under which Thermo Fisher has agreed to develop and supply up to 12 +fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® he device. Under the first phase of this agreement, we are selling a NIDA-5 panel of assays supplied +by Thermo Fisher in the U.S. forensic market. The parties expect to complete development of several additional assays and pursue FDA 510(k) clearance of the Intercept i2 ® he device for +use with a 12-assay panel. We also expect to obtain CE mark and other regulatory approvals to enable us to sell our Intercept i2 ® he collector and Thermo Fisher assays into Europe and +other foreign countries. +The assays from Thermo Fisher will be optimized as needed to comply with new oral fluid guidelines expected to +be issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) for the federally regulated market and certain other markets that follow Federal drug testing guidelines, none of which is currently served by OraSure. We believe +the offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us +to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 confirmatory test that received premarket approval from the FDA in 1996. This test uses the +original specimen collected with the OraSure ® oral fluid collection device to confirm positive results of initial oral fluid HIV-1 EIA screening tests. +12 +Table of Contents +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a +cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation +(“DOT”) has also approved the test. +Each Q.E.D. ® test kit +contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device +is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Since +2014, we have been pursuing the development and commercialization of a rapid Ebola antigen test using our OraQuick ® technology platform. Product development is now largely complete and +significant progress has been made in preparing for the commercial manufacturing of the product and obtaining the required regulatory approvals and registrations. In July 2015, we received an EUA for our OraQuick ® Ebola rapid antigen test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) +August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live +patients. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within +the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an +additional $8.6 million to fund certain clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7.2 million of this funding for our OraQuick ® Ebola +test. +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. The WHO has issued an +Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the product, particularly in +Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in 2017. +In response to global concerns regarding the Zika +virus, we are developing a rapid Zika antibody test on our OraQuick ® platform. This virus is believed to be spread primarily through infected mosquitoes and has been linked as a possible cause +of microcephaly in newborn babies whose mothers are infected. There has also been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. +In August 2016, we entered into a contract with BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product +enhancements, and certain clinical and regulatory activities. +Research and Development +In 2016, our research and development activities focused primarily on development of our next generation Intercept i2 ® collection device, our new rapid Ebola and Zika tests, our molecular collection product offerings for the microbiome and tuberculosis markets, and clinical and technical support for our existing +products. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +13 +Table of Contents +Research and development expenses were $9.8 million in 2016, $11.7 million in 2015, and $12.1 +million in 2014. These expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to +reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade +shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were +$99.8 million, $96.5 million and $82.3 million in 2016, 2015 and 2014, respectively. Consolidated net revenues attributable to international customers amounted to $28.4 million, $23.2 million and $24.2 million, or 22%, 19% and 23% of our total +revenues, in 2016, 2015 and 2014, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 11 to our consolidated financial statements included elsewhere in this +Annual Report. +Infectious Disease Testing—Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody test directly to +customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional +facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV +testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by +pharmacies. We have engaged two manufacturers’ representative organizations to assist with sales to U.S. physicians and retail clinics. Internationally, we distribute our OraQuick ® HIV +test in Europe and certain other foreign countries. +Our OraQuick ® HCV test is +sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in +Europe and other countries through distributors. Under an agreement with AbbVie, we previously co-promoted our OraQuick ® HCV test in certain U.S. markets, including general practitioners and +certain specialty physicians and AbbVie agreed to detail our OraQuick ® HCV test in the physician markets. This agreement was terminated at the end of 2016. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date +has been the CDC, which has purchased the product for field testing in Africa. Our ability to expand sales of this test to other customers will likely depend on the availability of government or other funding and whether we are able to obtain FDA +510(k) clearance and pre-qualification with the WHO for our product. +We market the +OraSure ® oral fluid collection device for HIV-1 testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have +contracted a commercial laboratory to provide prepackaged OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +We have distribution rights to an +FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are +permitted to sell this product into the U.S. hospital and public health markets. +We have also been working to commercialize the OMNIgene ® • SPUTUM and PrepIT ® • MAX products. TB is a major global health issue, with long established relationships among public health +agencies, NGO’s, and +14 +Table of Contents +suppliers. Our subsidiary, DNAG, has a focused sales and market development team working with these key players to have its products evaluated and adopted where possible. +Infectious Disease Testing—OTC +We +sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase +on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who +have sex with men, African Americans and Latino Americans. +To support individuals that purchase and use our test, we have established a +toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly-trained, bi-lingual representatives who can answer questions about HIV/AIDS and the use of our test, and +refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling +our OraQuick ® HIV Self-Test to PSI (Population Services International) for use in a self-testing pilot program in three African countries, Malawi, Zambia and Zimbabwe. We expect this program +to expand and we are marketing our test in several other countries that are also planning large HIV self-test programs. Our OraQuick ® HIV Self-Test has the same diagnostic capabilities as our +OraQuick ® In-Home test and was developed for use in certain foreign countries. +Molecular +Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some +countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular science +backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to +commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. +DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of +microbes and their effect on human health. DNAG’s primary product offering, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG is +leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. +Substance Abuse Testing +Our substance +abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection +device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology +testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +15 +Table of Contents +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the +criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market +consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® +collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These +products are currently sold into the criminal justice and drug treatment markets. We plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the NIDA-5 assay panel, +along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept +i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE +assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test +primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement +testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Cryosurgical Systems +Most of our +Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors +include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we +sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our distributor, +Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. More recently, we began selling our +product in the U.K. through another distributor, Appia, under the CrytoTag trade name. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada, for the removal of skin tags in the U.K. and for the +removal of warts in the U.S. +Insurance Risk Assessment +We currently market the OraSure ® oral fluid collection device for use in screening +life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which +in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection +16 +Table of Contents +devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in +confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. +In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers +using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and +instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during +the past three years. The OraQuick ® rapid HIV testing products, the cryosurgical systems products, and our Oragene ® product line +accounted for total revenues of $33.1 million, $13.2 million, and $31.1 million, respectively, in 2016, $34.3 million, $11.9 million and $29.4 million, respectively, in 2015, and $38.9 million, $15.5 million and $23.8 million, respectively, in +2014. In 2016, the OraQuick ® HCV testing products accounted for total revenues of $14.1 million. +One of our customers accounted for approximately 15% of our net consolidated revenues in 2016 and 12% in 2015. We had no individual customers +who accounted for more than 10% of our total revenues in 2014. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, +manufacture and sale of diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral +fluid collection devices that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues +consist primarily of product sold into the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ +offices, and commercial and industrial entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG +revenues consist of product sold into the academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external +customers, income and total assets, please see the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 11 to the +consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. +Supply and +Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, Western blot HIV-1 confirmatory test, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We +expect to continue to manufacture these products at this location for the foreseeable future. +17 +Table of Contents +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of +one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the OraQuick ® HIV product lines, the HCV antigens used in the OraQuick ® HCV test and the antigen used in the Western blot HIV-1 confirmatory test only +from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any +of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our +ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and +sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw +materials for these products. +Our OraSure QuickFlu ® test is manufactured and +supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput +oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these +products. +The Histofreezer ® product and our OTC cryosurgical products are +assembled by a U.S. vendor with certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in +the event that our current suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source +supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2016, we had 325 full-time employees (including 104 employees at our subsidiary, DNAG). Of this total, +there were 113 in sales, marketing and client services; 37 in research and development; 126 in operations, manufacturing, quality control, information systems, purchasing and shipping; 22 in quality assurance and regulatory affairs; and 27 in +administration and finance. This compares to 326 employees as of December 31, 2015. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +18 +Table of Contents +Important competitive factors for our products include price, quality, performance, ease of use, +customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing +practices); +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size +companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, +tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume +discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. +Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and +products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining +regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United +States. We expect the number of devices competing with our OraQuick ® , OraSure ® , +Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal +competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA +waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against +laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +19 +Table of Contents +Our competitors in the domestic infectious disease testing market include medical diagnostic +companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and +degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our +rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike +the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international +markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other international +markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test +approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The +OraQuick ® HIV Self-Test that we sell in certain international markets is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our OraQuick ® Ebola test includes government and +commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both +whole blood samples from living patients and oral fluid samples from cadavers. +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices +used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® products. Although we believe the +Oragene ® device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit +margin. Our Oragene ® product is also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes +with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and +stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM and +PrepIT ® • MAX products are unique and have no direct competition in terms of a comparable product. The primary competition for these products is the incumbent methodologies that are +widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, +our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products +to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the +United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our +Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +20 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse +reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on +radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run +on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and +heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® +urine assays have declined substantially during the past several years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically +paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have +received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be +substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This +product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our +Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the +results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new +product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States +patents generally have a maximum term of 20 years from the date an application is filed. +We have five United States patents and +numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, +containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The patents expire from March 2018 to December 2026. We have +also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have +five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. +patents expire from March to July 2019 and the fifth in July 2028. We have obtained licenses to certain lateral flow patents and to certain HIV-1 and HIV-2 patents held +by other parties. We also have obtained a license to certain HCV patents which we use to manufacture and sell a rapid HCV test on the OraQuick ® technology platform. +21 +Table of Contents +We hold, through our subsidiary, DNAG, seventeen United States patents and numerous foreign +patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2020 through +March 2031. +We have two United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of +skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to August 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of +employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and +not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the +consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary +to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , +Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ® , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® , PrepIT ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC +cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our +business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other +countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the +outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and +comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, +manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and +sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +All of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After +approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, +failure to comply with the FDA’s requirements +22 +Table of Contents +can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our +products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as medical devices. +There are several mechanisms by which regulated medical devices can be placed on the market in the United States. Some products may qualify for +clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the +product is substantially equivalent to another legally marketed predicate device t (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified +by the FDA; or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, +or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the +submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. An applicant must submit a 510(k) +application at least 90 days before commercial distribution of the affected product commences. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually +takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the medical +device does not qualify for the 510(k) procedure, either because it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de +novo classification or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent +predicate device exists. Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined +to be high risk and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid +scientific evidence, including the results of preclinical and clinical studies, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. +Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for +additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA +approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA +may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may refuse to +review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the +failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement may be required to be submitted +to, and cleared or approved by, the FDA, before the modified device may be +23 +Table of Contents +marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the +device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of +the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These +trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study +meets the requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. If a full IDE +is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical +study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue +the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE +supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human +subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain +clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to +obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other nonclinical or +non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA +does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Another +option for marketing a product in the U.S. is through Emergency Use Authorization, or EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of +certain in vitro diagnostic devices to aid in addressing the emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite +development of diagnostic tools to aid in the diagnosis of viral pathogens that have the potential to affect public health. +Most medical +devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including +design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend +time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance. +Companies are also +subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed +products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Medical device reporting regulations +24 +Table of Contents +require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or +serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine +compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an +investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or +partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with +the FDA’s OSR regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter +primarily focused on DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. +Specifically, the warning letter indicated the need for additional documentation regarding design and development activities for DNAG’s +products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • DX collection device. In addition, the warning letter requested +additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter further noted that DNAG does not currently have in +place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG has +submitted a formal response to the FDA to address the issues referenced in the warning letter. In addition, DNAG received 510(k) clearance of its ORAcollect ® device on April 18, 2016. +While the warning letter still remains pending, DNAG intends to continue to sell and market all of its products. We expect no material impact to product sales or our consolidated financial performance for the foreseeable future as a result of the +issues raised by the warning letter. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts +laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility +a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. +We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid +HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for +certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products +that may not have been able to use them without complying with applicable quality control and other requirements. +Certain of our products +may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove +any restrictions affecting our ability to sell products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission +(“FTC”) and by other federal and state regulatory and enforcement authorities, +25 +Table of Contents +including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or +approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham +Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that +we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC +enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is +brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the +FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are +subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also +called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and +that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such +certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to +regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval from international public health agencies, such as the World Health Organization, in order to sell products in certain +countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only +in those countries that we believe have a significant market opportunity. +The International Organization for Standardization +(“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to +facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and +distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive +(“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are +accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO +certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment +26 +Table of Contents +procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +We have completed the applicable conformity assessment procedures and obtained the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC +cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We +have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various +ISO requirements in order to obtain a license to sell their devices in Canada. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in +return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or +services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering +of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products +are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or +other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the +person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each +wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and +penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to +other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by +limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by +criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing +interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction +and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical +27 +Table of Contents +device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to +new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are +required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions +with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with +applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, +support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear +and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain +or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to +any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and +will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and +receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom +generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the +nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, +effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous +Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In +addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our +products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes +included in Item 15 of this Annual Report. +28 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/item13.txt b/raw/filings/0001116463/2016/0001193125-17-082033/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..fc37c3f0d45e2c90645843c2de052c91d0ecc68e --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The +information required by this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance—Director Independence” in the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/item9a.txt b/raw/filings/0001116463/2016/0001193125-17-082033/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..7f0913562545385ad969447a293faf3290ed46ac --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/item9a.txt @@ -0,0 +1,51 @@ +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has +evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2016. Based on that evaluation, the Company’s +management, including such officers, concluded that as of December 31, 2016 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the +reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding +required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term +is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s +management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated +Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2016. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of +any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent +registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial +Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, +2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +OraSure Technologies, Inc.: +We have audited +OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations +of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial +reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. +81 +Table of Contents +We conducted our audit in accordance with the standards of the Public Company Accounting +Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included +obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit +also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of +financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that +(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors +of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of +any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of +December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated +balance sheets of OraSure Technologies, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years +in the three-year period ended December 31, 2016, and our report dated March 14, 2017 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 14, 2017 \ No newline at end of file diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/rp_note.txt b/raw/filings/0001116463/2016/0001193125-17-082033/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2016/0001193125-17-082033/rpt_disclosure.txt b/raw/filings/0001116463/2016/0001193125-17-082033/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..9e1aa39f8489e311a8bcd1f6da7fd78c0eeb7889 --- /dev/null +++ b/raw/filings/0001116463/2016/0001193125-17-082033/rpt_disclosure.txt @@ -0,0 +1,10 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2016, +there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit +Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third +26 +Table of Contents +party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s +charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment and severance agreements between our executive officers and the Company is set forth in the Section +entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/filing.txt b/raw/filings/0001116463/2017/0001193125-18-064054/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8611f7e05fa66f5463430bed5013533465235f95 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/filing.txt @@ -0,0 +1,6071 @@ +10-K +1 +d519538d10k.htm +10-K +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC. +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem, Pennsylvania +18015 +(Address of Principal Executive Offices) +(Zip Code) +(610) 882-1820 +(Registrant’s Telephone Number, Including Area Code): +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☒ No ☐ +Indicate by check mark if the Registrant is not +required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities +Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days. Yes ☒ No ☐ +Indicate by check mark whether the +Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) +during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not +contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment +to this Form 10-K. ☒ +Indicate by check mark whether the Registrant is a large +accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting +company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended +transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the +Exchange Act). Yes ☐ No ☒ +State the aggregate market value +of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of +the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2017) : $1,010,050,592 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 23, 2018: +60,966,866 shares. +Documents Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this +Annual Report. +Table of Contents +Table of Contents +PART I +Page +ITEM 1. +Business +3 +ITEM 1A. +Risk Factors +29 +ITEM 1B. +Unresolved Staff Comments +58 +ITEM 2. +Properties +58 +ITEM 3. +Legal Proceedings +58 +ITEM 4. +Mine Safety Disclosures +58 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer +Purchases of Equity Securities +59 +ITEM 6. +Selected Financial Data +61 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +62 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +78 +ITEM 8. +Financial Statements and Supplementary Data +78 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +79 +ITEM 9A. +Controls and Procedures +79 +ITEM 9B. +Other Information +80 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +81 +ITEM 11. +Executive Compensation +81 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +81 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +81 +ITEM 14. +Principal Accountant Fees and Services +81 +PART IV +ITEM 15. +Exhibits and Financial Statement Schedules +82 +ITEM 16. +Form 10-K Summary +82 +Table of Contents +This Report contains certain “forward-looking statements,” within the meaning of the Federal +securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business +transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include +words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or +results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to market and sell products, whether through our internal, direct sales force or third parties; ability to manufacture +products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for +existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (“FDA”) or other +regulators; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; ability to meet +increased demand for the Company’s products; impact of significant customer concentration in the genomics business; impact of increased reliance on U.S. government contracts; failure of distributors or other customers to meet purchase +forecasts, historic purchase levels or minimum purchase requirements for our products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives +and continue to increase its revenues, including the ability to expand international sales; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology +changes; impact of negative economic conditions; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market +acceptance of oral fluid testing, collection or other products; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for +Disease Control and Prevention (“CDC”) or other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply +sources for critical products and components; availability of related products produced by third parties or products required for use of our products; ability to maintain sustained profitability; ability to utilize net operating loss carry forwards +or other deferred tax assets; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; +availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact +of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to meet financial covenants in credit agreements; ability to attract and +retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain +needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A, entitled +“Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are +cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material +non-public information or other confidential commercial information. +1 +Table of Contents +Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy +against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References in this Annual Report to “we,” +“us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +2 +Table of Contents +PART I +ITEM 1. +Business. +Our business is made up of two principal segments. The first is our “OSUR” +business, which consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other +in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the +United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +The second segment is our “DNAG” or molecular collection systems business and is operated primarily through our subsidiary, DNA Genotek Inc. +(“DNAG”), a company based in Ottawa, Canada. In the DNAG business, we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical +genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an +all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only products into the microbiome and +tuberculosis markets and we offer our customers a suite of genomics and microbiome services called “GenoFIND TM ”, which range from package customization and study design optimization to +extraction, analysis and reporting services. We serve customers in many countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) +and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on September 29, 2000. Our principal offices are located at 220 East +First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information +about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and +filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be +incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and services and their regulatory and commercial status: +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care +qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral +fluid, finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +Registered in various other countries. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +World Health Organization (“WHO”) +pre-qualification. +Marketed +Registered in various foreign countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, +point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +CE Mark (European Union) approved for OTC use. +Marketed +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care +qualitative and oral fluid HIV-1/2 Self-Test that can be visually read in approximately 20 minutes. +Registered in various countries. +WHO pre-qualification. +Marketed +OraQuick ® HCV +A rapid, point-of-care +qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various +other countries. +Marketed +Registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +4 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid samples from cadavers. +Marketed +OraQuick ® Zika +A rapid point-of-care +qualitative test for Zika antibodies that can be read in approximately 20 minutes. +Under development. +Not Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 +infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved +laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® • DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® • DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® • RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® • DX +All-in-one system for +the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +ORAcollect ® • DNA +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various foreign countries. +Marketed +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +5 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +Performagene +All-in-one non-invasive swab kit for the collection, +stablization and transportation of animal DNA samples. +Animal research use only. +Marketed +OMNIgene ® • +GUT +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in +stool samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving tuberculosis bacteria in sputum +samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +OMNIgene ® •VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +Hemagene ® +Reagent to stabilize high molecular weight DNA in buffy coat samples at ambient temperature +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +GenoFIND TM +End-to-end services for genomics and microbiome analysis +Provided by CLIA and College of American Pathologists (“CAP”) certified lab. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using +fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected +Forensic use only. +Marketed +6 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines +amphetamines, and THC. +Cryosurgical Systems - Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, +marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types +of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts and skin tags, sold in +various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +Marketed +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® +and POINTTS ® names and for skin tags under CryoTag name. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk assessment, substance +abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use +of our OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid +HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous +flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be +tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution +then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an +initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® +name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received +PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is +available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral +fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations +and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is +7 +Table of Contents +registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. +We have also received WHO pre-qualification for our export only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our +OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark for the OraQuick ® In-Home HIV test, although this product is not currently sold in the European Union. The In-Home test is performed +in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +The OraQuick ® HIV +Self-Test has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test but is sold into certain foreign countries at a lower +cost to meet the needs of those markets. We are working with Population Services International (“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from several African countries to deploy our +self-test through the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. The OraQuick ® Self-Test has labeling and instructions +specifically tailored for the African marketplace. The purpose of the STAR project is to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public +health impact of self-testing will be. Our OraQuick ® Self-Test was chosen by PSI because of its quality, +ease-of-use and oral fluid option. This product has received WHO pre-qualification and is eligible for procurement by purchasing +entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C virus, or HCV, in a variety of sample types. The +OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood +specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole +blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the OraQuick ® +technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and capable of testing for Ebola infection (including treatment centers +and public health clinics) on finger-stick and venous whole blood samples collected from live patients, as well as oral fluid specimens collected from cadavers. The WHO has also issued an Emergency Use Assessment and Listing for this product with +respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® Rapid Flu A&B test is an FDA 510(k) cleared rapid qualitative test for the +detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal +8 +Table of Contents +swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as +ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. PBM has also obtained a CLIA waiver for this test for use with nasal and +nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests +for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two +to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for +detecting HIV-1 infection and other analytes. +The +OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the +detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with either our oral fluid Western blot HIV-1 confirmatory test (described below) or a blood based nucleic acid +test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Tuberculosis (“TB”) Products +OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable +cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily mixing and quality control. We believe OMNIGENE ® • SPUTUM +can improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product is being offered to TB laboratories for evaluation. +The OMNIgene ® • SPUTUM product is CE marked and is gaining greater interest for tuberculosis +testing. Healthcare providers from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor +agencies and diagnostic test developers, have begun their product evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing +much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +We sell a number of genomic products that provide all-in-one systems +for the collection, stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to +collect DNA from human saliva. These products are currently sold to thousands of academic, research and commercial customers in many countries worldwide. +9 +Table of Contents +Our molecular collection products are available in several different configurations and contain proprietary +chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability +for self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. +When the container is closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method +yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We also market several microbiome collection products designed to collect, stabilize and transport the microbial profile from multiple sample types. Unlike +genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and preserves +(“snapshots”) the microbiome after collection, until analysis is required. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality +microbial DNA from feces or stool samples for gut microbiome profiling for use in clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and +reliable bacterial profile for weeks at room temperature. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We have also begun marketing +other microbiome collection kits for DNA or RNA collected from the vagina and oral cavity. +We believe these products provide significant advantages over +competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Our molecular business also offers customers our GenoFIND TM services, a suite of genomic and microbiome +services that range from package customization and study design optimization to extraction, analysis and reporting services. We believe our GenoFIND TM offering will become an increasingly valuable +tool for meeting the needs of our molecular customers. +Our molecular collection products historically have been sold primarily as Class I medical +devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® •DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our +ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® •DNA, +ORAcollect ® and OMNIgene ® •GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold under the name +Intercept ® , and is used to collect oral mucosal transudate or OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National +Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and +for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our +Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +10 +Table of Contents +We believe that the Intercept ® device has several +advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its +non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with +greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs +and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection device, which we are +marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original +Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample +required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently +being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an +agreement with Thermo Fisher Scientific (“Thermo Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost +alternative to liquid nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol +canister. When released, these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type +of lesion) creating localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of +benign skin lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product on a private label basis for resale by one of our physician +office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS +tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser +(“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private +label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell +immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed +under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, +along with the reagents. The result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety +of commercially available laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are +also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on +commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third +11 +Table of Contents +parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or +chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed +internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We previously entered into an agreement with Thermo Fisher under which Thermo Fisher would develop and supply up to 12 fully-automated high-throughput oral +fluid drug assays for use with our Intercept i2 ® device. Under this agreement, we are currently selling a NIDA-5 panel of assays supplied by +Thermo Fisher in the U.S. forensic market. The parties are discussing certain changes to this agreement and assessing their ability to complete development of several additional assays and pursue FDA 510(k) clearance, CE marking and other regulatory +approvals of the Intercept i2 ® device for use with a 12-assay panel. Subject to these further discussions with Thermo Fisher, we believe the +offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow +us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 +confirmatory test that received premarket approval from the FDA in 1996. This test uses the original specimen collected with the OraSure ® oral fluid collection device to confirm positive +results of initial oral fluid HIV-1 EIA screening tests. After re-evaluating the market demand for this product, we decided to stop manufacturing our western blot HIV-1 confirmatory test in the summer of 2017. We believe existing inventory levels of this product will be exhausted in the first quarter of 2018, after which we will no longer sell this product. We are providing +support to assist customers in seeking appropriate confirmatory testing services for positive results from the use of our OraQuick ® collection device. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a +point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of +ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva +and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the +result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Infectious Disease +One recent area of focus +for product development has been our OraQuick ® Ebola rapid antigen test. In July 2015, we received an Emergency Use Authorization or EUA for our Ebola test from the FDA. This authorization +allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the +Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live patients. +In June 2015, we +entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The +three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised an +option to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola test. +12 +Table of Contents +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. +The WHO has issued an Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the +product, particularly in Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in the future. +Our recent product development +efforts have also been focused on addressing global concerns regarding the Zika virus. As a result, we have been developing a rapid Zika antibody test on our OraQuick ® platform. This virus is believed to be spread primarily through infected mosquitoes and has been linked as a possible cause of microcephaly in newborn babies whose mothers are infected. There has also +been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. +In August 2016, we entered into a contract with +BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of +$7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and certain clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in +additional funding for our rapid Zika test. +Molecular Collections +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on +extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for RNA collection and stabilization. On the microbiome front, we continue to +focus research and development work on collecting and stabilizing microbial DNA and RNA from multiple sample types including gut, skin, and saliva. We are also evolving the physical design and features of our products to further enable high +throughput processing through improved interoperability with automated platforms. +Research and Development +In 2017, our research and development activities focused primarily on development of our new rapid Ebola and Zika tests, an improvement to our rapid HIV test, +expanded molecular collection product offerings for the microbiome and genomics markets, our next generation Intercept i2 ® collection device, and clinical and technical support for our +existing products, with significant focus in tuberculosis market support. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +Research and development expenses were $13.4 million in 2017, $9.8 million in 2016, and $11.7 million in 2015. These expenses include our costs +associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy +is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales +in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United +States were $121.5 million, $99.8 million, and $96.5 million in 2017, 2016 and 2015 respectively. Consolidated net revenues attributable to international customers amounted to $45.6 million, $28.4 million, and +$23.2 million, or 27%, 22% and 19% of our total revenues, in 2017, 2016 and 2015, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our +consolidated financial statements included elsewhere in this Annual Report. +13 +Table of Contents +Infectious Disease Testing - Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody +test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and +universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of +encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to +retail clinics operated by pharmacies. In addition, we distribute our OraQuick ® HIV test in certain other foreign countries. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +A major focus for our HCV business has been, and will continue to be, to market our test to foreign countries that intend to implement broad scale testing or +country-wide HCV elimination programs. +We currently sell our OraQuick ® Ebola test under an EUA +and our only customer to date has been the CDC, which has purchased the product for field testing in Africa. There were minimal Ebola sales in 2017. Our ability to expand sales of this test to other customers will likely depend on the timing and +extent of future outbreaks of the disease, the availability of government or other funding and whether we are able to obtain FDA 510(k) clearance and pre-qualification with the WHO for our product. +We market the OraSure ® oral fluid collection device for HIV-1 +testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged +OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the +international public health market. +We have distribution rights to an FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under +our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product +into the U.S. hospital and public health markets. +We have also been working to commercialize the +OMNIgene ® • SPUTUM and +PrepIT ® • MAX products. TB is a major global health issue, with long established relationships among public health agencies, NGO’s, and suppliers. We have a focused sales and market +development team working with these key players to have our products evaluated and adopted where possible. +Infectious Disease Testing - OTC +We sell our OraQuick ® In-Home test in the U.S. retail or +consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase on-line through certain +retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. +To support individuals that +purchase and use our test, we offer toll-free customer support on a 24/7, 365-day per year basis. This service provides consumers with access to trained representatives who can answer questions about HIV/AIDS +and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling our OraQuick ® HIV Self-Test to PSI (Population Services International) for +use in a self-testing pilot program called the HIV Self-Testing in Africa, or STAR, project. Under Phase I of the project, +14 +Table of Contents +750,000 OraQuick ® HIV self-tests were sold to PSI for use in three African countries, Malawi, Zambia and Zimbabwe. More recently, we were +selected to participate in Phase II of the project under which approximately 4 million HIV self-tests are expected to be deployed over a two-year period. We believe that we will supply the vast majority +of tests under this phase of the project. +In June 2017, we entered into a charitable support agreement with the Bill & Melinda Gates Foundation +(“Gates Foundation”) that will enable us to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates +Foundation. The funding will consist of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement has a four-year term and will enable non-governmental +organizations in the eligible countries that receive funding from government or public sector agencies and donors to access our HIV self-test at reduced pricing. The funding from the Gates Foundation will be in an aggregate amount not to exceed +$20.0 million over the four-year term or $6.0 million each year of the agreement. +In July 2017, our OraQuick ® HIV Self-Test was prequalified by the WHO. WHO prequalification aims to ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to +optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV self-test pilots and programs to access international funding to purchase our test. +Molecular Collection Systems +DNAG sells its products +directly to its customers, primarily through its own internal sales force. In some countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant +majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business +opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to +commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. +DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded +its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. DNAG’s primary product offering, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG +is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in +ease-of-collection, stabilization and transport of this challenging sample type. +Substance Abuse Testing +Our substance abuse testing +products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and +associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and +internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid +laboratory testing and specimen shipping costs included. +15 +Table of Contents +The criminal justice market in the United States for our substance abuse testing products consists of a wide +variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and +community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold +into the criminal justice and drug treatment markets. Subject to our further discussions with Thermo Fisher, we plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the +NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) +cleared drug tests. We expect that the 510(k) cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United +States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety +sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and +return-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the +product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ +representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than +20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our +distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We sell our product in +the U.K. through another distributor, Appia, under the CryoTag tradename, for the removal of skin tags. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada and for the removal of warts in the U.S. +Insurance Risk Assessment +We currently market the +OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: +HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance +risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our +OraSure ® device that initially test positive for HIV-1. +16 +Table of Contents +There exists a wide range of policy limits where our +OraSure ® product is being used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection +with life insurance policies having face amounts of up to $250,000, with some customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not +test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified +Issues” policy, where lab testing is no longer required and instead the applicant completes a questionnaire about personal behaviors. +We also sell +our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several +different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product revenues (dollars in thousands). +For the years ended December 31, +2017 +2016 +2015 +Oragene ® collection systems +$ +71,610 +$ +31,078 +$ +29,385 +OraQuick ® HIV +35,149 +33,068 +34,358 +OraQuick ® HCV +25,409 +14,066 +11,386 +Cryosurgical systems +12,279 +13,234 +11,920 +One of our customers accounted for approximately 25% of our net consolidated revenues in 2017. Another customer accounted for +approximately 15% and 12% of our net consolidated revenues in 2016 and 2015, respectively. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, manufacture and sale of +diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices +that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues consist primarily of product sold into +the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG revenues consist of product sold into the +academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external customers, income and total assets, please see the +sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the consolidated financial statements, included elsewhere in +this Annual Report on Form 10-K. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, +OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are +all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +17 +Table of Contents +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of +one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the +OraQuick ® HIV product lines and the HCV antigens used in the OraQuick ® HCV test only from a limited number of sources. If for any +reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other +critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected +products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of +interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and supplied by a third party, Princeton BioMeditech. +There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product and our OTC cryosurgical products are assembled by a U.S. vendor with +certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event that our current +suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract +manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also +purchased from third parties, including one critical component that is purchased from a sole source supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2017, we had +377 full-time employees (including 133 employees at our subsidiary, DNAG). Of this total, there were 131 in sales, marketing and client services; 43 in research and development; 140 in operations, manufacturing, quality control, information systems, +purchasing and shipping; 33 in quality assurance and regulatory affairs; and 30 in administration and finance. This compares to 325 employees as of December 31, 2016. Our employees are not currently represented by a collective bargaining +agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +18 +Table of Contents +Important competitive factors for our products include price, quality, performance, ease of use, customer +service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests +and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic +products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be +characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory +levels, obtaining better performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new +testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more +effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for +these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the +number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV +testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. +One of our competitors has received FDA approval and a CLIA waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +19 +Table of Contents +Our competitors in the domestic infectious disease testing market include medical diagnostic companies and +specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and degradation of the +price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete +against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In +addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and +HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in +the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The OraQuick ® HIV Self-Test that we sell in certain international markets +is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our +OraQuick ® Ebola test includes government and commercially-developed laboratory and point-of-care molecular +tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both whole blood samples from living patients and oral fluid +samples from cadavers. +The OraSure QuickFlu ® +test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the +prices charged for the Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other +products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® product is also facing increasing competition +from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and +stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM product is unique +and has no direct competition in terms of a comparable product. The primary competition for this product is the incumbent methodologies that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, our Intercept ® drug testing systems competes with +laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may +develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing +products in unregulated settings in the United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +20 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these +laboratories have typically had to rely on radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet +the laboratories’ sensitivity needs, run on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. +We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially over a number of years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be +produced at a cost lower than the price typically paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received +U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially +lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical +product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and +Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other +cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our +research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets +and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing +opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have five United States patents +and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, +containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from March 2018 to December 2026. We +have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United +States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire +from March to July 2019 and the fifth in July 2028. +21 +Table of Contents +We hold, through our subsidiary, DNAG, eighteen United States patents and numerous foreign patents issued +for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2019 through March 2034. +We have three United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our +cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to February 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or +consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to +third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of +services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as +currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ? , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are +owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. +Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The +issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such +litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and comparable +regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, +distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale of our +products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in +the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after +approval or clearance, failure to comply with the FDA’s requirements +22 +Table of Contents +can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our +products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. +There are several mechanisms by which regulated devices can be placed on the market in the United States. Some products may qualify for clearance under +Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is +substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified by the FDA; +or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if +different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the +submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. An applicant must submit a 510(k) +application at least 90 days before commercial distribution of the affected product commences. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually +takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify +for the 510(k) procedure, either because it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de novo classification +or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists. +Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined to be high risk and must +demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including +the results of preclinical and clinical studies, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, +the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an +independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on +the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, +which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has +submitted false or misleading information in any application or notification, the FDA may refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive +such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of +operations. +23 +Table of Contents +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement +may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for +example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could +significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of +the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These +trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study +meets the requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant +risk medical device studies. If a full IDE is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is +appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does +not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the +continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication +or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require +submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or +may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or +other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these +purposes, although other state and federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through Emergency Use +Authorization, or EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the +emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral +pathogens that have the potential to affect public health. +Most devices distributed in the United States must comply with the FDA’s Quality System +Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing +as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and postmarket surveillance to +ensure full compliance. +Companies are also subject to other post-market and general requirements, including product listing and establishment +regulations, which help facilitate FDA inspections and other regulatory action, post-market +24 +Table of Contents +surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Device +reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction +of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market +requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may +constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, +product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other +postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter primarily focused on +DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. Specifically, the warning letter indicated the need for additional documentation regarding +design and development activities for DNAG’s products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • DX collection +device. In addition, the warning letter requested additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter +further noted that DNAG does not currently have in place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG submitted a formal response to the FDA to address the issues referenced in the warning letter and the warning letter was cleared in August 2017. In +addition, DNAG received 510(k) clearance of its ORAcollect ® device on April 18, 2016. +The +Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment +of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be +waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for +our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test +and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products that may not have been able to +use them without complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in +the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell +products. +Advertising and Promotion +Advertising and +promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, +25 +Table of Contents +including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only +market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement +laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training +constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a +warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including +exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from +the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or +cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government +(“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in +compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the +FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in +foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from international public health agencies, such as the World +Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. +governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International +Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in +the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through +production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive +(“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are +accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO +certification creates a rebuttable presumption that the product satisfies the applicable +26 +Table of Contents +requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our +products, without which they may not be placed on the market in the EU. +We have completed the applicable conformity assessment procedures and obtained +the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV +test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as +dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of +medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. +We +have obtained WHO pre-qualification for our OraQuick ® HIV Self Test and OraQuick ® HCV test and +we will likely seek WHO pre-qualification or endorsement for certain other products sold into international markets. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal +Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental +healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as +civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties +Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of +Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, +restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state +laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of +financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil +sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and +application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government +27 +Table of Contents +authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and +requiring the disclosure by medical device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal +reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to +submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care +Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and +federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party +educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain or retain +business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to any +foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and will +continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving +bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will +be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our +current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge +and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or +RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s +Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future +environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable +environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing +discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +28 +Table of Contents +ITEM 1A. +Risk Factors +You should carefully consider the risks and uncertainties described below, together +with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties +not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Regulatory Risks +The Need to Obtain +Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products are subject +to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. +The process of obtaining required approvals, clearances or premarket authorizations can involve lengthy and detailed laboratory testing, human clinical +trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances and other premarket authorizations can require the submission of a large amount of clinical data which can be expensive and may require significant +time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory authority does not +guarantee that an authorization to market or import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, or other premarket authorization that may include significant +restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in +receipt or failure to receive such approvals, clearances or other premarket authorization could have a material adverse effect on our business, financial condition and results of operations. +Regulated devices must also meet ongoing FDA requirements after an initial pre-market authorization is received. These +requirements include manufacturing quality control and quality assurance registration and listing, adverse event and other reporting and labeling, promotion and advertising requirements. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential requirements of the +IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there +can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more +of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our +distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. We may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable our customers to access interested funding sources for our products. We may have difficulty obtaining such +authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain +restrictions that limit our ability to market and sell our products in the relevant country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product +registrations, thereby interrupting our ability to sell those products in the affected markets. +29 +Table of Contents +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale +of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and +foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion +and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO +standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators +will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product +clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these +activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of +the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning +letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of +product registrations, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their +operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for clinical diagnostic use +and they are labeled “For Research Use Only”, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If +regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale +of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on +our business. +Our Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory +requirements, but the regulations regarding the manufacture and sale of our products, the Quality System Regulation (“QSR”) and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated +regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory +authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion +of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay +30 +Table of Contents +or make it more difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is +determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and until a further regulatory approval or authorization is obtained. We cannot +predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Our Inability to Manufacture +Products in Accordance With Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The +materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations +and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human +errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not +perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable +specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our +revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs +and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our +ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard +control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which we advertise our products. Compliance with these laws or any new or changed laws regulating our business could +result in substantial costs. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature +and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely +affected. +Failure To Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +The Company believes it is neither a covered entity nor a business associate of a covered entity and is not responsible for complying with the Health Insurance +Portability and Accountability Act of 1996, as amended (“HIPAA”). However, the Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information +and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If we do not +comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and +state laws that protect the privacy and security of consumers’ personal information, we may be +31 +Table of Contents +subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. For example, we could incur damages under state laws pursuant to +an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Compliance With Regulations Governing +Public Company Corporate Governance and Reporting is Complex and Expensive. +Many laws and regulations impose obligations on public companies, and +these obligations have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. Examples include the Sarbanes-Oxley Act of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street +Reform and Consumer Protection Act, the SEC’s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”), and the International Financial +Reporting Standards conversion requirements. Our implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional +accounting and legal costs. We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and +regulations are also subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could +result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Although we are committed to maintaining high standards of corporate governance and public +disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against us, which may adversely affect our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In +the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs +are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by FDA under the agency’s medical +device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In +mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On +January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a +final version of the LDT draft guidance documents. We cannot predict what policies will be adopted with respect to regulating LDTs. +Our subsidiary, DNAG, +sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve +genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDT’s and reduce demand for DNAG’s products and adversely impact our revenues. +Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could Affect Our Molecular Collection Systems Business. +The adoption of genetic testing is occurring within the broader context of a myriad of decisions related to genetic patenting and genotyping. Issues +associated with regulatory requirements, health insurance, data access and +32 +Table of Contents +privacy, intellectual property protection, national and international legislative initiatives and other variables impact the widespread adoption of genetic testing or specific segments or tests +within the genetic testing market. These developments could impact sales of our molecular collection systems products. +Federal and State Laws +Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various +federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements +that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare +professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing +requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and +could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business +practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +Our International Sales Create Potential Exposure Under Anti-Corruption Laws . +In 2017, approximately $45.6 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These international +activities subject us to the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by +business entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in countries known to experience corruption. Further international expansion may create increased exposure to such +practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even +though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and +similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we +might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of +operations and financial condition. +Risks Relating to Our Industry, Business and Strategy +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and become more +widely known, and as new products reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products enter the market, our products may become obsolete or a +competitor’s products may be more effective or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products that would render our +33 +Table of Contents +technologies and products obsolete or otherwise commercially unattractive, or introduce or commercialize such products, before we can do so. If we fail to convince our customers of the advantages +and economic value of our products or otherwise maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues. These developments could have a material +adverse effect on our business, financial condition and results of operations. +We also face competition from products that are sold at a lower price. +Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of +our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +Consolidation +in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant +amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate +purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. We may not be able to compete successfully in such a consolidated industry. We believe industry consolidation may continue as companies +attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful +Products. +In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new +or enhanced products. The research and development process generally takes a significant amount of time from product inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we +will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. +During 2017, 2016 and 2015 we incurred $13.4 million, $9.8 million and $11.7 million, respectively, in research and development expenses. We +expect to continue to incur significant costs related to our research and development activities. +Successful products require significant development and +investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional development efforts on +these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition approval. Even if a product is +developed and all applicable regulatory approvals are obtained, there may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources, such as new employees, +offices and manufacturing facilities. Moreover, we may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product. Other factors that could affect the success of our +efforts include our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will +be sold. +Accordingly, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a +greater number of successful new products, customers may decide not to purchase our products or may purchase and use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash +flow and business. +34 +Table of Contents +Failure to Successfully Commercialize Rapid Point–of-Care +Ebola and Zika Tests Could Adversely Affect Our Results of Operations and Business Prospects. +We have completed development of a rapid Ebola antigen +test using our OraQuick ® technology platform. In 2015 and 2016, under an EUA (Emergency Use Authorization) received from the FDA, we sold +$2.5 million of product to the CDC for field testing. There were minimal sales of this product during 2017. It is uncertain whether, and to what extent, we will be successful in obtaining additional or sustainable purchase commitments for our +Ebola test. Significant efforts are under way to develop a vaccine for the Ebola virus. If a vaccine is developed and widely deployed in the countries at risk for Ebola, the need for testing could be reduced as could the demand for our product. +There is also no assurance that our Ebola test will perform at a level necessary to receive all of the regulatory approvals required for its use. In addition, +it is possible that the FDA may revoke our EUA if it is determined that Ebola is no longer an emergency warranting that authorization. Failure to successfully obtain the required regulatory approvals or receive sustainable and significant purchase +commitments for our Ebola test could adversely affect our revenues and results of operations. +During 2016 and 2017, we have worked to complete +development of a rapid Zika antibody test, also using our OraQuick ® technology platform. Once development is complete and a prototype test is finalized, we intend to seek EUA for this product. +There is no assurance that we will be able to successfully complete development of our Zika test or that we will be able to obtain EUA or other necessary regulatory approvals required to commercialize this product. In addition, even if our +development efforts are successful and such approvals are received, there is no assurance that we will be able to obtain significant or sustainable purchase commitments for our Zika test. Our failure to successfully complete development, obtain the +required regulatory approvals or receive substantial purchase commitments for our Zika test could adversely affect our revenues and results of operations. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our financial +and strategic objectives, including our efforts to increase sales of our products or continue growing our business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our business +operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, +equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, +clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and scientific staff. Our +business may be harmed by the loss of a significant number of our executive officers or senior managers. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified +personnel among medical products and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for +advancement within our organization. We generally do not enter into employment agreements requiring our employees to work for us for any specified period. +35 +Table of Contents +If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we +may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic partners in a timely fashion, or to support research, development and clinical programs. +Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit our +ability to do so on acceptable terms. +If We Do Not Successfully Manage the Transition Associated with the Appointment of a New Chief Executive Officer +and Chief Financial Officer, Our Business May Be Harmed +In January 2018, we announced the retirement of our President and Chief Executive Officer, +which will become effective as of April 1, 2018, and the retirement of our Chief Financial Officer and Chief Operating Officer, which will become effective on or before June 30, 2018, with the exact date to be determined based on the +timing for our appointment of a new Chief Financial Officer. Any changes that may result from hiring a new Chief Executive Officer or Chief Financial Officer can create uncertainty and may negatively impact our ability to execute our business +strategy quickly and effectively. Management transition periods can be difficult as the new management gains detailed knowledge of our operations, and friction or further management changes or disruptions could result from changes in strategy and +management style. Until we fully integrate our new Chief Executive Officer and Chief Financial Officer, we may be unable to successfully manage and grow our business, and our results of operations and financial condition could suffer as a result. +Any changes in our organization as a result of this management transition may have a disruptive impact and could have a material adverse effect on our business, financial condition and results of operations. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses +and Adversely Affect Our Business. +We may pursue strategic acquisitions or investments as a way to expand our business. These activities, and their +impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new +businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +We may have difficulties in coordinating geographically separate organizations; +• +We may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• +An acquisition may result in a diversion of resources from our existing products, business and technologies; +36 +Table of Contents +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered +liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully +assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an +acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could +be adversely impacted if these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely +affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as +private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on +the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not +continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement +amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of +and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the +public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar +reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may +continue to reduce funding in an effort to lower overall federal healthcare spending. The U.S. government recently enacted legislation that eliminated what is known as the “individual mandate” under the Affordable Care Act and may enact +other changes in the future. The ultimate content and timing of any of these types of changes +37 +Table of Contents +in other healthcare reform legislation and the resulting impact on us are impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other +jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +The +Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many medical devices, which includes domestic sales of certain of our products. This new tax became effective in January 2013. However, the Consolidated +Appropriations Act of 2016, which was enacted late 2015, suspended the tax beginning January 1, 2016, and this suspension was recently extended through December 31, 2019. It is unclear whether and to what extent this tax will impact our +business, if and when the suspension is lifted. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention, or CDC, issue diagnostic testing guidelines or +recommendations, which can affect the usage of our HIV and HCV testing products. For example, domestic professional OraQuick ® HIV sales have decreased in recent years in part due to customer +migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that +affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the +degree to which our OraQuick ® rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and +whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. +These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research +Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick +ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the public health market which consists of +state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on +grants or funding provided by governmental agencies to run their operations including programs that use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such +agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, +government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic +conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Any reduction or delay in government funding as a result of legislative or regulatory changes or +other factors, could cause our customers to delay, reduce or forego purchases of our products. +Certain Changes by the Current Administration Could +Affect our Business. +The current Administration has promised to repeal and replace the Affordable Care Act, has expressed concerns with respect to +existing trade agreements such as the North American Free Trade Agreement, or NAFTA, and has indicated a desire to make other regulatory changes. Changes in regulatory or economic conditions or in the laws and policies governing foreign trade, +taxes, manufacturing, and development in the United States could impact +38 +Table of Contents +our business. For example, changes in the level of reimbursement or the availability of funding for health care could create uncertainty for our business and negatively impact our revenues and +results of operations. Similarly a substantial part of DNAG’s revenues represent sales of product from Canada into the United States. The imposition of tariffs or other changes in the trade relationship between Canada and the United States +could negatively impact DNAG’s performance. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis. +Developments Related To The U.K.’s Referendum On Membership in The E.U. Could Adversely Affect Us. +On June 23, 2016, the United Kingdom (“U.K.”) held a referendum and voted in favor of exiting the European Union, or E.U. This +“Brexit” referendum has created political and economic uncertainty, particularly in the U.K. and E.U. and this uncertainty may last for years. Until the precise terms and timing of the U.K.’s exit from the E.U. are determined, it will +be difficult to predict the impact of the Brexit referendum. Our business in the U.K., the E.U. and world-wide could be affected during this period of uncertainty, and perhaps longer, by the impact of the Brexit referendum. The U.K.’s decision +to exit the E.U. could cause volatility in global financial markets, including in global currency exchange rates, resulting in a slow-down in economic activity in the U.K., Europe or globally, negatively impact new trade agreements between the U.K +and other countries, including the United States, and result in significant regulatory changes and uncertainty. One or more of these events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and +negatively affect our revenues and results of operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the E.U. This in turn could result in additional changes and uncertainty, any or +all of which could negatively impact our business. +Increases in Demand for Our Products Could Require Us to Expend Considerable Resources or Harm Our +Customer Relationships if We are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products, we +and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could +adversely affect our earnings. Our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be +used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. +If we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our sales could be adversely affected. If we fail to +increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could +experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the demand. Some +raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term agreements involve +risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become +unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our +ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +39 +Table of Contents +Our inability to meet customer demand for our products could also harm our customer relationships and impair +our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information +Technology in Our Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, including for +management of inventory, purchase orders, invoices, shipping, interactions with our third-party logistics provider, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. Our ability to +effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the +reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with +transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to remediate any such +problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary +business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this information is critical to +our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +Cyber-attacks could result in unauthorized access to our computer systems or our third party IT service provider’s systems and, if successful, +misappropriate personal or confidential information. In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a +breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used +in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our +information technology networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. Even the most well protected IT networks, systems and facilities remain +potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be +detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims and proceedings, liability +under laws to protect privacy of personal information, and regulatory penalties, and could disrupt our operations, require significant management attention and resources to remedy any damages that result, and damage our reputation and customers +willingness to transact business with us, any of which could adversely affect our business. +40 +Table of Contents +Risks Relating to Collaborators +The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological antigens +and antibodies, nitrocellulose and certain other components required to make our OraQuick HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® +test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE +oral fluid drugs-of-abuse assays are obtained from third party suppliers. +We have contracted with a third party in Thailand for the assembly of OraQuick ® HIV device and the +OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of its products, +including its Oragene ® line of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a +sole source supplier. +If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make +changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be +difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our +products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply +sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us +from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on +our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on +distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +41 +Table of Contents +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we +will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on +satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and +Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a +technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for +development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships +could be risky to our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Our collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there +is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to +accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Actions of Third-Party Inventory Management and Logistics Providers Could Adversely Affect Our Ability to Supply Products to Our Customers. +We use third-party logistics providers to store and manage certain of our finished goods inventory and ship finished product to our customers. We have selected +highly reputable providers with extensive experience in the +42 +Table of Contents +logistics field for these services. However, in the event any of our providers lose or damage our products, experience a casualty or catastrophic event at a warehouse or otherwise fail to provide +safe storage and timely handling and delivery of our products, we could incur additional costs, experience difficulty in supplying our products to our customers or suffer damage to our reputation in the industry. These events could, in turn, reduce +our revenues and adversely affect our results of operations. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new +technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If +we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be +adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary +technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those +products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For +example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. +These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary +technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us +interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with +employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, employees, consultants and others who participate in the development of our products may breach their agreements +with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same +level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through +other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may +also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. +Moreover, +issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not +be able to successfully protect our rights to unpatented trade secrets and know-how. +43 +Table of Contents +Some of our employees, including scientific and management personnel, were previously employed by competing +companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. In addition, some of these +agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. +We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical +information derived from our collaboration with them. +To facilitate development and commercialization of a proprietary technology base, we may need to +obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product +development and commercialization efforts may be delayed or precluded. +We May Become Involved in Intellectual Property Disputes, Which Could Increase +our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies. +From time to time, we may seek to enforce our patents or +other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We, our +customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property +rights is prevalent and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a +significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we +incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s +proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, our involvement in litigation or other legal proceedings with respect to patents or other intellectual +property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive +damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights; +44 +Table of Contents +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop or acquire; +• +We may be required to alter our product, given the proprietary rights of others; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products. +We may indemnify some customers and strategic partners under our agreements with such parties if our products or activities have actually or allegedly +infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or customers, and we may have little or no ability to +determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is +asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign +court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent +office as well. Under the AIA, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds +that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial +condition, results of operations and growth prospects. +Risks Relating to Products, Marketing and Sales +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products. +We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and +learning to use a new product and are reluctant to switch thereafter. Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick ® HIV Self-Test , OraQuick ® Ebola test, OraQuick ® Zika test, OMNIgene ® • GUT and OMNIgene ® • SPUTUM product offerings, and other new products or technologies that may be developed or acquired. To achieve market acceptance, we and/or +our distributors will likely be required to undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these products. In addition, governmental funding +for the purchase of our products may be needed to help create market acceptance and expand the use of our products. +There may be limited evidence on +which to evaluate the market reaction to products that may be developed and our marketing efforts for new products may not be successful. It is also possible that governmental funding may be limited for new products, such as our OraQuick ® Ebola and Zika tests or the new sample collection and stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant market +acceptance and fill the market need that is perceived to exist on a timely basis, or at all. +If Acceptance and Adoption of Oral Fluid Testing and +Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing +products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the +45 +Table of Contents +workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing +applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be +no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +Our Customers May Resist Adoption of +Rapid Point-of-Care Diagnostic Testing. +Sales of our rapid point-of-care diagnostic products, such as our OraQuick ADVANCE ® +HIV-1/2, OraQuick ® HCV and OraQuick ® In-Home HIV tests, +are an important part of our business. Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their +own facilities or used by consumers at home without sending samples to central laboratories and can help ensure that test results are delivered to the individuals being tested. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other +healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical +reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our +products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid +point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on our future sales growth. +We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection Products. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test. In addition, the Oragene ® product line sold by our subsidiary, DNAG, competes +against other molecular collection products, such as blood collection kits and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may have a competitive +advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we have. We also face +competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors’ products take market share from our products through more effective +marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own +sample collection devices and use those devices in place of our products in order to reduce costs. +Customer Concentration and Purchase Seasonality +Creates Risk for Our Business. +We have experienced strong revenue growth during the past several years, primarily due to increasing sales of our +OraQuick ® rapid HCV test and our Oragene ® saliva DNA collection kit. The higher +sales of these products have been driven by increased demand by an increasing number of large customers. +Our molecular collections sales grew from +$32.2 million in 2016 to $75.1 million in 2017, largely as a result of increased orders of our Oragene ® collection systems by our largest customer serving the consumer genomics +market. In November 2017, we announced the execution of a multi-year purchase agreement for the sale of $144 million of our Oragene ® product to a large consumer genomics customer. +46 +Table of Contents +In our infectious disease business, sales of our HCV test rose from $14.1 million in 2016 to +$25.4 million in 2017. This growth was primarily attributable to sales under a previously announced $18.0 million contract with a foreign government in support of a country-wide HCV elimination program. This agreement was largely completed +in 2017 and this customer unexpectedly decided not to renew the agreement for an additional 12 months. +We expect that sales to the large consumer +genetics customer will continue to be a significant growth driver for our molecular business. It is also possible that other countries implementing broad based HCV testing or elimination programs could have a significant impact on our business. As a +result, certain parts of our business will likely continue to have a high customer concentration and depend disproportionately on a few large customers. In addition, demand from a large consumer genomics customer increased significantly in 2016 and +2017 due to special promotions towards the end of these years. To the extent that such a large customer fails to meet its purchase commitments, does not continue such promotional programs or otherwise does not continue to purchase our products, or +if we experience difficulty in meeting the high demand by these customers for our products, our revenues and results of operations could be adversely affected. +Our Inability to Carry Out Certain of Our Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain Our Business. +We have implemented in the past, and we intend to implement in the future, an aggressive sales and marketing plan to expand sales of our products. If we are +unable to successfully implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our business could suffer. +Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period +and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or +political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of +HCV testing, especially in the public health market. More recently, we have sold large quantities of our OraQuick ® HCV test to foreign governments and agencies for use in broad-based or +country-wide HCV elimination programs. There can be no assurance that purchases or funding from these agencies will occur or continue. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete +transactions at all or on a schedule and in an amount consistent with our objectives. +We May Face Product Liability Claims for Injuries Resulting From +the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our +technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against +us. Regardless of merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +47 +Table of Contents +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling cryosurgical products in the consumer or OTC +market in the United States and certain countries and we may expand OTC sales of these products into other countries. We also sell the OraQuick ® In-Home +HIV test in the United States OTC market, and we offer HIV self-tests to consumers internationally. We believe the sale of products in the OTC market increases our potential exposure to product liability and other claims. +The Insurance We Purchase to Cover Our Potential Business Risks May be Inadequate. +Although we believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, we cannot be sure +that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so at acceptable costs. +We Could Suffer Monetary Damages, Incur Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal +Proceedings. +We have been, and in the future may become, involved in various legal proceedings arising out of our businesses. These may include +commercial disputes, negligence claims or various other lawsuits arising in the ordinary course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries +allegedly suffered and can include claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or +otherwise have a material adverse effect on our sales, operations or financial performance. +Performance of Our Products May Affect Our Revenues, Stock +Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other +regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a +false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product +performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or +otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to +implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our +reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Ability To Expand International Sales +Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to substantially expand our product sales +internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large +self-testing +48 +Table of Contents +programs in certain African countries and elsewhere. While we believe international sales of our HIV self-test and other products represent attractive long-term opportunities with significant +growth potential, there is no guarantee that these opportunities will continue or increase. Among other factors, competition from other cheaper products and the uncertainties of available funding could negatively impact the success of these +opportunities. If international sales of these products do not continue or increase or if we are otherwise unable to expand international sales of our other products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing in order to +participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins will be +negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other +sources. If we are unable to obtain or continue this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $45.6 million or 27% of consolidated +net revenues in 2017, $28.4 million or 22% of consolidated net revenues in 2016 and $23.2 million or 19% of consolidated net revenues in 2015. In addition, our molecular collection systems business, which accounted for $75.1 million +or 45% of consolidated net revenues in 2017, is operated in Canada. +A number of factors could adversely affect the performance of our business and/or +cause us to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements (including compliance with applicable customs regulations) and the need for reimbursement approvals; +• +Trade protection measures, trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to obtain or maintain regulatory approvals or registrations for our products; +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Multiple jurisdictions and differing tax laws, as well as changes in those laws; +49 +Table of Contents +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our +OraQuick ® HIV-1/2 tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in +additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply +of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of +manufacturing our products in foreign countries. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our Risk and +Liability. +We are currently receiving funding from the U.S. government related to our +OraQuick ® Ebola rapid antigen test and our OraQuick ® Zika rapid antibody test and we sell some of our products to the federal +government. As a result of our U.S. government funding and product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts +typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a +U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our +business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the +imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could +be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the +U.S. government and private customers, which could materially and adversely affect our business and +50 +Table of Contents +results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow +rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively +affected if allegations of impropriety related to such contracts are made against us. +Our U.S. Government Contracts May Affect our Intellectual +Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, +and may in the future be funded, by the U.S. government, including our contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a +nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” +rights to use and allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application +of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be +reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States. +Our U.S. Government Contracts Are Subject to Future Funding and the Government’s Choice to Exercise Options, and May be Terminated for the +Government’s Convenience. +Our contracts with the U.S. government are subject to future funding and are subject to the right of the government to +terminate the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the government’s +convenience of our contracts could negatively affect our financial results. +For U.S. government contracts that include options, such as our BARDA +contracts, the U.S. government generally has the unilateral right not to exercise such options and may not exercise an option if the agency is not satisfied with our performance under the contract or does not receive funding to continue the program, +among other reasons. If levels of U.S. government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government +otherwise declines to exercise its options under its contracts with us, our business, revenue and operating results would suffer. +Our U.S. Government +Contracts Are Subject To Numerous Requirements in Order to be Reimbursed by the Federal Government. +Our current contracts with BARDA are cost plus +fixed fee contracts and potential future contracts with the U.S. government may also be structured this way. Under our cost plus fixed fee contracts, we are allowed to recover our approved costs plus a fixed fee. The total price on a cost plus fixed +fee contract is based primarily on allowable costs incurred, but generally is subject to contract funding limitations. U.S. government regulations require us to notify our customer of any cost overruns or underruns on a cost plus contract. If we +incur costs in excess of the funding limitation specified in the contract we may not be able to recover those cost overruns. +Our U.S. Government +Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can +audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review our performance on government contracts, +51 +Table of Contents +pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and policies and the adequacy of +our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or +unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on our +business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found +not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An +unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +Risks Relating to the +Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption Could Adversely Affect +Our Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers. +Volatile economic conditions may occur again or +continue in the future. These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our +business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a +result of economic conditions or other factors. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials +or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic +slowdown or the strength or sustainability of an economic recovery. +We Have Experienced Losses in the Recent Past and May Not Be Able to Maintain +Profitable Operations. +We experienced annual net losses during the five years prior to 2015. In addition, as of December 31, 2017, the Company +had an accumulated deficit of $119.5 million. Even though we achieved profitability since 2015, there can be no assurance that we will be able to sustain this profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• +Our ability to continue growing our molecular collection systems business; +• +Our ability to mitigate declining sales of our OraQuick ADVANCE ® +HIV-1/2 test in the United States and expand sales of our OraQuick ® HIV Self-Test internationally; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to successfully commercialize our OraQuick ® Ebola and Zika tests and other new products. +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +52 +Table of Contents +• +The degree to which our major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• +Failure to achieve our revenue growth targets; +• +Changes in distributor buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or against us. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the +expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short +of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, reduced governmental funding and other circumstances described elsewhere in this +Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can +vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk +losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our +quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to our gross +margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the +expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +Changes in Foreign Currency +Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our +international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values +of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general +economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and certain of its +international sales are denominated in local currencies, including the Euro, British Pound and Australian Dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of +53 +Table of Contents +reporting our consolidated financial results. Our expectation is that the DNAG business will continue to grow and our exposure to foreign currency exchange rates may be more significant than in +past years. +Exchange rate fluctuations may affect DNAG’s revenues and expenses and the translation of DNAG’s financial results into U.S. +dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of +operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have +not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge +against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Tax Matters, Including the +Changes in Corporate Tax Rates, Disagreements with Taxing Authorities and Imposition of New Taxes Could Impact our Results of Operations and Financial Condition. +We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives. On December 22, +2017, the U.S. Government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). This legislation makes broad and complex changes to the U.S. tax code, including but not limited to reducing the corporate +tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and accelerating first year expensing of certain capital expenditures. The Tax Act also +introduces new tax laws that may impact our taxable income in 2018, which will include, but not be limited to, a new provision designed to tax global intangible low taxed income (GILTI), limitations on the deductibility of certain executive +compensation, creating a base erosion anti-abuse tax (BEAT) and modifying or repealing many deductions and credits. The impact of many provisions of the Tax Act lack clarity and is subject to interpretation until additional Treasury Department +guidance is issued. The ultimate impacts of the Tax Act may differ from the Company’s estimates due to changes in the interpretations and assumptions made, as well as any forthcoming regulatory guidance. The Tax Act could also impact changes to +our valuation of deferred tax assets and liabilities. Any such change in valuation could have a material impact on our income tax expense and deferred tax balances. +We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. +Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such +additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position. +We also +need to comply with new, evolving or revised tax laws and regulations. The enactment of new or revised foreign or domestic tax regulations or increases in tariffs or changes in the application or interpretation of the Tax Act, could have an +adverse effect on our business or on our results of operations. +Our Revolving Credit Facility Contains Certain Financial Covenants Which, if Not +Satisfied, Could Limit Our Ability to Borrow in the Future or Result in the Acceleration of the Amounts Borrowed Under This Facility. +Our revolving +credit facility with a commercial bank contains various financial and other covenants with which we must comply on an ongoing or periodic basis. If we enter into new or additional credit facilities or loan agreements, we would expect those +arrangements would contain similar types of covenants. Although we do not expect to violate these covenants and obligations, if such a violation were to occur, our ability to borrow funds in the future may be adversely affected. To the extent we +borrow funds and a subsequent violation occurs, the outstanding debt under our credit facility or other arrangement could become immediately due and payable and our lender(s) could proceed against any collateral securing such indebtedness. +54 +Table of Contents +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products; +• +The costs and timing of the expansion of our manufacturing capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments; +If additional financing is needed, we may seek to raise +funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks or Natural Disasters May Adversely Affect Our Business. +Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely +affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase +and use our products and our suppliers’ ability to provide raw materials and finished products. +Although we have business interruption insurance, +our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including earthquakes, fires, floods and acts of +terrorism, may affect our manufacturing facilities and computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have +difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. Moreover, +we may incur incremental costs following an unforeseen event which could adversely affect our results of operation. +Risks Relating to +Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The +following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HIV, HCV and molecular collection systems products and our OraQuick ® In-Home HIV test and HIV self-test; +55 +Table of Contents +• +Future announcements concerning us and our products, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +Clinical results with respect to our products or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products; +• +Legislative developments and industry or competitive trends; +• +Biological or medical discoveries; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters. +In addition, the stock market in general has +experienced extreme price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the +operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a +company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our +management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It +More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could +negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the +individual circumstances of the sellers and other factors. +56 +Table of Contents +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or +more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more +of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 +sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Investor Confidence and Share Value May be Adversely Impacted if We and/or Our Independent Registered Public Accounting Firm Conclude That Our Internal +Control Over Financial Reporting is Not Effective. +As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring +us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our +independent registered public accounting firm must report on the effectiveness of these internal controls. +We expect that our internal controls will +continue to evolve as our business activities change. Although we seek to diligently and vigorously review our internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any control system, +regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over +financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business. +If, during any year, our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at +which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report that is +qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our +financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and do not expect to pay any +cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or +even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under +Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it +more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could +limit the price investors might be willing to pay in the future for shares of our Common Stock. +57 +Table of Contents +Future Sales of Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock +and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related +securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or +equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. +Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary corporate office and +manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for manufacturing activities. +Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis, including a 70,000 square foot warehouse in Bethlehem Township, Northampton +County, Pennsylvania. In addition, our subsidiary, DNAG, leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, research and development, and regulatory and quality +operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary +course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +58 +Table of Contents +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading +on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol OSUR. High and low sales prices reported by NASDAQ during the periods indicated are shown below. +Year ended December 31, +Year ended December 31, +2017 +2016 +High +Low +High +Low +First Quarter +$ +12.97 +$ +8.39 +$ +7.39 +$ +5.09 +Second Quarter +$ +17.96 +$ +12.03 +$ +7.99 +$ +5.81 +Third Quarter +$ +22.79 +$ +17.06 +$ +9.05 +$ +5.57 +Fourth Quarter +$ +23.01 +$ +12.86 +$ +9.53 +$ +7.09 +On February 20, 2018, there were 369 holders of record and approximately 16,426 holders in street name of our Common +Stock, and the closing price of our Common Stock was $17.86 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any +future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number +of shares +purchased +Average price +paid per +Share +Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar +value) of shares that +may yet be repurchased +under +the plans or +programs (1, 2) +October 1, 2017 - October 31, 2017 +254 +(3) +$ +19.92 +N/A +11,984,720 +November 1, 2017 - November 30, 2017 +— +— +— +11,984,720 +December 1, 2017 - December 31, 2017 +— +— +— +11,984,720 +254 +— +(1) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be +discontinued at any time. +(2) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no commitment to purchase any shares under this plan. +(3) +Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted shares, these shares were retired to satisfy minimum tax withholdings. +59 +Table of Contents +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 +of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of +1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ +Biotechnology Index for the period from December 31, 2012 through December 31, 2017. The graph assumes that $100 was invested on December 31, 2012 in the Company’s Common Stock and in each of the above-mentioned indices, and that +all dividends, if any, were reinvested. +The NASDAQ Composite Index was chosen because it is a broad index of companies whose equity securities are traded +on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns +for any other past or future period. +* +$100 invested on 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. +12/12 +12/13 +12/14 +12/15 +12/16 +12/17 +OraSure Technologies, Inc. +100.00 +87.60 +141.23 +89.69 +122.28 +262.67 +NASDAQ Composite +100.00 +141.63 +162.09 +173.33 +187.19 +242.29 +NASDAQ Biotechnology +100.00 +174.05 +230.33 +244.29 +194.95 +228.29 +60 +Table of Contents +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, “Securities Ownership of Certain +Beneficial Owners and Management and Related Stockholder Matters.” +ITEM 6. +Selected Consolidated Financial Data. +The following table sets forth selected consolidated financial +data of the Company. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 15 and the information set forth in Item 7, “Management’s Discussion and Analysis of +Financial Condition and Results of Operations.” +Selected Consolidated Financial Data +(In thousands, except per share data) +Years ended December 31, +2017 +2016 +2015 +2014 +2013 +Operating Results: +Net revenues +$ +167,064 +$ +128,198 +(2) +$ +119,719 +$ +106,464 +$ +98,940 +(4) +Costs and expenses +126,826 +(1) +107,933 +111,661 +111,266 +(3) +111,102 +(5) +Operating income (loss) +40,238 +20,265 +8,058 +(4,802 +) +(12,162 +) +Other income, net +794 +58 +774 +531 +200 +Income tax expense (benefit) +10,084 +603 +665 +343 +(772 +) +Net income (loss) +30,948 +19,720 +8,167 +(4,614 +) +(11,190 +) +Earnings (loss) per share +Basic +$ +0.52 +$ +0.35 +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +Diluted +$ +0.51 +$ +0.35 +$ +0.14 +$ +(0.08 +) +$ +(0.20 +) +Shares used in computing earnings (loss) per share +Basic +59,050 +55,615 +56,397 +55,949 +55,555 +Diluted +61,024 +56,513 +56,846 +55,949 +55,555 +Cash Flow: +Cash flows provided by operating activities +$ +28,156 +(1) +$ +24,598 +$ +15,773 +$ +7,526 +(3) +$ +8,385 +(5) +December 31, +2017 +2016 +2015 +2014 +2013 +Financial Position: +Cash, cash equivalents, and investments +$ +176,587 +$ +120,950 +$ +101,319 +$ +97,867 +$ +93,191 +Working capital +189,668 +139,106 +111,480 +104,752 +100,590 +Total assets +296,201 +207,935 +189,321 +189,633 +184,245 +Accumulated deficit +(119,510 +) +(150,458 +) +(170,178 +) +(178,345 +) +(173,731 +) +Stockholders’ equity +258,081 +185,850 +159,436 +158,701 +161,146 +(1) +Includes a $12.5 million gain associated with the settlement of our litigation with Ancestry.com DNA LLC and its contract manufacturer, which was recorded as a reduction of operating expenses in the indicated +period. +(2) +Includes an additional $5.4 million of exclusivity payments recognized in other revenues as a result of the early termination of our HCV co-promotion agreement with AbbVie, bringing total exclusivity payments recognized in 2016 to $18.9 million. +(3) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +(4) +Includes a non-recurring net favorable $2.5 million adjustment to account for a change in the Company’s revenue recognition policy related to its OraQuick ® In-Home HIV test. +(5) +Includes an $8.3 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +61 +Table of Contents +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation +Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and +elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on +the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The +following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. +Overview and Business Segments +Our business is comprised +of two segments: Our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products +including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to +collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. +Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These +products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and +commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +Our DNAG or molecular collection systems business is operated by our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada. +DNAG’s Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, +transportation and storage of DNA from human saliva. We also sell research use only sample collection products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services called “GenoFIND TM ”, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers worldwide, including many leading research universities +and hospitals. +Recent Developments +Litigation +Settlement +Effective February 6, 2017, we settled our patent infringement and breach of contract litigation against Ancestry.com DNA LLC +(“Ancestry”) and its contract manufacturer. Under a Settlement and License Agreement executed by the parties, Ancestry agreed to pay a settlement fee of $12.5 million which we received in the first quarter of 2017 and recorded as a +gain on litigation settlement in our consolidated statement of income. In addition, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to +the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside +of Ancestry’s business. The Settlement and License Agreement also provides us with a royalty-free, non-exclusive license to patents related to Ancestry’s existing saliva DNA collection kit. +62 +Table of Contents +Gates Foundation +In June 2017, we entered into a charitable support agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that enables us +to offer our OraQuick ® HIV self-test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates Foundation. The funding will consist of support payments +tied to the volume of product we sell and reimbursement of certain related costs. The agreement has a four-year term and will enable non-governmental organizations in the eligible countries that receive +funding from government or public sector agencies and donors to access our HIV self-test at reduced pricing. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20.0 million over the four-year term or +$6.0 million each year of the agreement. +WHO Prequalification +In July 2017, our OraQuick ® HIV self-test was prequalified by the World Health Organization +(“WHO”). WHO prequalification indicates that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy, in order to optimize use of health resources and improve health outcomes. WHO prequalification +enables governmental organizations implementing HIV self-test pilots and programs to access international funding to purchase our test. +Self-Testing +Project in Africa +In July 2017, our OraQuick ® HIV self-test was selected by UNITAID and +Population Services International (“PSI”) for use in Phase II of the HIV Self-Testing in Africa (“STAR”) project. Phase II of the project began late in 2017 and will continue over a +two-year period. Approximately 4.0 million HIV self-tests are expected to be deployed in Phase II. We believe that we will supply the vast majority of these tests. The OraQuick ® HIV self-test has been used in Phase I of the STAR Project, which represented the largest evaluation of HIV self-testing to date. Upon completion of Phase I of the project, 750,000 OraQuick ® HIV self-tests will have been distributed. +New Genomics Contract +In November 2017, we entered into a new $144.0 million agreement for the supply of our +Oragene ® • Dx devices to a leading consumer genomics customer. The agreement provides for the supply of product over several years with minimum annual purchases by the customer. +HCV Foreign Supply Contract +In 2016, we entered into a +contract to supply a foreign government with $18.0 million of product, primarily to support a nationwide HCV testing and treatment program. Through December 31, 2017, we have supplied $14.1 million of product to this customer under +the contract. The contract includes a renewal option under which the government may purchase up to 100% of the original quantities of product on the same terms and conditions contained in the contract. During the second half of 2017, we engaged in +renewal discussions with this customer, including with respect to specific quantities of product to be supplied. Subsequent to these discussions in late 2017, we were informed that the government decided to move to an all laboratory testing solution +and that another party had been selected to provide that solution based on cost. In light of these developments, it is unclear whether this government will fulfill the remaining purchase obligations under our existing contract. +Management Succession Plan +In January 2018, we announced +the retirement of our President and Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) and Chief Operating Officer. Stephen S. Tang, Ph.D., who currently serves as Chairman of the Board of Directors (the +“Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018. Dr. Tang will replace Douglas A. Michels, who will retire as President and CEO, +63 +Table of Contents +and as a member of the Board, on March 31, 2018. In addition, Ronald H. Spair, our CFO and Chief Operating Officer, will be retiring on or before June 30, 2018, with his exact +retirement date to be determined based on the timing for the Company’s appointment of a new CFO. +Current Consolidated Financial Results +During the year ended December 31, 2017, our consolidated net revenues were $167.1 million, compared to $128.2 million for the year ended +December 31, 2016. Net product revenues during the year ended December 31, 2017 increased 51% when compared to 2016, primarily due to higher sales of our molecular and OraQuick ® HCV +products and increased international sales of our OraQuick ® HIV self-test. Partially offsetting these increases were lower domestic sales of our professional OraQuick ® HIV product and lower domestic and OTC sales of our cryosurgical products. Other revenues for 2017 were $5.1 million compared to $21.3 million in 2016. Other revenues in 2017 included +$4.4 million recognized in connection with funding received from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority +(“BARDA”) related to our Ebola and Zika products and $689,000 of cost reimbursement under our charitable support agreement with the Gates Foundation. Other revenues in 2016 included $2.3 million of BARDA funding and $18.9 million +of exclusivity revenues recognized under our HCV co-promotion agreement with AbbVie, which terminated on December 31, 2016. +Our consolidated net income for the year ended December 31, 2017 was $31.0 million, or $0.51 per share on a fully-diluted basis, compared to +consolidated net income of $19.7 million, or $0.35 per share on a fully-diluted basis for the year ended December 31, 2016. Results for the current year include a pre-tax gain of $12.5 million +associated with the settlement of our litigation against Ancestry and its contract manufacturer in the first quarter of 2017. +Cash provided by operating +activities for the year ended December 31, 2017 was $28.2 million and included the $12.5 million litigation settlement noted above. Cash provided by operating activities during the year ended December 31, 2016 was +$24.6 million. As of December 31, 2017, we had $176.6 million in cash (including restricted cash), cash equivalents, and available-for-sale securities, +compared to $120.9 million at December 31, 2016. +Results of Operations +YEAR ENDED DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016 +CONSOLIDATED NET REVENUES +The table below +shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +2017 +2016 +% +Change +2017 +2016 +OSUR +$ +86,889 +$ +74,710 +16 +% +52 +% +58 +% +DNAG +75,099 +32,214 +133 +45 +25 +Net product revenues +161,988 +106,924 +51 +97 +83 +Other +5,076 +21,274 +(76 +) +3 +17 +Net revenues +$ +167,064 +$ +128,198 +30 +% +100 +% +100 +% +Consolidated net product revenues increased 51% to $162.0 million in 2017 from $106.9 million in 2016. Higher sales +of our molecular and OraQuick ® HCV products and higher international sales of our OraQuick ® HIV +self- +64 +Table of Contents +test were partially offset by lower domestic sales of our professional OraQuick ® HIV product and lower domestic and OTC sales of our +cryosurgical products. In 2017, we recognized $4.4 million as other revenues in connection with funding from BARDA related to our Ebola and Zika products and $689,000 of cost reimbursement under the Gates Foundation agreement. Other revenues in +2016 included $18.9 million in exclusivity payments received under our AbbVie HCV co-promotion agreement and $2.3 million in BARDA funding. Our co-promotion +agreement with AbbVie was terminated on December 31, 2016 and no further revenues were recognized under this agreement after that date. +Consolidated +net revenues from products sold to customers outside of the United States were $45.6 million and $28.4 million, or 27% and 22% of total net revenues, during the years ended December 31, 2017 and 2016, respectively. Because the +majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The table below shows +the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +Market +2017 +2016 +% +Change +2017 +2016 +Infectious disease testing +$ +61,951 +$ +48,408 +28 +% +67 +% +50 +% +Risk assessment testing +12,659 +13,068 +(3 +) +14 +14 +Cryosurgical systems +12,279 +13,234 +(7 +) +13 +14 +Net product revenues +86,889 +74,710 +16 +94 +78 +Other +5,076 +21,274 +(76 +) +6 +22 +Net revenues +$ +91,965 +$ +95,984 +(4 +) % +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market increased 28% to $61.9 million in 2017 from $48.4 million in 2016. This increase resulted from higher +sales of our OraQuick ® HCV product and higher international sales of our OraQuick ® HIV self-test, partially offset by a decline in +domestic sales of our professional OraQuick ® HIV product. +The table below shows a breakdown of +our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2017 and 2016. +Year Ended December 31, +Market +2017 +2016 +% +Change +Domestic HIV +$ +17,015 +$ +21,499 +(21 +)% +International HIV +11,301 +5,248 +115 +Domestic OTC HIV +6,832 +6,320 +8 +Net HIV revenues +35,148 +33,067 +6 +Domestic HCV +8,448 +7,436 +14 +International HCV +16,961 +6,630 +156 +Net HCV revenues +25,409 +14,066 +81 +Net OraQuick ® revenues +$ +60,557 +$ +47,133 +28 +% +65 +Table of Contents +Domestic OraQuick ® HIV sales decreased 21% to +$17.0 million for the year ended December 31, 2017 from $21.5 million for the year ended December 31, 2016. This reduction was primarily the result of competitive losses tied to pricing, the loss of sales to point-of-care HIV tests perceived to be more sensitive, and the CDC’s testing guidelines recommending the use of competing fourth generation automated HIV immunoassays +performed in a laboratory. We anticipate that future domestic sales of our professional HIV product will continue to be negatively affected by the CDC testing guidelines, changes in government funding, and continued product and price competition. +International sales of our OraQuick ® HIV products during 2017 rose 115% to $11.3 million +from $5.2 million in 2016. This increase was largely due to the continued shipment of product in support of an HIV self-testing program in Africa, and higher sales of our professional product into certain areas of Africa, Asia, and Latin +America, partially offset by a decline in sales in the Middle East and Europe. Funding under the charitable support agreement with the Gates Foundation began in the third quarter of 2017 and product revenues in 2017 included approximately +$1.0 million of support payments under that agreement. +Sales of our OraQuick ® In-Home HIV test in 2017 of $6.8 million increased 8% compared to $6.3 million in 2016, largely due to expansion of public health programs that use our In-Home test +and additional shelf placement of the product in the home diagnostic section of certain retail pharmacies. +Domestic OraQuick ® HCV sales increased 14% to $8.4 million in 2017 from $7.4 million in 2016 primarily due to higher sales to our U.S. public health customers in support of HCV testing program expansion, +higher sales to non-acute healthcare offices, and increased sales to hospitals. International OraQuick ® HCV sales increased 156% to $17.0 million +in 2017 from $6.6 million in 2016, largely due to continued product shipments to a foreign government to support a nationwide HCV testing and treatment program and increased sales in Asia and Africa, partially offset by the loss of a +multi-national humanitarian organization customer who switched to a competitive product due to pricing. As discussed above, we were recently notified that our supply contract with the foreign government will not be renewed and it is unclear +whether this government will fulfill the remaining purchase obligations under the existing contract. During 2017, we recorded $11.8 million in revenue from this contract. It is uncertain if we will record revenues of this magnitude in 2018, if +at all. +Risk Assessment Market +Sales to the risk +assessment market decreased 3% to $12.6 million for the year ended December 31, 2017 from $13.1 million for the year ended December 31, 2016, primarily as a result of a reduction of inventory maintained by one of our largest +customers and lab closings due to consolidations occurring in the laboratory service industry, partially offset by higher sales resulting from increased drug testing in the pain management and drug treatment markets. +Cryosurgical Systems Market +Sales of our cryosurgical +systems products (which includes both the physicians’ office and OTC markets) decreased 7% to $12.3 million in 2017 from $13.2 million in 2016. +66 +Table of Contents +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in thousands) +generated in each market during 2017 and 2016. +Year Ended December 31, +Market +2017 +2016 +% +Change +Domestic professional +$ +5,400 +$ +5,545 +(3 +)% +International professional +797 +771 +3 +Domestic OTC +1,230 +1,350 +(9 +) +International OTC +4,852 +5,568 +(13 +) +Net cryosurgical systems revenues +$ +12,279 +$ +13,234 +(7 +)% +Sales of our Histofreezer ® product to physicians’ offices in the +United States decreased 3% to $5.4 million in the 2017 from $5.5 million 2016, primarily due to timing of orders placed by our distributors and loss of sales due to competing private label products. These declines in sales were partially +offset by increased sales into new markets and additional business generated by our new mid-tier distributors. International sales of our Histofreezer ® +product increased 3% to $797,000 in 2017 from $771,000 in 2016. +Sales of our private-label wart removal product in the U.S. retail market decreased to +$1.2 million in 2017 from $1.4 million in 2016. Sales volume in 2016 was higher as a result of initial stocking orders for a new large pharmacy customer during that period. +Sales of our international OTC cryosurgical products during 2017 decreased 13% to $4.9 million compared to $5.6 million in 2016, largely due to +lower sales into Europe as a result of competitive pressures and lower sales in Latin America due to the economic instability of certain countries in that region. +Other revenues +Other revenues in 2017 decreased 76% to +$5.1 million from $21.3 million in 2016. Other revenues in 2016 included AbbVie exclusivity revenues of $18.9 million. There are no similar revenues in 2017 due to the termination of our AbbVie HCV +co-promotion agreement on December 31, 2016. Revenues related to funding from BARDA increased to $4.4 million in 2017 compared to $2.3 million in 2016. Revenues in 2017 also include $689,000 in +reimbursement of certain costs under our charitable support agreement with the Gates Foundation. No such reimbursement occurred in 2016. +DNAG Segment +Molecular +Collection Systems +Sales of our molecular collection systems products increased 133% to $75.1 million in 2017 from $32.2 million in 2016. +The table below shows a breakdown of our total net molecular collection systems revenues (dollars in thousands) generated in each market during 2017 and +2016. +Year Ended December 31, +Market +2017 +2016 +% +Change +Commercial genomics +$ +61,594 +$ +20,767 +197 +% +Academic genomics +10,017 +10,312 +(3 +) +Microbiome +3,488 +1,135 +207 +Net molecular collection systems revenues +$ +75,099 +$ +32,214 +133 +% +67 +Table of Contents +Sales of our Oragene ® product in the commercial +market rose 197% to $61.6 million in 2017 compared to $20.8 million in 2016, largely as a result of higher customer demand primarily from a large customer in the consumer genetics market. Sales of our Oragene ® product in the academic market decreased 3% to $10.0 million in 2017 compared to $10.3 million in 2016 largely due to the non-recurrence of a +large order which occurred in 2016. Microbiome sales increased 207% to $3.5 million in 2017 compared to $1.1 million in 2016 as interest in our microbiome product offering continues to grow with both new and existing customers. +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 59% for the year ended December 31, 2017 compared to 69% for the comparable period of 2016. Gross margin for 2017 decreased +primarily due to the absence of AbbVie exclusivity revenues, an increase in lower margin international product sales, and higher scrap and spoilage costs. +Consolidated operating income in 2017 was $40.2 million, a $19.9 million improvement from $20.3 million of operating income reported in 2016. +Operating income in 2017 benefited from increased product revenues, the Ancestry litigation settlement gain, and lower sales and marketing costs, partially offset by the loss of AbbVie exclusivity revenues recorded in the prior year and higher +research and development and general and administrative expenses in the current year. +OPERATING INCOME (LOSS) BY SEGMENT +OSUR Segment +OSUR’s gross +margin was 58% in 2017 compared to 69% in 2016. OSUR’s margin was negatively impacted in 2017 primarily by the absence of exclusivity revenues under our AbbVie agreement ($18.9 million was recorded in 2016 versus none in 2017), an increase +in lower margin international product sales, and an increase in scrap and spoilage costs. +Research and development expenses increased 50% to +$10.5 million in 2017 from $7.0 million in 2016, largely as a result of the inclusion in 2016 of a $1.4 million payment received to settle a claim against one of our raw material suppliers. This settlement was recorded as a reduction +in research and development expense in 2016. During 2017, research and development expenses also increased due to higher supply costs associated with the development of our Ebola and Zika products and increased staffing expenses. +Sales and marketing expenses decreased 11% to $18.9 million in 2017 from $21.3 million in 2016, primarily as a result of the termination of our +AbbVie HCV co-promotion agreement on December 31, 2016. During 2016, we incurred $1.1 million of detailing and co-promotion expenses associated with the AbbVie +agreement. No such costs were incurred for 2017. For the year ended December 31, 2017, we also experienced lower staffing costs, partially offset by higher external commissions payable to certain international distributors. +General and administrative expenses increased 16% to $26.1 million in 2016 from $22.6 million in 2016 due to higher staffing costs and an increase +in accrued bonuses as a result of Company’s strong performance. +All of the above contributed to OSUR’s operating loss of $2.7 million for +2017, which included non-cash charges of $3.2 million for depreciation and amortization and $6.4 million for stock-based compensation. +DNAG Segment +DNAG’s gross +margin was 61% in 2017 compared to 67% in 2016. The decline in gross margin was primarily due to an increase in lower margin sales in 2017 as compared to 2016. +68 +Table of Contents +Research and development expenses increased 4% to $2.8 million in 2017 from $2.7 million in 2016 +due to higher staffing costs. +Sales and marketing expenses increased 15% to $9.6 million in 2017 compared to $8.3 million in 2016 due to higher +staffing and commission expenses. +General and administrative expenses decreased 45% to $3.2 million in 2017 compared to $5.7 million in 2016, +largely due to lower legal costs as our lawsuit with Ancestry and its contract manufacturer was settled in the first quarter of 2017. +Operating expenses +in 2017 were offset by the $12.5 million pre-tax gain associated with the settlement of the Ancestry litigation. +All of the above contributed to DNAG’s operating income of $43.0 million for 2017, which included non-cash +charges of $3.2 million for depreciation and amortization and $543,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against OSUR’s total U.S. deferred tax asset is appropriate as the facts +and circumstances necessitating the allowance have not changed. For the year ended December 31, 2017, we recorded state income tax expense of $0 compared to $250,000 in the year ended December 31, 2016. Canadian income tax expense of +$10.1 million and $353,000 was recorded in 2017 and 2016, respectively. Canadian taxes in 2017 included the additional taxes due as a result of the $12.5 million Ancestry litigation settlement gain and DNAG’s increased pre-tax income. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation on multinational corporations. The impact of the Tax +Act on our current and future financial results is discussed in more detail in Note 8 of the Notes to the consolidated financial statements included herein. +YEAR ENDED DECEMBER 31, 2016 COMPARED TO DECEMBER 31, 2015 +CONSOLIDATED NET REVENUES +The table +below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +2016 +2015 +% +Change +2016 +2015 +OSUR +$ +74,710 +$ +74,534 +0 +% +58 +% +62 +% +DNAG +32,214 +29,924 +8 +25 +25 +Net product revenues +106,924 +104,458 +2 +83 +87 +Other +21,274 +15,261 +39 +17 +13 +Net revenues +$ +128,198 +$ +119,719 +7 +% +100 +% +100 +% +Consolidated net product revenues increased 2% to $106.9 million in 2016 from $104.5 million in 2015, primarily as a +result of higher international sales of our OraQuick ® HIV and HCV tests and higher sales of our molecular collection systems and cryosurgical system products. These increases were partially +offset by lower domestic sales of our OraQuick ® HIV test and lower sales of our Ebola product. Other revenues in 2016 +69 +Table of Contents +increased 39% to $21.3 million compared to $15.3 million during 2015, largely due to higher exclusivity revenue recognized under our HCV +co-promotion agreement with AbbVie. AbbVie revenues in 2016 included an additional $5.4 million recognized due to the early termination of the contract at the end of that year. +Consolidated net revenues derived from products sold to customers outside the U.S. were $28.4 million and $23.2 million, or 22% and 19% of total +consolidated net revenues during the years ended December 31, 2016 and 2015, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not +material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The table below shows +the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Year Ended December 31, +Dollars +Percentage of Total +Net Revenues +Market +2016 +2015 +% +Change +2016 +2015 +Infectious disease testing +$ +48,408 +$ +49,129 +(1 +)% +50 +% +55 +% +Risk assessment testing +13,068 +13,485 +(3 +) +14 +15 +Cryosurgical systems +13,234 +11,920 +11 +14 +13 +Net product revenues +74,710 +74,534 +0 +78 +83 +Other +21,274 +15,261 +39 +22 +17 +Net revenues +$ +95,984 +$ +89,795 +7 +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market decreased 1% to $48.4 million in 2016 from $49.1 million in 2015, primarily due to lower domestic +sales of our OraQuick ® HIV product and lower sales of our OraQuick ® Ebola and In-Home HIV +tests, partially offset by higher international sales of our OraQuick ® HIV and HCV tests. +The +table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2016 and 2015. +Year Ended December 31, +Market +2016 +2015 +% +Change +Domestic HIV +$ +21,499 +$ +24,956 +(14 +)% +International HIV +5,248 +2,410 +118 +Domestic OTC HIV +6,320 +6,992 +(10 +) +Net HIV revenues +33,067 +34,358 +(4 +) +Domestic HCV +7,436 +7,502 +(1 +) +International HCV +6,630 +3,884 +71 +Net HCV revenues +14,066 +11,386 +24 +Net OraQuick ® revenues +$ +47,133 +$ +45,744 +3 +% +Domestic OraQuick ® HIV sales decreased 14% to $21.5 million for +the year ended December 31, 2016 from $24.9 million for the year ended December 31, 2015. This decrease was primarily the result of the continued loss +70 +Table of Contents +of sales to competing fourth generation automated HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the Centers for Disease Control and Prevention +(“CDC”), the loss of sales to point-of-care HIV tests perceived to be more sensitive, reduced program funding, and the timing of orders placed by our +customers. International sales of our OraQuick ® HIV test in 2016 increased 118% to $5.2 million from $2.4 million in 2015. This increase was largely due to the shipment of product in +support of a new HIV self-testing program in Africa, new shipments into the Middle East, sales to a new distributor in Russia, and increased sales in Asia due to a new military testing project. +Sales of our OraQuick ® In-Home HIV test decreased 10% to +$6.3 million in 2016 from $7.0 million in 2015. This decline was primarily the result of a reduction in promotions run in 2016 as compared to 2015 and a fourth quarter 2015 sales increase immediately following a celebrity’s +announcement that he had tested positive for the HIV virus. A comparable event did not occur in 2016. The decline in sales was partially offset by the positive impact of a price increase implemented in the third quarter of 2015. +Domestic OraQuick ® HCV sales decreased 1% to $7.4 million in 2016 from $7.5 million in +2015, largely due to the inclusion in 2015 of a $1.3 million order for a U.S. government HCV testing program that did not recur in 2016, partially offset by the expansion of existing HCV testing programs and the addition of new programs in the +public health market. International OraQuick ® HCV sales increased 71% to $6.6 million in 2016 from $3.9 million in 2015, largely due the first shipments of $1.4 million of +product to a foreign government to support a nationwide HCV testing and treatment program, the expansion of our business in Asia, and increased sales in Africa. +Risk Assessment Market +Sales to the risk assessment +market decreased 3% to $13.1 million for the year ended December 31, 2016 from $13.5 million for the year ended December 31, 2015, primarily as a result of lower sales of our +OraSure ® oral fluid collection device into the domestic life insurance market. +Cryosurgical +Systems Market +Sales of our cryosurgical systems products (which includes both the physicians’ office and OTC markets) increased 11% to +$13.2 million in 2016 from $11.9 million in 2015. +The table below shows a breakdown of our total net cryosurgical systems revenues (dollars in +thousands) generated in each market during 2016 and 2015. +Year Ended December 31, +Market +2016 +2015 +% +Change +Domestic professional +$ +5,545 +$ +4,311 +29 +% +International professional +771 +916 +(16 +) +Domestic OTC +1,350 +390 +246 +International OTC +5,568 +6,303 +(12 +) +Net cryosurgical systems revenues +$ +13,234 +$ +11,920 +11 +% +Sales of our Histofreezer ® product to physicians’ offices in the +United States increased 29% to $5.5 million in 2016 from $4.3 million in 2015, primarily due to the recovery of business previously lost to competition from private label brands, the initiation of a distributor expansion strategy, and the +timing of orders by certain customers. International sales of Histofreezer ® decreased 16% to $771,000 in 2016 from $916,000 in the same period of the prior year, primarily due to lower sales +in Asia. +71 +Table of Contents +Sales of our domestic private-label OTC wart removal products in the U.S. retail market increased to +$1.4 million in 2016 from $390,000 in 2015, due to the launch of private-label products in two additional large pharmacy chains early in 2016. +Sales +of our international OTC cryosurgical products during 2016 decreased 12% to $5.6 million compared to $6.3 million in 2015, largely due to lower sales into Europe, partially offset by higher sales in Latin America. +Other revenues +Other revenues in 2016 increased 39% to +$21.3 million from $15.3 million in 2015. AbbVie exclusivity revenues increased to $18.9 million in 2016 from $13.5 million in 2015 due to the early termination of our co-promotion +agreement with AbbVie which we agreed to as of June 30, 2016. The agreement terminated on December 31, 2016, and as a result of the shortened term, an additional $5.4 million of associated deferred revenue which existed as of +June 30, 2016 was recognized into revenue over the remaining six months of 2016. Following the termination of our HCV co-promotion agreement with AbbVie on December 31, 2016, AbbVie has no further +financial obligations to us. Also included in other revenues for 2016 was $2.3 million in BARDA funding, a 30% increase from the $1.8 million in BARDA funding in 2015. This increase was due to new funding for our Zika product. +DNAG Segment +Molecular +Collection Systems +Net molecular collection systems revenues increased 8% to $32.2 million in 2016 from $29.9 million in 2015. +The table below shows a breakdown of our total net molecular collection systems revenues (dollars in thousands) generated in each market during 2016 and 2015. +Year Ended December 31, +Market +2016 +2015 +% +Change +Commercial genomics +$ +20,767 +$ +19,513 +6 +% +Academic genomics +10,312 +9,872 +4 +Microbiome +1,135 +539 +111 +Net molecular collection systems revenues +$ +32,214 +$ +29,924 +8 +% +Sales of our Oragene ® product in the commercial market increased 6% +to $20.8 million in 2016 compared to $19.5 million in 2015, primarily as a result of sales to new customers and ordering patterns of existing customers, partially offset by the loss of two U.S. customers that previously filed for +bankruptcy protection in 2015. These customers contributed approximately $2.9 million in sales during 2015. The Company has no unreserved collection exposure related to these two customers. Sales of our Oragene ® product in the academic market rose 4% to $10.3 million in 2016 compared to $9.8 million in 2015, due to the shipment of product to support a study on autism. Sales in 2016 also +included $1.1 million in sales of our gut microbiome product compared to $539,000 in the same period of 2015 as interest in our microbiome product offering continued to grow with both new and existing customers. +CONSOLIDATED OPERATING RESULTS +Consolidated gross margin was 69% for the year ended December 31, 2016 compared to 67% for the comparable period of 2015. Gross margin for 2016 increased +primarily due to the higher AbbVie exclusivity revenues. +72 +Table of Contents +Consolidated operating income in 2016 was $20.3 million, a $12.2 million increase from the +$8.1 million of operating income reported in 2015. Operating income in 2016 benefited as compared to the prior year from higher revenues, improved gross margins and lower sales and marketing and research and development costs, partially offset +by higher general and administrative expenses. +OPERATING INCOME BY SEGMENT +OSUR Segment +OSUR’s gross +margin was 69% in 2016 compared to 66% in 2015. OSUR’s margin in 2016 was positively impacted by the increase in other revenues and lower scrap and spoilage costs. +Research and development expenses decreased 21% to $7.0 million in 2016 from $8.9 million in 2015, largely as a result of a $1.4 million +payment received to settle a claim against one of our raw material suppliers. This settlement was recorded as a reduction in research and development expense. +Sales and marketing expenses decreased 20% to $21.3 million in 2016 from $26.6 million in 2015, primarily as a result of lower detailing and other +expenses associated with our OraQuick ® HCV co-promotion agreement with AbbVie, as well as lower staffing costs. +General and administrative expenses increased 12% to $22.6 million in 2015 from $20.1 million in 2015 due increased consulting, severance, and other +staffing-related costs. +All of the above contributed to OSUR’s operating income of $15.6 million for 2016, which included non-cash charges of $2.7 million for depreciation and amortization and $5.6 million for stock-based compensation. +DNAG Segment +DNAG’s gross +margin was 67% in 2016 compared to 70% in 2015. This decrease was attributable to a higher volume of lower margin sales experienced in 2016 when compared to 2015 coupled with the inclusion of severance costs in DNAG’s costs of goods sold in +2016. +Research and development expenses were $2.7 million in both 2016 and 2015. +Sales and marketing expenses decreased 1% to $8.3 million in 2016 compared to $8.4 million in 2015 due to lower bad debt expense. +General and administrative expenses increased 7% to $5.7 million in 2016 compared to $5.3 million in 2015, largely due to higher legal costs. +All of the above contributed to DNAG’s operating income of $4.6 million for 2016, which included non-cash +charges of $3.0 million for depreciation and amortization and $467,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and +circumstances necessitating the allowance have not changed. For the year ended December 31, 2016, state income tax expense of $250,000 was recorded compared to $0 in 2015. Canadian income tax expense of $353,000 and $665,000 was recorded in +2016 and 2015, respectively. +73 +Table of Contents +Liquidity and Capital Resources +December 31, +2017 +2016 +(In thousands) +Cash, cash equivalents and restricted cash +$ +72,869 +$ +109,790 +Available for sale securities +103,718 +11,160 +Working capital +189,668 +139,106 +Our cash, cash equivalents, restricted cash and +available-for-sale securities increased to $176.6 million at December 31, 2017 from $120.9 million at December 31, 2016. Our working capital +increased to $189.7 million at December 31, 2017 from $139.1 million at December 31, 2016. +During 2017, we generated +$28.2 million in cash from operating activities. Our net income of $31.0 million included non-cash charges for stock-based compensation expense of $6.9 million and depreciation and amortization +expense of $6.4 million, as well as non-cash benefits of $518,000. Additional sources of cash include increases in accounts payable of $5.2 million largely due to inventory purchases that were +invoiced at the end of the year, accrued expenses and other liabilities of $9.2 million largely due to an increase in Canadian income taxes payable and a higher year-end accrual for management incentive +bonuses. Uses of cash in operating activities during the year included an increase in accounts receivable of $22.1 million largely resulting from an increase in product orders placed during the fourth quarter of 2017, an increase in inventory +balances of $7.4 million related to higher raw material purchases for our HIV self-test and HCV products, and an increase in prepaid expenses and other assets of $384,000. +We used $96.3 million in investing activities in 2017 to purchase $161.3 million of investments and $4.3 million to acquire property and +equipment, partially offset by proceeds from the maturities and redemptions of investments of $69.3 million. +Net cash provided by financing +activities was $30.4 million in 2017, which resulted from $31.7 million in proceeds received from the exercise of stock options partially offset by $1.2 million used for the repurchase of common stock to satisfy withholding taxes +related to the vesting of restricted shares. +In September 30, 2016, we entered into a credit agreement (the “Credit Agreement”) with a +commercial bank, which was amended in December 2017. The Credit Agreement provides for revolving extensions of credit in an initial aggregate amount of up to $10.0 million (inclusive of a letter of credit subfacility of $2.5 million), with an +option to request, prior to the second anniversary of the closing date, that lenders, at their election, provide up to $5.0 million of additional revolving commitments. Obligations under the Credit Agreement are secured by a first priority +security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings outstanding under the Credit Agreement at December 31, 2017 or 2016. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest under the +Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement will be subject to an unused line +fee of 0.375% per annum on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as +of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2017 and 2016, we were in compliance with all applicable covenants under the Credit Agreement. +Our current balances of cash and cash equivalents and available-for-sale +securities and our available borrowing capacity are expected to be sufficient to fund our current operating and capital needs for the foreseeable future. +74 +Table of Contents +Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress +of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and +cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing +activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $43.7 million, or 25% of our $176.6 million in cash, cash +equivalents, restricted cash and available-for-sale securities, belongs to our Canadian subsidiary. Repatriation of such cash into the United States exceeding certain +levels could have adverse tax consequences. +Contractual Obligations and Commercial Commitments +The following sets forth our approximate aggregate obligations as of December 31, 2017 (in thousands) for future payments under contracts and other +contingent commitments, for the year 2018 and beyond: +Payments due by December 31, +Contractual +Obligations +Total +2018 +2019 +2020 +2021 +2022 +Thereafter +Operating leases 1 +$ +5,157 +$ +617 +$ +791 +$ +828 +$ +834 +$ +845 +$ +1,242 +Employment contracts 2 +2,059 +1,729 +330 +— +— +— +— +Purchase obligations 3 +15,028 +14,262 +383 +383 +— +— +— +Minimum commitments under contracts 4 +292 +292 +— +— +— +— +— +Total contractual obligations +$ +22,536 +$ +16,900 +$ +1,504 +$ +1,211 +$ +834 +$ +845 +$ +1,242 +1 +Represents payments required under our operating leases. See Note 11 of the Notes to the consolidated financial statements included herein. +2 +Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 11 of the Notes to the consolidated financial statements included herein. +3 +Represents payments required by non-cancellable purchase orders or supply agreements related to inventory, supplies, capital expenditures and other goods or services. The supply +agreements are cancellable within a specified number of days of written notice to the supplier. See Note 11 of the Notes to the consolidated financial statements included herein. +4 +Represents payments required pursuant to certain licensing agreements executed by the Company. These agreements are cancellable within a specified number of days after communication by the Company of its intent to +terminate. See Note 11 of the Notes to the consolidated financial statements included herein. +5 +Does not include any obligations under our revolving credit facility, which was undrawn as of December 31, 2017. See Note 7 of the Notes to the consolidated financial statements included herein. +Off-Balance Sheet Arrangements . We do not have any off-balance sheet +arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended. +Critical Accounting Policies and Estimates +This +Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of +America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial +statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our judgments and estimates, including those related to bad debts, customer sales +returns, inventories, intangible assets, income taxes, revenue recognition, +75 +Table of Contents +performance-based compensation, contingencies and litigation. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under +the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different +assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in +Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements +and the uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . We recognize product +revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. We do not +grant price protection or product return rights to our customers except for sales of our OraQuick ® In-Home HIV test in the retail market and for +warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +Our net revenues recorded on sales of the OraQuick ® +In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The allowance for +expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual rates and are +recorded as a reduction of gross revenue when recognized in our consolidated statements of income. +We record shipping and handling charges billed to our +customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. This agreement with AbbVie was terminated effective December 31, 2016. Accordingly, we did not +record any revenue from this co-promotion agreement during 2017. During 2016 and 2015, $18.9 million and $13.5 million, respectively, in exclusivity revenues were recognized and recorded as other +revenue in our consolidated statements of income. +On June 12, 2015, we were awarded a grant for up to $10.4 million in total funding from the +U.S. Department of Health and Human Services (“HHS”) Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® Ebola rapid antigen test. The three-year, multi-phased grant included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and +regulatory activities. In September 2015 and July 2017, BARDA exercised options to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola +test. Amounts related to this grant are recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2017, 2016 and 2015, $2.0 million, $1.7 million and +$1.8 million, respectively, were recognized in connection with this grant. +In August 2016, we were awarded a contract for up to $16.6 million +in total funding from BARDA related to our rapid Zika test. The six-year, multi-phased contract includes an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund +the evaluation of additional product enhancements and clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in additional funding for +76 +Table of Contents +our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are +incurred. During 2017 and 2016, $2.4 million and $616,000, respectively, were recognized in connection with this grant. +In June 2017, we entered +into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that will enable us to offer our OraQuick ® HIV self-test at an +affordable price in 50 developing countries with funding from the Gates Foundation. The funding will consist of support payments tied to volume of product sold by us and reimbursement of certain related costs. The funding from the Gates Foundation +will be in an aggregate amount not to exceed $20.0 million over the four-year term or $6.0 million each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a +component of product revenue. During 2017, $1.0 million of support payments were recognized in product revenue in connection with this agreement. Funding received in the form of reimbursement of certain related costs in the amount of $689,000 +was also recorded as other revenue in our consolidated statements of income. +Inventories . Our inventories are valued at the lower of cost or net +realizable value, with cost determined on a first-in first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are +subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories based primarily on the estimated forecast of product sales. +When, in the opinion of management, factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration +dates. In addition to reserving for these items identified through specific identification procedures, we also reserve for unidentified scrap or spoilage under a fixed-formula methodology. During 2017, 2016, and 2015 we wrote-off inventory which had a cost of $3.3 million, $739,000 and $2.6 million, respectively. These write-offs were a result of quality, scrap and product expiration issues. Although we make every effort +to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Deferred Tax Assets and Liabilities . We re-measured our Federal net deferred tax asset based on +the federal rate at which they were expected to reverse in the future which is 21% pursuant to the recently enacted Tax Act. We also re-measured our state net deferred asset since the future Federal benefit +was reduced to 21%. +At December 31, 2017, we had federal Net Operating Loss (“NOL”) carryforwards of $66.2 million. The net deferred +tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $27.3 million at December 31, 2017. Net operating losses will begin to expire in 2020. In assessing the realizability of deferred +tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the +period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making +this assessment. +We currently have a full valuation allowance recorded against our total U.S. deferred tax asset as we had determined in 2008 that it was +more likely than not that we would not realize the benefits associated with our deferred tax asset in the immediate future. Each year, we continue to reevaluate our valuation allowance position and believe that it is more likely than not that our +U.S. deferred income tax asset will not be realized in the immediate future. As such, we maintain a full valuation allowance as of December 31, 2017 and 2016 against our deferred tax assets associated with the operations subject to income tax +in the U.S. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of +federal and state NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes +in the ownership of our stock. The Company does not believe, +77 +Table of Contents +however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income and the Company continues to review ownership changes +on an annual basis. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +We do not hold any amounts of derivative +financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of +December 31, 2017, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 3.5% of our total revenues for the year ended +December 31, 2017. We do have foreign currency exchange risk related to our operating subsidiary in Canada. While the majority of their revenues are recorded in U.S. dollars, almost all of their operating expenses are denominated in Canadian +dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar could affect year-to-year comparability of operating results and cash flows. +Our Canadian subsidiary had net assets, subject to translation, of $102.6 million Canadian dollars ($81.6 million USD), which are included in the Company’s consolidated balance sheet as of December 31, 2017. A 10% unfavorable +change in the Canadian-to-U.S. dollar exchange rate would have decreased our comprehensive income by $8.2 million in 2017. +ITEM 8. +Consolidated Financial Statements and Supplementary Data. +Information with respect to this Item is +contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +78 +Table of Contents +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the +effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of +December 31, 2017. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2017 the Company’s disclosure controls and procedures were effective to provide reasonable +assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive +Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in +Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our +principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework +(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2017. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public +accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2017 that have materially affected, +or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting +Firm . +The Board of Directors and Stockholders +OraSure +Technologies, Inc.: +We have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2017, based on +criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of +79 +Table of Contents +Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting +and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the +Company’s internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public +Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the +assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit +preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, +based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of +OraSure Technologies, Inc. and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended +December 31, 2017, and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +February 28, 2018 +ITEM 9B. +Other Information. +Not applicable. +80 +Table of Contents +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders (the “Proxy +Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by this Item is +incorporated by reference to the information under the captions “Proposal No. 1. Election of Directors,” “Corporate Governance - Governance Guidelines and Code of Conduct,” “Corporate Governance – Committees of the +Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. +Our +Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other +officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any +amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. +Executive Compensation. +The information required by this Item is incorporated by reference to the +information under the captions “Compensation Committee Matters,” (including the “Compensation Committee Report”), “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and +Potential Payments Upon Termination or Change in Control,” and “Director Compensation” in the Proxy Statement. +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The +information required by this Item with respect to the securities ownership of certain beneficial owners and management, and equity compensation plan information, is incorporated by reference to the information under the captions “Stock +Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by +this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance - Director Independence” in the Proxy Statement. +ITEM 14. +Principal Accountant Fees and Services. +The information required by this Item is incorporated by +reference to the information under the caption “Audit Committee Matters” in the Proxy Statement. +81 +Table of Contents +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial +Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated +financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . See Index to Exhibits following the consolidated financial statements in this Annual Report. +ITEM 16. +Form 10-K Summary. +None +82 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on +its behalf by the undersigned, thereunto duly authorized, on February 28, 2018. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Douglas A. Michels +Douglas A. Michels +President and Chief +Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 28, +2018, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Douglas A. Michels +Douglas A. Michels +President, Chief Executive Officer and Director (Principal Executive Officer) +/s/ Ronald H. Spair +Ronald H. Spair +Chief Operating Officer, Chief Financial Officer and Director (Principal Financial Officer) +/s/ Mark L. Kuna +Mark L. Kuna +Senior Vice President, Finance and Controller (Principal Accounting Officer) +*MARA ASPINALL +Mara Aspinall +Director +*MICHAEL CELANO +Michael Celano +Director +*EAMONN P. HOBBS +Eamonn P. Hobbs +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*CHARLES W. PATRICK +Charles W. Patrick +Director +*ARADHANA SARIN +Aradhana Sarin +Director +*STEPHEN S. TANG +Stephen S. Tang +Director +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +83 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Income +F-4 +Consolidated Statements of Comprehensive Income +F-5 +Consolidated Statements of Stockholders’ Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to the Consolidated Financial Statements +F-8 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Stockholders and Board of Directors +OraSure +Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2017 and +2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated +financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows +for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. +We also +have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in +Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the +Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these +consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable +rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. +Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures +to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the +amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated +financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +February 28, 2018 +F-2 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2017 +December 31, 2016 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ +71,029 +$ +107,959 +Restricted cash +1,840 +1,831 +Short-term investments +83,028 +11,160 +Accounts receivable, net of allowance for doubtful accounts of $471 and $484 +42,521 +19,827 +Inventories +19,343 +11,799 +Prepaid expenses +1,658 +1,722 +Other current assets +2,486 +2,143 +Total current assets +221,905 +156,441 +PROPERTY AND EQUIPMENT, net +21,372 +20,033 +INTANGIBLE ASSETS, net +8,223 +10,337 +GOODWILL +20,083 +18,793 +LONG TERM INVESTMENTS +20,690 +— +OTHER ASSETS +3,928 +2,331 +$ +296,201 +$ +207,935 +LIABILITIES AND STOCKHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +10,228 +$ +4,633 +Deferred revenue +1,314 +1,388 +Accrued expenses +20,695 +11,314 +Total current liabilities +32,237 +17,335 +OTHER LIABILITIES +3,932 +2,304 +DEFERRED INCOME TAXES +1,951 +2,446 +COMMITMENTS AND CONTINGENCIES (Note 11) +STOCKHOLDERS’ EQUITY +Preferred stock, par value $.000001, 25,000 shares authorized, none issued +— +— +Common stock, par value $.000001, 120,000 shares authorized, 60,662 and 56,001 shares issued and +outstanding +— +— +Additional paid-in capital +387,931 +350,528 +Accumulated other comprehensive loss +(10,340 +) +(14,220 +) +Accumulated deficit +(119,510 +) +(150,458 +) +Total stockholders’ equity +258,081 +185,850 +$ +296,201 +$ +207,935 +See +accompanying notes to the consolidated financial statements. +F-3 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF INCOME +(in thousands, except per share amounts) +For the years ended December 31, +2017 +2016 +2015 +NET REVENUES: +Product +$ +161,988 +$ +106,924 +$ +104,458 +Other +5,076 +21,274 +15,261 +167,064 +128,198 +119,719 +COST OF PRODUCTS SOLD +68,108 +40,171 +39,426 +Gross profit +98,956 +88,027 +80,293 +OPERATING EXPENSES: +Research and development +13,365 +9,754 +11,654 +Sales and marketing +28,532 +29,652 +35,088 +General and administrative +29,321 +28,356 +25,493 +Gain on litigation settlement +(12,500 +) +— +— +58,718 +67,762 +72,235 +Operating income +40,238 +20,265 +8,058 +OTHER INCOME +794 +58 +774 +Income before income taxes +41,032 +20,323 +8,832 +INCOME TAX EXPENSE +10,084 +603 +665 +NET INCOME +$ +30,948 +$ +19,720 +$ +8,167 +EARNINGS PER SHARE: +BASIC +$ +0.52 +$ +0.35 +$ +0.14 +DILUTED +$ +0.51 +$ +0.35 +$ +0.14 +SHARES USED IN COMPUTING EARNINGS PER SHARE: +BASIC +59,050 +55,615 +56,397 +DILUTED +61,024 +56,513 +56,846 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(in thousands) +For the years ended December 31, +2017 +2016 +2015 +NET INCOME +$ +30,948 +$ +19,720 +$ +8,167 +OTHER COMPEHENSIVE INCOME (LOSS) +Currency translation adjustments +4,433 +1,419 +(7,791 +) +Unrealized loss on marketable securities +(553 +) +— +— +COMPREHENSIVE INCOME +$ +34,828 +$ +21,139 +$ +376 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2017, 2016 and 2015 +(in thousands) +Common Stock +Additional Paid-in +Capital +Accumulated +Other +Comprehensive +Loss +Accumulated +Deficit +Shares +Amount +Total +Balance at January 1, 2015 +56,187 +$ +— +$ +344,894 +$ +(7,848 +) +$ +(178,345 +) +$ +158,701 +Common stock issued upon exercise of options +74 +— +404 +— +— +404 +Vesting of restricted stock +354 +— +— +— +— +— +Purchase and retirement of common shares +(910 +) +— +(6,090 +) +— +— +(6,090 +) +Compensation cost for restricted stock +— +— +2,642 +— +— +2,642 +Compensation cost for stock option grants +— +— +3,403 +— +— +3,403 +Net income +— +— +— +— +8,167 +8,167 +Currency translation adjustments +— +— +— +(7,791 +) +— +(7,791 +) +Balance at December 31, 2015 +55,705 +— +345,253 +(15,639 +) +(170,178 +) +159,436 +Common stock issued upon exercise of options +405 +— +2,656 +— +— +2,656 +Vesting of restricted stock +446 +— +— +— +— +— +Purchase and retirement of common shares +(555 +) +— +(3,444 +) +— +— +(3,444 +) +Compensation cost for restricted stock +— +— +2,861 +— +— +2,861 +Compensation cost for stock option grants +— +— +2,691 +— +— +2,691 +Compensation cost for performance stock units +— +— +511 +— +— +511 +Net income +— +— +— +— +19,720 +19,720 +Currency translation adjustments +— +— +— +1,419 +— +1,419 +Balance at December 31, 2016 +56,001 +— +350,528 +(14,220 +) +(150,458 +) +185,850 +Common stock issued upon exercise of options +4,413 +— +31,670 +— +— +31,670 +Vesting of restricted stock +378 +— +— +— +— +— +Purchase and retirement of common shares +(130 +) +— +(1,240 +) +— +— +(1,240 +) +Compensation cost for restricted stock +— +— +2,705 +— +— +2,705 +Compensation cost for stock option grants +— +— +2,045 +— +— +2,045 +Compensation cost for performance stock units +— +— +2,223 +— +— +2,223 +Net income +— +— +— +— +30,948 +30,948 +Currency translation adjustments +4,433 +4,433 +Unrealized loss on marketable securities +— +— +— +(553 +) +— +(553 +) +Balance at December 31, 2017 +60,662 +$ +— +$ +387,931 +$ +(10,340 +) +$ +(119,510 +) +$ +258,081 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2017 +2016 +2015 +OPERATING ACTIVITIES: +Net income +$ +30,948 +$ +19,720 +$ +8,167 +Adjustments to reconcile net income to net cash provided by operating activities: +Stock-based compensation +6,973 +6,063 +6,045 +Depreciation and amortization +6,402 +5,640 +5,806 +Unrealized foreign currency loss +156 +122 +367 +Loss (gain) on sale of fixed assets +(25 +) +(28 +) +80 +Deferred income taxes +(649 +) +(529 +) +48 +Changes in assets and liabilities +Accounts receivable +(22,116 +) +(576 +) +(3,739 +) +Inventories +(7,391 +) +1,476 +2,348 +Prepaid expenses and other assets +(384 +) +(652 +) +(1,415 +) +Accounts payable +5,157 +46 +(2,648 +) +Deferred revenue +(93 +) +(8,350 +) +1,706 +Accrued expenses and other liabilities +9,178 +1,666 +(992 +) +Net cash provided by operating activities +28,156 +24,598 +15,773 +INVESTING ACTIVITIES: +Purchases of investments +(161,269 +) +(34,133 +) +(26,895 +) +Proceeds from maturities and redemptions of investments +69,253 +30,421 +23,934 +Purchases of property and equipment +(4,337 +) +(4,353 +) +(3,744 +) +Net cash used in investing activities +(96,353 +) +(8,065 +) +(6,705 +) +FINANCING ACTIVITIES: +Payments for debt issue costs +— +(367 +) +— +Proceeds from exercise of stock options +31,675 +2,656 +404 +Repurchase of common stock +(1,240 +) +(3,444 +) +(6,090 +) +Net cash provided by (used in) financing activities +30,435 +(1,155 +) +(5,686 +) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +841 +318 +(2,155 +) +NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH +(36,921 +) +15,696 +1,227 +CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD +109,790 +94,094 +92,867 +CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD +$ +72,869 +$ +109,790 +$ +94,094 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. +THE COMPANY: +Our business is comprised of two segments: Our “OSUR” business consists of the +development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests +that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic +material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. +Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These +products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and +commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +Our “DNAG” or molecular collection systems business is operated by our subsidiary, DNA Genotek Inc., a company based in Ottawa, Canada. DNAG’s +Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, +transportation and storage of DNA from human saliva. We also sell research use only sample collection products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services called “GenoFIND TM ”, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers worldwide, including many leading research universities +and hospitals. +2. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of +Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned +subsidiary, DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated +subsidiary, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires +management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues +and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, and performance-based +compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, +which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. +Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +F-8 +Table of Contents +Supplemental Cash Flow Information +In 2017, 2016 and 2015, we paid income taxes of $4,309, $1,123 and $719, +respectively. +In 2017, 2016 and 2015, we recorded through +the consolidated statements of income an increase in our allowance for doubtful accounts of $172, $40 and $341, respectively. We had $200 and $369 in write-offs against the allowance for doubtful accounts in 2017 and 2016, respectively. We had no +material write-offs against the allowance for doubtful accounts in 2015. +As of December 31, 2017, 2016 and 2015, we had accruals for purchases of +property and equipment of $449, $302 and $1,256, respectively. +Investments +We consider all investments to be available-for-sale securities. These +securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are +carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +The following is a summary of our available-for-sale securities as of +December 31, 2017 and 2016: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +December 31, 2017 +Guaranteed investment certificates +$ +22,261 +$ +— +$ +— +$ +22,261 +Corporate bonds +82,010 +— +(553 +) +81,457 +Total +available-for-sale securities +$ +104,271 +$ +— +$ +(553 +) +$ +103,718 +December 31, 2016 +Guaranteed investment certificates +$ +11,160 +$ +— +$ +— +$ +11,160 +Total +available-for-sale securities +$ +11,160 +$ +— +$ +— +$ +11,160 +At December 31, 2017 maturities of our available-for-sale securities were as follows: +Less than one year +$ +83,403 +$ +— +$ +(375 +) +$ +83,028 +Greater than one year +$ +20,868 +$ +— +$ +(178 +) +$ +20,690 +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based +primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories are stated at +the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority +of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based primarily on the estimated +forecast of product sales. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In +addition to reserving for these items identified through specific identification procedures, we also reserve for unidentified scrap or spoilage under a fixed-formula methodology. +F-9 +Table of Contents +Property and Equipment +Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and +amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture and fixtures are +depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in +the consolidated statements of income. +Intangible Assets +Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs +associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of seven to fifteen years. +Impairment of Long-Lived Assets +We +assess the recoverability of our long-lived assets, which include property and equipment and intangible assets, by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated +from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on +the present value of the expected future cash flows associated with the use of the assets. +Goodwill +Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and +liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting +principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required +to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +We performed our annual impairment assessment as of July 31, 2017 utilizing a qualitative evaluation and concluded that it was more likely than not that +the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not consistent with +management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event +occurs. As of December 31, 2017, we believe no indicators of impairment exist. +Revenue Recognition +We recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection +is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. Other than for sales of our OraQuick ® In-Home HIV +test to the retail trade, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense +warranty returns as incurred. +F-10 +Table of Contents +Our net revenues recorded on sales of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, +rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer +allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of income. +We record +shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. On June 30, 2016, we mutually agreed to terminate our agreement effective December 31, 2016. +Accordingly, we did not record any revenue from this co-promotion agreement during 2017. During 2016 and 2015, $18,951 and $13,479, respectively, in exclusivity revenues were recognized and recorded as other +revenue in our consolidated statements of income. +On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. +Department of Health and Human Services (“HHS”) Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® Ebola rapid antigen test. The three-year, multi-phased grant included an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory +activities. In September 2015 and July 2017, BARDA exercised options to provide $7,200 and $1,330, respectively, in additional funding for our OraQuick ® Ebola test. Amounts related to this +grant are recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2017, 2016 and 2015, $1,999, $1,707 and $1,783, respectively, were recognized in connection +with this grant. +In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid Zika test. The six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and regulatory activities. +In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed +and the related costs are incurred. During 2017 and 2016, $2,388 and $616, respectively, were recognized in connection with this grant. +In June 2017, we +entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that will enable us to offer our OraQuick ® HIV self-test +at an affordable price in 50 developing countries with funding from the Gates Foundation. The funding will consist of support payments tied to volume of product sold by us and reimbursement of certain related costs. The funding from the Gates +Foundation will be in an aggregate amount not to exceed $20,000 over the four-year term or $6,000 each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a component of +product revenue. During 2017, $1,047 of support payments were recognized in product revenue in connection with this agreement. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated +statements of income. During 2017, $689 was recognized in other revenue in connection with this agreement. +Customer Sales Returns and +Allowances +We do not grant return rights to our customers for any product, except for our +OraQuick ® In-Home HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick ® In-Home HIV product revenues in our consolidated statements of income. This estimate reflects our historical sales experience to retailers and consumers, +as well as other retail factors, and is reviewed regularly to ensure that it reflects +F-11 +Table of Contents +potential product returns. As of December 31, 2017 and 2016, the reserve for sales returns and allowances was $217. If actual product returns differ materially from our reserve amount, or if +a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, +our operating and financial results could be materially affected. +Deferred Revenue +We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2017 and 2016 +includes customer prepayments of $1,314 and $1,388, respectively. +Customer and Vendor Concentrations +One of our customers accounted for 37% and 15% of our accounts receivable as of December 31, 2017 and 2016, respectively. The same customer accounted for +approximately 25% of our net consolidated revenues for the year ended December 31, 2017. Another customer accounted for approximately 15% and 12% of our net consolidated revenues for the years ended December 31, 2016 and 2015, +respectively. +We currently purchase certain products and critical components of our products from sole-supply vendors. If these +vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party +suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. +Research and Development +Research and +development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services +and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2017, 2016, and 2015, we incurred $717, $626, and $623, respectively, in advertising +expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and +restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what +percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted +stock, or redemption of performance-based restricted stock units, we issue new shares rather than purchase shares in the open market. +Income Taxes +We follow the asset and +liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial +F-12 +Table of Contents +statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and +liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be +recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more +likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including +the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +Foreign Currency +Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet +date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our +consolidated statements of income in the period in which the change occurs. Net foreign exchange (losses) gains resulting from foreign currency transactions that are included in other income (expense) in our consolidated statements of income were +$(1,442), $(607), and $1,005 for the years ended December 31, 2017, 2016, and 2015, respectively. +Earnings Per Share +Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted +earnings per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such +as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares +and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. +The computations of basic and diluted earnings per share are as follows: +Year ended December 31, +2017 +2016 +2015 +Net income +$ +30,948 +$ +19,720 +$ +8,167 +Weighted average shares of common stock outstanding: +Basic +59,050 +55,615 +56,397 +Dilutive effect of stock options, restricted stock, and performance stock units +1,974 +898 +449 +Diluted +61,024 +56,513 +56,846 +Earnings per share: +Basic +$ +0.52 +$ +0.35 +$ +0.14 +Diluted +$ +0.51 +$ +0.35 +$ +0.14 +F-13 +Table of Contents +For the years ended December 31, 2017, 2016, and 2015, outstanding common stock options, unvested +restricted stock, and unvested performance stock units representing 180, 2,546, and 4,314 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We +classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the +stockholders’ equity section of our consolidated balance sheets. +We have defined the Canadian dollar as the functional currency of our Canadian +subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2017 consists of $9,787 of currency translation +adjustments and $553 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio. Accumulated other comprehensive loss at December 31, 2016 consists of $14,220 of currency +translation adjustments. +Fair Value of Financial Instruments +As of December 31, 2017 and 2016, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate +their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured +and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: +Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: +Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: +Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +All of our available-for-sale securities are +measured as Level 1 instruments as of December 31, 2017 and 2016. +Included in cash and cash equivalents at December 31, 2017 and 2016, was +$40,760 and $83,704 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. +We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in +the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan +are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 2017 and 2016 was $3,514 and $1,980, respectively, and was calculated using the quoted market prices of the assets as of those dates. All +investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying consolidated +balance sheets. +In 2017, we purchased certificates of deposit (“CDs”) from a commercial bank. The CDs bear interest at rates ranging from 0.89% +to 1.03% and mature periodically through January 22, 2018. The carrying values of the CDs approximate their fair value. These CDs serve as collateral for certain standby letters of credit and are reported as restricted cash on the accompanying +consolidated balance sheets. Also see Note 11 – Commitments and Contingencies. +F-14 +Table of Contents +Recent Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (“FASB”) issued converged guidance on recognizing revenue in contracts with customers, ASU 2014-09, Revenue from Contracts with Customers . The intent of the new standard is to improve financial reporting and comparability of revenue globally. The core principle of the standard is for a company to +recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. The guidance provides a five-step +analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and in certain circumstances, +allowing estimates of variable consideration to be recognized before contingencies are resolved. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an +entity’s contracts with customers. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017. +We have completed our evaluation of the new standard and have assessed the impacts of adoption on our consolidated financial statements and disclosures. Based +on our evaluation of our current contracts and revenue streams, revenue recognition is mostly consistent under both the previous and new standard, with the exception of one revenue stream within our drug testing kits segment, which is described +below. +We believe the key changes in the standard that impact our revenue recognition relate to the allocation of the transaction price to performance +obligations and the estimate of unexercised rights (“breakage”) associated with the contracts. Prior to the adoption of ASU 2014-09, we used the residual value method to allocate the transaction +prices related to our drug testing kits. With the issuance of ASU 2014-09, we have determined the more appropriate method to be based on the stand-alone selling price. This change in methodology also impacts +our estimated breakage amount. +The FASB allows two adoption methods under ASU 2014-09. The guidance may be +adopted through either retrospective application to all periods presented in the consolidated financial statements (full retrospective) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective). We +adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, we applied the rules to all contracts existing as of January 1, 2018. We estimate the cumulative effect recorded to +the opening balance of retained earnings of the above impacted revenue stream is approximately $163. +The disclosures in our notes to the consolidated +financial statements related to revenue recognition will be significantly expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, +and disaggregation of revenue. +In July 2015, the FASB issued ASU 2015-11, Simplifying +the Measurement of Inventory , which requires an entity that uses the first-in, first-out method for inventory measurement to report inventory cost at the lower of +cost and net realizable value versus the current measurement principle of lower of cost or market. The ASU requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016. We +adopted ASU 2015-11 on January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures. +In February 2016, the FASB issued ASU 2016-02, Leases , which requires entities to begin recording assets and +liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period +within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 may have on our +consolidated financial statements and related disclosures. +F-15 +Table of Contents +In March 2016, the FASB issued authoritative guidance under ASU +2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting . ASU 2016-09 provides for simplification of several +aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted ASU 2016-09 on January 1, 2017. Since we have a full valuation allowance against our U.S. net deferred tax assets, the adoption of this standard for recognition of the tax effect of deductions for employee share +awards in excess of compensation costs (“windfall”) did not have a material impact on our consolidated financial statements and related disclosures. See Note 8 – Income Taxes, for additional information. Should our full valuation +allowance be reversed in future periods, the adoption of this new guidance will introduce more volatility in the calculation of our effective tax rate, depending on the Company’s share price at exercise or vesting of share-based awards as +compared to grant date. The other provisions of ASU 2016-09 did not have a material impact on our consolidated financial statements and related disclosures. +In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash +Receipts and Cash Payments , which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classifications and we do not expect the adoption of this standard will have a material impact on our consolidated financial statements. +In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for +Goodwill Impairment , which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value +of the reporting unit. This update will be effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We adopted ASU 2017-04 in the second +quarter of 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures. +In March +2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities , +which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income +recognition with the expectations incorporated in the market pricing on the underlying securities. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. We are +evaluating the effect that ASU 2017-08 may have on our consolidated financial statements and related disclosures, but do not anticipate the adoption will have a material impact on our financial results. +In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting , to provide +clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update will be effective for annual periods and interim periods in fiscal years beginning +after December 15, 2017 with early adoption permitted. We do not expect the adoption will have a material effect on our consolidated financial statements. +3. +INVENTORIES: +December 31, +2017 +2016 +Raw materials +$ +10,299 +$ +5,399 +Work in process +199 +1,034 +Finished goods +8,845 +5,366 +$ +19,343 +$ +11,799 +F-16 +Table of Contents +4. +PROPERTY AND EQUIPMENT: +December 31, +2017 +2016 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +20,726 +20,179 +Machinery and equipment +26,685 +22,764 +Computer equipment and software +9,131 +8,357 +Furniture and fixtures +2,194 +2,113 +Construction in progress +897 +1,569 +60,751 +56,100 +Less accumulated depreciation +(39,379 +) +(36,067 +) +$ +21,372 +$ +20,033 +Depreciation expense was $3,434, $3,149, and $2,992 for 2017, 2016, and 2015, respectively. +5. +GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2017 +2016 +Balance as of January 1 +$ +18,793 +$ +18,250 +Change related to foreign currency translation +1,290 +543 +Balance as of December 31 +$ +20,083 +$ +18,793 +Intangible assets consist of the following: +December 31, 2017 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,960 +$ +(6,122 +) +$ +3,838 +Patents and product rights +10 +5,400 +(4,258 +) +1,142 +Acquired technology +7 +7,737 +(6,690 +) +1,047 +Tradename +15 +3,818 +(1,622 +) +2,196 +$ +26,915 +$ +(18,692 +) +$ +8,223 +December 31, 2016 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,321 +$ +(4,830 +) +$ +4,491 +Patents and product rights +10 +5,400 +(3,808 +) +1,592 +Acquired technology +7 +7,240 +(5,279 +) +1,961 +Tradename +15 +3,573 +(1,280 +) +2,293 +$ +25,534 +$ +(15,197 +) +$ +10,337 +F-17 +Table of Contents +Patents and products rights are made up of the following: +December 31, +2017 +2016 +HIV-related +$ +900 +$ +900 +HCV-related +4,500 +4,500 +5,400 +5,400 +Less accumulated amortization +(4,258 +) +(3,808 +) +$ +1,142 +$ +1,592 +Amortization expense for 2017, 2016, and 2015 was $2,641, $2,538, and $2,704, respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2018 +$ +2,639 +2019 +1,626 +2020 +1,417 +2021 +1,173 +2022 +246 +Beyond +1,122 +$ +8,223 +6. +ACCRUED EXPENSES: +December 31, 2017 +December 31, 2016 +Payroll and related benefits +$ +9,265 +$ +7,685 +Income taxes payable (receivable) +6,469 +(39 +) +Professional fees +1,064 +982 +Royalties +845 +715 +Other +3,052 +1,971 +$ +20,695 +$ +11,314 +7. +CREDIT FACILITY: +On September 30, 2016, we entered into a credit agreement (the “Credit +Agreement”) with a commercial bank. The Credit Agreement, as amended on December 20, 2017, provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit sub-facility of $2,500), with an option to request, prior to the second anniversary of the closing date, that the lender, at its election, provide up to $5,000 of additional revolving commitments. Obligations under +the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings under the facility during 2017 and 2016. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest +under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement is subject to an unused +line fee of 0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +F-18 +Table of Contents +In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed +charge coverage ratio of 1.10 to 1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2017 and 2016, we were in compliance with all applicable covenants in the +Credit Agreement. +8. +INCOME TAXES: +Income before income tax expense consists of the following: +Years Ended December 31, +2017 +2016 +2015 +United States +$ +2,270 +$ +18,492 +$ +5,302 +Canada +38,762 +1,831 +3,530 +$ +41,032 +$ +20,323 +$ +8,832 +The components of income tax expense are as follows: +Years Ended December 31, +2017 +2016 +2015 +Current +Federal +$ +— +$ +— +$ +— +State +— +250 +— +Canada +10,733 +882 +617 +10,733 +1,132 +617 +Deferred +Federal +10,297 +6,508 +1,511 +State +(827 +) +569 +311 +Canada +(649 +) +(529 +) +48 +8,821 +6,548 +1,870 +Decrease in valuation allowance +(9,470 +) +(7,077 +) +(1,822 +) +(649 +) +(529 +) +48 +Total income tax expense +$ +10,084 +$ +603 +$ +665 +For the years ended December 31, 2017, 2016, and 2015 we recorded foreign income tax expense of $10,084, $353, and $665, +respectively. +The Tax Cuts and Jobs Act +On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation on +multinational corporations. Although the Tax Act is generally effective January 1, 2018, U.S. generally accepted accounting principles requires recognition of the tax effects of new legislation during the reporting period that includes the +enactment date, which was December 22, 2017. Among the numerous provisions, the Tax Act includes two provisions in particular which require consideration for 2017 financial reporting: a permanent reduction in the corporate tax rate to 21%; and +a one-time transition tax imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. +The reduction in the U.S. corporate tax rate to 21% is effective in 2018. However, this change results in a +re-measurement of our net deferred tax balance at the end of 2017 with no net financial statement impact due to a comparable decrease in our deferred tax valuation allowance. +F-19 +Table of Contents +The one-time tax on undistributed and previously untaxed post-1986 +foreign earnings and profits (E&P) of foreign affiliates owned by U.S. shareholders as of December 31, 2017 was analyzed for our Canadian subsidiary. As of December 31, 2017, our U.S. federal taxable loss exceeded and offset the +provisional mandatory repatriation net inclusion and as such, no additional taxes will be due as a result of the deemed repatriation of these foreign earnings. +In addition, the Tax Act also includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current +anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion and promote U.S. production. The Tax Act also includes repeal of the corporate alternative minimum tax, +expensing of capital investment, changes to the Federal net operating loss (“NOL”) utilization and carryforward rules, and limitations of the deduction for interest expense and certain employee compensation. +As a result of the complex impact of the Tax Act, the SEC provided guidance under Staff Accounting Bulletin No. 118 (“SAB 118”) that allows the +Company to record provisional amounts as of December 31, 2017 for the impact of the Tax Act, provided that the provisional amounts can be reasonably determined and with the requirement that the final accounting be completed in a period not to +exceed one year from the date of enactment. As of December 31, 2017, the Company has not completed the accounting for the tax effects of the Tax Act, and therefore, has recorded provisional amounts which include: +(a) +An estimate of the impact of the one-time transition tax on existing net operating loss and foreign tax credit carryforwards generated, as well as the related offsetting valuation +allowances. These results are subject to change as there is limited information for federal and state taxing authorities regarding the application and interpretation of the recently enacted legislation. In addition, the results are based on +estimates and are affected by the interaction of various provision of the Tax Act on future taxable income. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not +exceed one year from the date of the enactment. +(b) +The valuation allowance for the Company’s deferred tax assets as of December 31, 2017, is primarily dependent on forecasted future taxable income in the U.S. and Canada and may be impacted by the provisions of +the Tax Act. Any increase or reduction in estimated forecasted future taxable income may require the Company to adjust the valuation allowance against the remaining deferred tax asset. The Company will continue to assess the impact of the Tax Act on +the valuation allowance during the provisional period. +The Tax Act imposes a U.S. tax on global intangible low taxed income +(“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder effective in 2018. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return +relative to the underlying tangible property. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected. The Company has not yet made a policy election related to its treatment of GILTI as either a +current period expense in the reporting period in which the tax is incurred or recognizing deferred taxes when a basis differences exists that is expected to affect the amount of the GILTI inclusion upon reversal. The Company is still in the process +of analyzing the expected impact of GILTI in future periods. +F-20 +Table of Contents +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each +of the years ended December 31, 2017, 2016, and 2015 is as follows: +2017 +2016 +2015 +Statutory U.S. federal income tax rate +34.0 +% +34.0 +% +34.0 +% +Deemed repatriation tax +7.8 +— +— +Statutory rate change, deferred tax impact +29.4 +— +— +Excess tax benefits for share-based payment awards +(16.0 +) +— +— +Tax effect of Canadian items +(9.8 +) +(4.9 +) +(13.1 +) +State income taxes, net of federal benefit +(1.1 +) +2.0 +1.5 +Nondeductible expenses and other +3.4 +6.7 +5.7 +Change in valuation allowance, federal and state +(23.1 +) +(34.8 +) +(20.6 +) +Effective tax rate +24.6 +% +3.0 +% +7.5 +% +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized +for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2017 and 2016 are as follows: +2017 +2016 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +15,338 +$ +17,673 +Inventories +1,179 +1,680 +Capitalized research and development costs +2,402 +4,711 +Accruals and reserves currently not deductible +3,103 +3,282 +Acquired intangible assets +(1,825 +) +(2,268 +) +Depreciation and amortization +(621 +) +(212 +) +Stock-based compensation +976 +6,110 +Tax credit carryforwards +6,722 +1,751 +Net deferred tax asset +27,274 +32,727 +Valuation allowance +(29,225 +) +(35,173 +) +Net deferred tax liability +$ +(1,951 +) +$ +(2,446 +) +In assessing the realizability of our deferred tax asset, we consider all relevant positive and negative evidence in +determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of +sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of +December 31, 2017 and 2016 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2017, 2016, or 2015. The valuation +allowance primarily decreased by $9,470 in 2017 due to its re-measurement to the new corporate tax rate of 21% effective in 2018. +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2020 - 2025 +$ +16,268 +2026 - 2030 +11,956 +2031 - 2037 +37,937 +$ +66,161 +F-21 +Table of Contents +The new accounting guidance under ASU 2016-09 allows for the +recognition of excess tax benefits associated with stock based compensation awards regardless of whether the deduction reduces taxes payable. On January 1, 2017, we recorded a cumulative adjustment to retained earnings of $3,391 to recognize +the increase in our net operating loss carryforwards from the cumulative excess tax benefits not recognized in periods prior to January 1, 2017. A corresponding $3,391 increase to our valuation allowance associated with this tax benefit was +also recorded to retained earnings thereby resulting in no impact to retained earnings. +The Tax Reform Act of 1986 contains provisions under Internal +Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. The Company does not believe that there is a +Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income. The Company continues to review ownership changes on an annual basis and we do not believe we have had a subsequent ownership change +that would impact the NOLs. +Effective January 1, 2018, there is a transition to a participation exemption system whereby distributions from foreign +subsidiaries to U.S. shareholders are generally exempt from taxation; therefore, the deferred tax liability on undistributed earnings is limited to any foreign withholding or other local taxes. The Company’s intention is to continue to +permanently reinvest the historical undistributed earnings of our Canadian subsidiary to the extent that we will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. +As of December 31, 2017, our gross unrecognized tax benefits totaled $1,663, and based upon the valuation allowance for our U.S. operations, the +recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2017, 2016 and 2015. As a +result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, +2017. +A reconciliation of our unrecognized tax benefits is as follows: +2017 +2016 +2015 +Balance as of January 1 +$ +2,084 +$ +2,088 +$ +2,073 +Additions for tax positions of prior periods +— +— +22 +Reductions for tax positions of prior periods +(421 +) +(4 +) +(7 +) +Balance as of December 31 +$ +1,663 +$ +2,084 +$ +2,088 +9. +STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based +awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted +awards, performance awards and other stock-based awards. +As of December 31, 2017, 4,355 shares were available for future grants under the Stock +Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including our officers at a price not less than +75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be +exercised. To date, options generally have been granted with ten-year exercise periods +F-22 +Table of Contents +and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years, with one quarter of the options vesting one year after grant and the +remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the +Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2017 +2016 +2015 +Risk-free interest rate (1) +2.22 +% +1.76 +% +1.49 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +43 +% +46 +% +51 +% +Expected life of stock options (in +years) (2) +7 +7 +7 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during +the years ended December 31, 2017, 2016 and 2015 was $4.71, $2.91 and $4.86, respectively. +Compensation expense recognized in the financial +statements related to stock options was as follows: +Years Ended December 31, +2017 +2016 +2015 +Total compensation cost during the year +$ +2,045 +$ +2,691 +$ +3,403 +Amounts capitalized into inventory during the year +(371 +) +(270 +) +(153 +) +Amounts recognized in cost of products sold for amounts previously capitalized +276 +212 +153 +Amounts charged against income +$ +1,950 +$ +2,633 +$ +3,403 +The aggregate intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015 (the amount +by which the market price of the stock on the date of exercise exceeded the exercise price) was $35,631, $763, and $329, respectively. +F-23 +Table of Contents +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +(in years) +Aggregate +Intrinsic +Value +Outstanding on January 1, 2015 +5,740 +$ +7.22 +Granted +773 +9.28 +Exercised +(74 +) +5.46 +Expired +(163 +) +8.55 +Forfeited +(60 +) +8.07 +Outstanding on December 31, 2015 +6,216 +7.46 +Granted +347 +6.00 +Exercised +(405 +) +6.57 +Expired +(479 +) +9.17 +Forfeited +(223 +) +7.31 +Outstanding on December 31, 2016 +5,456 +7.28 +Granted +231 +9.92 +Exercised +(4,413 +) +7.20 +Expired +(27 +) +8.36 +Forfeited +(46 +) +7.79 +Outstanding on December 31, 2017 +1,201 +$ +8.04 +6.5 +$ +12,986 +Vested or expected to vest as of December 31, 2017 +1,201 +$ +8.04 +6.5 +$ +12,986 +Exercisable on December 31, 2017 +659 +$ +7.81 +5.2 +$ +7,280 +As of December 31, 2017, there was $1,950 of unrecognized compensation expense related to unvested option awards that is +expected to be recognized over a weighted-average period of 1.9 years. +Net cash proceeds from the exercise of stock options were $31,675, $2,656 and $404 +for the years ended December 31, 2017, 2016, and 2015, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +F-24 +Table of Contents +The following table summarizes information about stock options outstanding as of December 31, 2017: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$2.79 -$5.19 +19 +0.3 +$ +3.46 +19 +$ +3.46 +$5.37 +158 +8.0 +5.37 +45 +5.37 +$5.47 +3 +7.7 +5.47 +1 +5.47 +$5.71 +149 +5.9 +5.71 +116 +5.71 +$5.79 - $7.05 +138 +4.5 +6.73 +130 +6.74 +$7.28 - $8.33 +122 +6.4 +7.81 +95 +7.74 +$8.33 - $8.63 +41 +1.9 +8.62 +41 +8.62 +$8.87 +167 +8.9 +8.87 +— +0.00 +$8.93 +6 +9.0 +8.93 +— +0.00 +$9.31 - $14.95 +398 +6.5 +10.32 +212 +10.40 +1,201 +6.5 +$ +8.04 +659 +$ +7.81 +The Stock Plan also permits us to grant restricted shares of our common stock to eligible employees, including officers, and +our outside directors. Generally, these shares are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by our Compensation Committee or Board of Directors. The market value of these shares at the +date of grant is recognized on a straight-line basis over the period during which the restrictions lapse. Compensation cost of $2,705, $2,861 and $2,642 related to restricted shares was recognized during the years ended December 31, 2017, 2016, +and 2015, respectively. +The following table summarizes restricted stock award activity under the Stock Plan: +Units +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2015 +707 +$ +6.50 +Granted +362 +8.25 +Vested +(354 +) +6.94 +Forfeited +(18 +) +8.01 +Issued and unvested, December 31, 2015 +697 +7.14 +Granted +632 +5.63 +Vested +(446 +) +6.65 +Forfeited +(133 +) +6.43 +Issued and unvested, December 31, 2016 +750 +6.28 +Granted +329 +9.77 +Vested +(378 +) +6.47 +Forfeited +(30 +) +7.57 +Issued and unvested, December 31, 2017 +671 +$ +7.83 +Issued and expected to vest, December 31, 2017 +671 +$ +7.83 +As of December 31, 2017, there was $2,910 of unrecognized compensation expense related to unvested restricted stock +awards that is expected to be recognized over a weighted average period of 1.7 years. +F-25 +Table of Contents +In connection with the vesting of restricted shares and exercise of stock options during the years ended +December 31, 2017, 2016 and 2015, we purchased and immediately retired 130, 132 and 133 shares with aggregate values of $1,240, $784 and $1,164, respectively, in satisfaction of minimum tax withholding and exercise obligations. +Commencing in 2016, we granted performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon +achievement of performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also remain in our service for +three years from the grant date. Performance during the one-year period will be based on a one-year earnings per share target. If the +one-year target is achieved, the PSUs will then vest three years from grant date. Performance during the three-year period will be based on achievement of a three-year compound annual growth rate for +consolidated product revenues. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested. Upon grant of the PSUs, we recognize compensation +expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $2,223 and $511 related to the PSUs was recognized during the years ended December 31, 2017 and 2016, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2017 +456 +5.46 +Granted +424 +8.19 +Vested +0 +0.00 +Forfeited +(28 +) +6.71 +Issued and unvested, December 31, 2017 +852 +$ +6.78 +Issued and expected to vest, December 31, 2017 +852 +$ +6.78 +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 of our +outstanding common shares. No shares were purchased and retired in 2017. During the years ended December 31, 2016 and 2015, we purchased and retired 423 and 777 shares of common stock at an average price of $6.29 and $6.34 per share for a total +cost of $2,660 and $4,926, respectively. +10. +BUSINESS SEGMENT INFORMATION: +Our business is comprised of two segments: Our “OSUR” business +consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro +diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to collect, stabilize, transport and store samples +of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. +We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same +as those described in the summary of significant accounting +F-26 +Table of Contents +policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income. We do not allocate interest income, interest expense, other income, other expenses +or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +The +following table summarizes operating segment information for the years ended December 31, 2017, 2016, and 2015, and asset information as of December 31, 2017 and 2016: +Years Ended December 31, +2017 +2016 +2015 +Net revenues: +OSUR +$ +91,965 +$ +95,984 +$ +89,795 +DNAG +75,099 +32,214 +29,924 +Total +$ +167,064 +$ +128,198 +$ +119,719 +Operating income (loss): +OSUR +$ +(2,706 +) +$ +15,606 +$ +3,558 +DNAG +42,944 +4,659 +4,500 +Total +$ +40,238 +$ +20,265 +$ +8,058 +Depreciation and amortization: +OSUR +$ +3,170 +$ +2,751 +$ +3,015 +DNAG +3,232 +2,889 +2,791 +Total +$ +6,402 +$ +5,640 +$ +5,806 +Capital expenditures: +OSUR +$ +2,752 +$ +2,145 +$ +1,645 +DNAG +1,585 +2,208 +2,099 +Total +$ +4,337 +$ +4,353 +$ +3,744 +December 31, +2017 +2016 +Total assets: +OSUR +$ +192,352 +$ +151,719 +DNAG +103,849 +56,216 +Total +$ +296,201 +$ +207,935 +The following table represents total net revenues by geographic area, based on the location of the customer: +Years Ended December 31, +2017 +2016 +2015 +United States +$ +121,458 +$ +99,758 +$ +96,522 +Europe +11,827 +11,646 +13,535 +Other regions +33,779 +16,794 +9,662 +$ +167,064 +$ +128,198 +$ +119,719 +F-27 +Table of Contents +The following table represents total long-lived assets by geographic area: +December 31, +2017 +2016 +United States +$ +16,160 +$ +15,737 +Canada +5,083 +4,286 +Other regions +129 +10 +$ +21,372 +$ +20,033 +11. +COMMITMENTS AND CONTINGENCIES: +Sublicense Agreement +In June 2004, we entered into a sublicense agreement with a third party pursuant to which we have been granted a limited, worldwide, non-exclusive sublicense to certain HIV-2 patents held by such party. Under the terms of this sublicense agreement, we are obligated to pay royalties based on a percentage of +our net sales of certain products, which incorporate the technology covered by the licensed patents. Royalties are expensed as an element of cost of goods sold. Future minimum payments under this agreement are $292 for 2018. Royalties from our +commercial sale of products covered by the sublicense can be credited against these minimum royalty obligations. +Leases +We lease office space for our Canadian subsidiary and domestic warehouse facilities under operating lease agreements. Future payments required under these non-cancelable leases are as follows: +2018 +$ +617 +2019 +791 +2020 +828 +2021 +834 +2022 +845 +Thereafter +1,242 +$ +5,157 +Rent expense for 2017, 2016 and 2015 was $852, $715, and $481, respectively. +Purchase Commitments +As of +December 31, 2017, we had outstanding non-cancelable purchase commitments related to inventory, supplies, capital expenditures, and other goods or services as follows: +2018 +14,262 +2019 +383 +2020 +383 +$ +15,028 +Employment Agreements +Under terms of employment agreements with certain employees, which extend through 2019, we are required to pay each individual a base salary for continuing +employment with us. The agreements require payments totaling $1,729 and $330 in 2018 and 2019, respectively. +F-28 +Table of Contents +Standby Letters of Credit +We established standby letters of credit in the amount of $1,840, naming international customers as the beneficiaries. These letters of credit were required as +a performance guarantee of our obligations under our product supply contracts with those customers and are collateralized by certificates of deposit maintained at a commercial bank. The standby letters of credit are recorded in restricted cash in +the accompanying consolidated balance sheet. +Litigation +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such +actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +12. +RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure +Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and +the regulations thereunder. The 401(k) Plan also provides for us to match employee contributions up to $4 per year. We contributed $617, $619 and $587 to the 401(k) Plan, net of forfeitures, in 2017, 2016, and 2015, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the +Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase +OraSure stock as an investment vehicle. As of December 31, 2017 and 2016, the value of the assets associated with this plan was $3,514 and $1,980, respectively, and is included in other assets in our consolidated balance sheets. Our obligation +related to the deferred compensation plan is included in other liabilities in our consolidated balance sheets. As of December 31, 2017 and 2016, our total obligation under this plan was $3,514 and $1,980, respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the +“RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee +contributions up to $2 per year. We contributed $145, $134 and $134 to the RRSP in 2017, 2016, and 2015, respectively. +F-29 +Table of Contents +13. +QUARTERLY DATA (Unaudited): +The following tables summarize the quarterly results of operations for +each of the quarters in 2017 and 2016. These quarterly results are unaudited, but in the opinion of management, have been prepared on the same basis as our audited financial information and include all adjustments (consisting only of normal +recurring adjustments) necessary for a fair presentation of the information set forth herein. +2017 Results +Three months ended +March 31, +2017 +June 30, +2017 +September 30, +2017 +December 31, +2017 +Net revenues +$ +32,546 +$ +40,176 +$ +42,314 +$ +52,028 +Costs and expenses +16,675 +(1) +33,289 +34,995 +41,867 +Operating income +15,871 +(1) +6,887 +7,319 +10,161 +Other income, net +467 +96 +113 +118 +Income before income taxes +16,338 +6,983 +7,432 +10,279 +Income tax expense +3,897 +1,555 +1,669 +2,963 +Net income +$ +12,441 +$ +5,428 +$ +5,763 +$ +7,316 +Earnings per share +Basic +$ +0.22 +$ +0.09 +$ +0.10 +$ +0.12 +(2) +Diluted +$ +0.21 +$ +0.09 +$ +0.09 +$ +0.12 +(2) +2016 Results +Three months ended +March 31, +2016 +June 30, +2016 +September 30, +2016 +December 31, +2016 +Net revenues +$ +29,089 +$ +31,359 +$ +32,251 +(3) +$ +35,499 +(3) +Costs and expenses +26,390 +27,010 +26,107 +28,426 +Operating income +2,699 +4,349 +6,144 +7,073 +Other income (expense), net +(192 +) +(340 +) +498 +92 +Income before income taxes +2,507 +4,009 +6,642 +7,165 +Income tax expense (benefit) +61 +173 +400 +(31 +) +Net income +$ +2,446 +$ +3,836 +$ +6,242 +$ +7,196 +Earnings per share +Basic +$ +0.04 +$ +0.07 +$ +0.11 +$ +0.13 +Diluted +$ +0.04 +$ +0.07 +$ +0.11 +$ +0.13 +(1) +Includes a $12,500 gain associated with the settlement of our litigation with Ancestry.com DNA LLC and its contract manufacturer, which was recorded as a reduction of operating expenses in the indicated period. +(2) +The summation of the quarterly amounts may not equal the year-end amounts as included in the consolidated financial statements +due to the use of weighted-average shares for each period. +(3) +Revenues in the last six months of 2016 include an additional $5,436 of exclusivity payments recognized in other revenues as a result of the early termination of our +HCV co-promotion agreement with AbbVie. +14. +SUBSEQUENT EVENTS: +In January 2018, we announced the retirement of our President and Chief Executive +Officer (“CEO”) and our Chief Financial Officer (“CFO”) and Chief Operating Officer. Stephen S. Tang, Ph.D., who currently serves as +F-30 +Table of Contents +Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018. Dr. Tang will replace Douglas A. +Michels, who will retire as President and CEO, and as a member of the Board, on March 31, 2018. In addition, Ronald H. Spair, our CFO and Chief Operating Officer, will be retiring on or before June 30, 2018, with his exact retirement date +to be determined based on the timing for the Company’s appointment of a new CFO. Charges associated with these transitions are expected to total $8,590 in 2018. These charges primarily reflect non-cash +charges associated with modifications to existing stock grants held by the retiring executives and expenses associated with the onboarding of the Company’s new President and CEO. +F-31 +Table of Contents +INDEX TO EXHIBITS +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration +Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May +23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., as amended and restated as of February 19, 2018. +10.1 +Employment Agreement dated as of January +3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Employment Agreement, dated as of June +22, 2004, between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December +16, 2008, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.4 +Amendment No. 2 to Employment Agreement, dated as of December +15, 2010, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.5 +Amendment No. 3 to Employment Agreement, dated as of March +27, 2015, between the Company and Douglas A. Michels is incorporated by reference to Exhibit 99.1 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.6 +Retirement Agreement, dated as of January +3, 2018 between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.7 +Employment Agreement, dated as of July +1, 2004, between OraSure Technologies, Inc. and Ronald H. Spair, is incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.8 +Amendment No. 1 to Employment Agreement, dated as of December +16, 2008, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.9 +Amendment No. 2 to the Employment Agreement, dated as of December +15, 2010, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.10 +Amendment No. 3 to Employment Agreement, dated as of March +27, 2015, between the Company and Ronald H. Spair is incorporated by reference to Exhibit 99.2 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.11 +Retirement Agreement dated as of January +31, 2018, between OraSure Technologies, Inc. and Ronald H. Spair is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 2, 2018.* +10.12 +Employment Agreement, dated as of July +1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +Table of Contents +Exhibit +Number +Exhibit +10.13 +Amendment No. 1 to Employment Agreement, dated as of December +16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.14 +Amendment No. 2 to the Employment Agreement, dated as of December +15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.15 +Amendment No. 3 to Employment Agreement, dated as of March +27, 2015, between the Company and Jack E. Jerrett is incorporated by reference to Exhibit 99.3 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.16 +Employment Agreement, dated as of October +2, 2006, between Mark L. Kuna and OraSure Technologies, Inc., is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 5, 2006.* +10.17 +Amendment No. 1 to Employment Agreement, dated as of December +16, 2008, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.18 +Amendment No. 2 to the Employment Agreement, dated as of December +15, 2010, between the Company and Mark L. Kuna, is incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.19 +Amendment No. 3 to Employment Agreement, dated as of March +27, 2015, between the Company and Mark L. Kuna is incorporated by reference to Exhibit 99.4 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.20 +Employment Agreement, dated as of January +3, 2011, between the Company and Anthony Zezzo II is incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.21 +Terms of Employment for Michael Reed, Senior Vice President and Chief Science Officer for OraSure Technologies, Inc., is incorporated by reference +to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* +10.22 +Employment Agreement, dated as of January 7, 2008, between DNA Genotek, Inc. and Brian Smith, as amended July +25, 2011 and June 16, 2016, is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* +10.23 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item +5.02 to the Company’s Current Report on Form 8-K filed February 24, 2017. * +10.24 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form +10-K for the year ended December 31, 2002.* +10.25 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended +and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.26 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective February +21, 2017, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 5, 2017, for the 2017 Annual Meeting of Stockholders.* +10.27 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to +the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.28 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the +Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +Table of Contents +Exhibit +Number +Exhibit +10.29 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit +10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.30 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s +Annual Report on Form 10-K for the year ended December 31, 2011.* +10.31 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated +by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.32 +Description of the OraSure Technologies, Inc. 2017 Management Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current +Report on Form 8-K filed February 24, 2017.* +10.33 +Description of the OraSure Technologies, Inc. 2017 Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report +on Form 8-K filed May 19, 2017*. +10.34 +Description of the OraSure Technologies, Inc. 2018 Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report +on Form 8-K filed February 22, 2018.* +10.35 +Description of Amended Long-Term Incentive Policy is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed May 14, 2015.* +10.36 +Description of Long-Term Incentive Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form +8-K filed February 24, 2017.* +10.37 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form +8-K filed December 21, 2011.* +10.38 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s +Current Report on Form 8-K filed December 21, 2011.* +10.39 +Credit Agreement, between Wells Fargo Bank, National Association, and OraSure Technologies, Inc., is incorporated by reference to Exhibit 10 to +the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. +10.40 +First Amendment to Credit Agreement, dated as of December +20, 2017, by and among OraSure Technologies, Inc., Wells Fargo Bank, National Association, and the Lending Parties thereto, is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-k filed December 21, 2017. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Douglas A. Michels required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as +amended. +31.2 +Certification of Ronald H. Spair required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 +Certification of Douglas A. Michels required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as +amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +Table of Contents +Exhibit +Number +Exhibit +32.2 +Certification of Ronald H. Spair required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, +and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase document +* +Management contract or compensatory plan or arrangement. \ No newline at end of file diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/filing_metadata.csv b/raw/filings/0001116463/2017/0001193125-18-064054/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..9ce4fc1d633f08f6e06fd5d381348377094faf00 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2018-02-28,2017-12-31,2018-02-28T21:30:10.000Z,0001193125-18-064054,d519538d10k.htm,10-K,7159379,1,0,https://www.sec.gov/Archives/edgar/data/1116463/000119312518064054/d519538d10k.htm,https://www.sec.gov/Archives/edgar/data/1116463/000119312518064054/,2017,2017,1 diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/item1.txt b/raw/filings/0001116463/2017/0001193125-18-064054/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6281bc5cef5ff981ec940c89f7fa16d373be2e53 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/item1.txt @@ -0,0 +1,925 @@ +ITEM 1. +Business. +Our business is made up of two principal segments. The first is our “OSUR” +business, which consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other +in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the +United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +The second segment is our “DNAG” or molecular collection systems business and is operated primarily through our subsidiary, DNA Genotek Inc. +(“DNAG”), a company based in Ottawa, Canada. In the DNAG business, we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical +genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an +all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only products into the microbiome and +tuberculosis markets and we offer our customers a suite of genomics and microbiome services called “GenoFIND TM ”, which range from package customization and study design optimization to +extraction, analysis and reporting services. We serve customers in many countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) +and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on September 29, 2000. Our principal offices are located at 220 East +First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information +about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and +filings. These Reports and filings are made available as soon as reasonably practicable after they are filed or furnished to the SEC. Our Internet website and the information contained in or connected to that website are not intended to be +incorporated by reference into this Annual Report. +3 +Table of Contents +Products +The following is a summary of our principal products and services and their regulatory and commercial status: +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care +qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral +fluid, finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +Registered in various other countries. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +World Health Organization (“WHO”) +pre-qualification. +Marketed +Registered in various foreign countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, +point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +CE Mark (European Union) approved for OTC use. +Marketed +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care +qualitative and oral fluid HIV-1/2 Self-Test that can be visually read in approximately 20 minutes. +Registered in various countries. +WHO pre-qualification. +Marketed +OraQuick ® HCV +A rapid, point-of-care +qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. Also registered in various +other countries. +Marketed +Registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +4 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid samples from cadavers. +Marketed +OraQuick ® Zika +A rapid point-of-care +qualitative test for Zika antibodies that can be read in approximately 20 minutes. +Under development. +Not Marketed +OraSure QuickFlu ® +Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 +infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved +laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® • DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including OTC use. +Marketed +Oragene ® • DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® • RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® • DX +All-in-one system for +the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +ORAcollect ® • DNA +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various foreign countries. +Marketed +OMNIgene ® • +DISCOVER +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +5 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +Performagene +All-in-one non-invasive swab kit for the collection, +stablization and transportation of animal DNA samples. +Animal research use only. +Marketed +OMNIgene ® • +GUT +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in +stool samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving tuberculosis bacteria in sputum +samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +OMNIgene ® •VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +Hemagene ® +Reagent to stabilize high molecular weight DNA in buffy coat samples at ambient temperature +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +GenoFIND TM +End-to-end services for genomics and microbiome analysis +Provided by CLIA and College of American Pathologists (“CAP”) certified lab. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using +fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected +Forensic use only. +Marketed +6 +Table of Contents +Product/Service +Description +Regulatory Status +Commercial +Status +with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines +amphetamines, and THC. +Cryosurgical Systems - Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, +marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types +of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts and skin tags, sold in +various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +Marketed +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® +and POINTTS ® names and for skin tags under CryoTag name. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk assessment, substance +abuse testing and forensic toxicology applications; an oral fluid Western blot HIV-1 confirmatory test for confirming positive HIV-1 test results obtained from the use +of our OraSure ® collection device; and the FDA 510(k) cleared Q.E.D. ® rapid point-of-care saliva alcohol test. +OraQuick ® Rapid +HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous +flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be +tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution +then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an +initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® +name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received +PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is +available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral +fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations +and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is +7 +Table of Contents +registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. +We have also received WHO pre-qualification for our export only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our +OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark for the OraQuick ® In-Home HIV test, although this product is not currently sold in the European Union. The In-Home test is performed +in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established a toll free, 24/7, 365-day per year customer call center to provide additional information and referral support for consumers. +OraQuick ® HIV Self-Test +The OraQuick ® HIV +Self-Test has the same diagnostic capabilities as our U.S. approved OraQuick ® In-Home HIV test but is sold into certain foreign countries at a lower +cost to meet the needs of those markets. We are working with Population Services International (“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from several African countries to deploy our +self-test through the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. The OraQuick ® Self-Test has labeling and instructions +specifically tailored for the African marketplace. The purpose of the STAR project is to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public +health impact of self-testing will be. Our OraQuick ® Self-Test was chosen by PSI because of its quality, +ease-of-use and oral fluid option. This product has received WHO pre-qualification and is eligible for procurement by purchasing +entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. Like the OraQuick ® HIV test, this product is a qualitative test that can detect antibodies to the hepatitis C virus, or HCV, in a variety of sample types. The +OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV +test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood +specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole +blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the OraQuick ® +technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and capable of testing for Ebola infection (including treatment centers +and public health clinics) on finger-stick and venous whole blood samples collected from live patients, as well as oral fluid specimens collected from cadavers. The WHO has also issued an Emergency Use Assessment and Listing for this product with +respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® Rapid Flu A&B test is an FDA 510(k) cleared rapid qualitative test for the +detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal +8 +Table of Contents +swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as +ten minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. PBM has also obtained a CLIA waiver for this test for use with nasal and +nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests +for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two +to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for +detecting HIV-1 infection and other analytes. +The +OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the +detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with either our oral fluid Western blot HIV-1 confirmatory test (described below) or a blood based nucleic acid +test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Tuberculosis (“TB”) Products +OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable +cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily mixing and quality control. We believe OMNIGENE ® • SPUTUM +can improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product is being offered to TB laboratories for evaluation. +The OMNIgene ® • SPUTUM product is CE marked and is gaining greater interest for tuberculosis +testing. Healthcare providers from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor +agencies and diagnostic test developers, have begun their product evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing +much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +We sell a number of genomic products that provide all-in-one systems +for the collection, stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to +collect DNA from human saliva. These products are currently sold to thousands of academic, research and commercial customers in many countries worldwide. +9 +Table of Contents +Our molecular collection products are available in several different configurations and contain proprietary +chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability +for self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. +When the container is closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method +yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We also market several microbiome collection products designed to collect, stabilize and transport the microbial profile from multiple sample types. Unlike +genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and preserves +(“snapshots”) the microbiome after collection, until analysis is required. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality +microbial DNA from feces or stool samples for gut microbiome profiling for use in clinical laboratory and research use settings. The product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and +reliable bacterial profile for weeks at room temperature. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We have also begun marketing +other microbiome collection kits for DNA or RNA collected from the vagina and oral cavity. +We believe these products provide significant advantages over +competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Our molecular business also offers customers our GenoFIND TM services, a suite of genomic and microbiome +services that range from package customization and study design optimization to extraction, analysis and reporting services. We believe our GenoFIND TM offering will become an increasingly valuable +tool for meeting the needs of our molecular customers. +Our molecular collection products historically have been sold primarily as Class I medical +devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® •DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our +ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® •DNA, +ORAcollect ® and OMNIgene ® •GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold under the name +Intercept ® , and is used to collect oral mucosal transudate or OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National +Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”), and +for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our +Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +10 +Table of Contents +We believe that the Intercept ® device has several +advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its +non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with +greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs +and inconvenience, thereby streamlining the testing process. +During 2014, we completed development of a next generation collection device, which we are +marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original +Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample +required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently +being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an +agreement with Thermo Fisher Scientific (“Thermo Fisher”). +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost +alternative to liquid nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol +canister. When released, these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type +of lesion) creating localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of +benign skin lesions, and this product has been CE marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product on a private label basis for resale by one of our physician +office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS +tradename, in Mexico and a number of South and Central American countries. We sell a CE marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser +(“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private +label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell +immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed +under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, +along with the reagents. The result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety +of commercially available laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are +also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on +commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third +11 +Table of Contents +parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or +chemicals in urine. Test results are produced quickly, allowing for high-throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed +internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We previously entered into an agreement with Thermo Fisher under which Thermo Fisher would develop and supply up to 12 fully-automated high-throughput oral +fluid drug assays for use with our Intercept i2 ® device. Under this agreement, we are currently selling a NIDA-5 panel of assays supplied by +Thermo Fisher in the U.S. forensic market. The parties are discussing certain changes to this agreement and assessing their ability to complete development of several additional assays and pursue FDA 510(k) clearance, CE marking and other regulatory +approvals of the Intercept i2 ® device for use with a 12-assay panel. Subject to these further discussions with Thermo Fisher, we believe the +offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow +us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Western blot HIV-1 Confirmatory Test +We sell an oral fluid Western blot HIV-1 +confirmatory test that received premarket approval from the FDA in 1996. This test uses the original specimen collected with the OraSure ® oral fluid collection device to confirm positive +results of initial oral fluid HIV-1 EIA screening tests. After re-evaluating the market demand for this product, we decided to stop manufacturing our western blot HIV-1 confirmatory test in the summer of 2017. We believe existing inventory levels of this product will be exhausted in the first quarter of 2018, after which we will no longer sell this product. We are providing +support to assist customers in seeking appropriate confirmatory testing services for positive results from the use of our OraQuick ® collection device. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a +point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of +ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva +and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the +result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Products Under Development +Infectious Disease +One recent area of focus +for product development has been our OraQuick ® Ebola rapid antigen test. In July 2015, we received an Emergency Use Authorization or EUA for our Ebola test from the FDA. This authorization +allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the +Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live patients. +In June 2015, we +entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The +three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised an +option to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola test. +12 +Table of Contents +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. +The WHO has issued an Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the +product, particularly in Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in the future. +Our recent product development +efforts have also been focused on addressing global concerns regarding the Zika virus. As a result, we have been developing a rapid Zika antibody test on our OraQuick ® platform. This virus is believed to be spread primarily through infected mosquitoes and has been linked as a possible cause of microcephaly in newborn babies whose mothers are infected. There has also +been some potential correlation reported with Guillain-Barre syndrome in certain other infected patients. +In August 2016, we entered into a contract with +BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of +$7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and certain clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in +additional funding for our rapid Zika test. +Molecular Collections +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on +extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for RNA collection and stabilization. On the microbiome front, we continue to +focus research and development work on collecting and stabilizing microbial DNA and RNA from multiple sample types including gut, skin, and saliva. We are also evolving the physical design and features of our products to further enable high +throughput processing through improved interoperability with automated platforms. +Research and Development +In 2017, our research and development activities focused primarily on development of our new rapid Ebola and Zika tests, an improvement to our rapid HIV test, +expanded molecular collection product offerings for the microbiome and genomics markets, our next generation Intercept i2 ® collection device, and clinical and technical support for our +existing products, with significant focus in tuberculosis market support. From time to time, we have contracted with third parties to conduct research and development activities and we may do so in the future. +Research and development expenses were $13.4 million in 2017, $9.8 million in 2016, and $11.7 million in 2015. These expenses include our costs +associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy +is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales +in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United +States were $121.5 million, $99.8 million, and $96.5 million in 2017, 2016 and 2015 respectively. Consolidated net revenues attributable to international customers amounted to $45.6 million, $28.4 million, and +$23.2 million, or 27%, 22% and 19% of our total revenues, in 2017, 2016 and 2015, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note 10 to our +consolidated financial statements included elsewhere in this Annual Report. +13 +Table of Contents +Infectious Disease Testing - Professional +We market the OraQuick ADVANCE ® rapid HIV-1/2 antibody +test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and +universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of +encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to +retail clinics operated by pharmacies. In addition, we distribute our OraQuick ® HIV test in certain other foreign countries. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +A major focus for our HCV business has been, and will continue to be, to market our test to foreign countries that intend to implement broad scale testing or +country-wide HCV elimination programs. +We currently sell our OraQuick ® Ebola test under an EUA +and our only customer to date has been the CDC, which has purchased the product for field testing in Africa. There were minimal Ebola sales in 2017. Our ability to expand sales of this test to other customers will likely depend on the timing and +extent of future outbreaks of the disease, the availability of government or other funding and whether we are able to obtain FDA 510(k) clearance and pre-qualification with the WHO for our product. +We market the OraSure ® oral fluid collection device for HIV-1 +testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged +OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the +international public health market. +We have distribution rights to an FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under +our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product +into the U.S. hospital and public health markets. +We have also been working to commercialize the +OMNIgene ® • SPUTUM and +PrepIT ® • MAX products. TB is a major global health issue, with long established relationships among public health agencies, NGO’s, and suppliers. We have a focused sales and market +development team working with these key players to have our products evaluated and adopted where possible. +Infectious Disease Testing - OTC +We sell our OraQuick ® In-Home test in the U.S. retail or +consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase on-line through certain +retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. +To support individuals that +purchase and use our test, we offer toll-free customer support on a 24/7, 365-day per year basis. This service provides consumers with access to trained representatives who can answer questions about HIV/AIDS +and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling our OraQuick ® HIV Self-Test to PSI (Population Services International) for +use in a self-testing pilot program called the HIV Self-Testing in Africa, or STAR, project. Under Phase I of the project, +14 +Table of Contents +750,000 OraQuick ® HIV self-tests were sold to PSI for use in three African countries, Malawi, Zambia and Zimbabwe. More recently, we were +selected to participate in Phase II of the project under which approximately 4 million HIV self-tests are expected to be deployed over a two-year period. We believe that we will supply the vast majority +of tests under this phase of the project. +In June 2017, we entered into a charitable support agreement with the Bill & Melinda Gates Foundation +(“Gates Foundation”) that will enable us to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates +Foundation. The funding will consist of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement has a four-year term and will enable non-governmental +organizations in the eligible countries that receive funding from government or public sector agencies and donors to access our HIV self-test at reduced pricing. The funding from the Gates Foundation will be in an aggregate amount not to exceed +$20.0 million over the four-year term or $6.0 million each year of the agreement. +In July 2017, our OraQuick ® HIV Self-Test was prequalified by the WHO. WHO prequalification aims to ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to +optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV self-test pilots and programs to access international funding to purchase our test. +Molecular Collection Systems +DNAG sells its products +directly to its customers, primarily through its own internal sales force. In some countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant +majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business +opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to +commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. +DNAG also has a number of established global customers in the livestock market, including breed associations and research institutions. +DNAG has expanded +its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. DNAG’s primary product offering, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG +is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in +ease-of-collection, stabilization and transport of this challenging sample type. +Substance Abuse Testing +Our substance abuse testing +products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and in certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and +associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and +internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in +combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid +laboratory testing and specimen shipping costs included. +15 +Table of Contents +The criminal justice market in the United States for our substance abuse testing products consists of a wide +variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and +community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we have also launched our next generation Intercept i2 ® collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold +into the criminal justice and drug treatment markets. Subject to our further discussions with Thermo Fisher, we plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the +NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) +cleared drug tests. We expect that the 510(k) cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United +States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety +sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and +return-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the +product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ +representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than +20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our +distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We sell our product in +the U.K. through another distributor, Appia, under the CryoTag tradename, for the removal of skin tags. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada and for the removal of warts in the U.S. +Insurance Risk Assessment +We currently market the +OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: +HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance +risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our +OraSure ® device that initially test positive for HIV-1. +16 +Table of Contents +There exists a wide range of policy limits where our +OraSure ® product is being used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection +with life insurance policies having face amounts of up to $250,000, with some customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not +test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified +Issues” policy, where lab testing is no longer required and instead the applicant completes a questionnaire about personal behaviors. +We also sell +our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several +different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product revenues (dollars in thousands). +For the years ended December 31, +2017 +2016 +2015 +Oragene ® collection systems +$ +71,610 +$ +31,078 +$ +29,385 +OraQuick ® HIV +35,149 +33,068 +34,358 +OraQuick ® HCV +25,409 +14,066 +11,386 +Cryosurgical systems +12,279 +13,234 +11,920 +One of our customers accounted for approximately 25% of our net consolidated revenues in 2017. Another customer accounted for +approximately 15% and 12% of our net consolidated revenues in 2016 and 2015, respectively. +Financial Information by Segment +We operate our business within two reportable segments. The first is our “OSUR” business, which consists of the development, manufacture and sale of +diagnostic products, specimen collection devices, and medical devices. The second is our “DNAG” or molecular collection systems business, which consists primarily of the development, manufacture and sale of oral fluid collection devices +that are used to collect, stabilize, and store samples of genetic material for molecular testing. +OSUR revenues consist primarily of product sold into +the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial +entities. OSUR also derives revenues from the sale of OTC products to retail pharmacies and mass merchandisers, and to consumers over the internet and from licensing and product development activities. DNAG revenues consist of product sold into the +academic research, consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. For more information about our revenues from external customers, income and total assets, please see the +sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to the consolidated financial statements, included elsewhere in +this Annual Report on Form 10-K. +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, +OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are +all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +17 +Table of Contents +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of +one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to manufacture these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue manufacturing this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components used in the +OraQuick ® HIV product lines and the HCV antigens used in the OraQuick ® HCV test only from a limited number of sources. If for any +reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other +critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected +products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of +interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and supplied by a third party, Princeton BioMeditech. +There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product and our OTC cryosurgical products are assembled by a U.S. vendor with +certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event that our current +suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract +manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also +purchased from third parties, including one critical component that is purchased from a sole source supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2017, we had +377 full-time employees (including 133 employees at our subsidiary, DNAG). Of this total, there were 131 in sales, marketing and client services; 43 in research and development; 140 in operations, manufacturing, quality control, information systems, +purchasing and shipping; 33 in quality assurance and regulatory affairs; and 30 in administration and finance. This compares to 325 employees as of December 31, 2016. Our employees are not currently represented by a collective bargaining +agreement. +Competition +The diagnostic +industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +18 +Table of Contents +Important competitive factors for our products include price, quality, performance, ease of use, customer +service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests +and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic +products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be +characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory +levels, obtaining better performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new +testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more +effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for +these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the +number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV +testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. +One of our competitors has received FDA approval and a CLIA waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +19 +Table of Contents +Our competitors in the domestic infectious disease testing market include medical diagnostic companies and +specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and degradation of the +price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete +against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In +addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and +HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in +the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The OraQuick ® HIV Self-Test that we sell in certain international markets +is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our +OraQuick ® Ebola test includes government and commercially-developed laboratory and point-of-care molecular +tests, along with a small number of rapid antigen tests sold under FDA Emergency Use Authorization (EUA). Our Ebola test is the only product with regulatory authorization for use on both whole blood samples from living patients and oral fluid +samples from cadavers. +The OraSure QuickFlu ® +test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the +prices charged for the Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other +products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® product is also facing increasing competition +from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and +stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM product is unique +and has no direct competition in terms of a comparable product. The primary competition for this product is the incumbent methodologies that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, our Intercept ® drug testing systems competes with +laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may +develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing +products in unregulated settings in the United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +20 +Table of Contents +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” +assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure +because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these +laboratories have typically had to rely on radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet +the laboratories’ sensitivity needs, run on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. +We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially over a number of years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be +produced at a cost lower than the price typically paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received +U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially +lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical +product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and +Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other +cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our +research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets +and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing +opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have five United States patents +and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, +containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from March 2018 to December 2026. We +have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United +States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire +from March to July 2019 and the fifth in July 2028. +21 +Table of Contents +We hold, through our subsidiary, DNAG, eighteen United States patents and numerous foreign patents issued +for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2019 through March 2034. +We have three United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our +cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to February 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or +consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to +third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of +services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as +currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ? , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , +Oragene ® , ORAcollect ® , OMNIgene ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are +owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. +Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The +issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such +litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and comparable +regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, +distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable FDA regulations, but the regulations regarding the manufacture and sale of our +products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in +the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after +approval or clearance, failure to comply with the FDA’s requirements +22 +Table of Contents +can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our +products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. +There are several mechanisms by which regulated devices can be placed on the market in the United States. Some products may qualify for clearance under +Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is +substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified by the FDA; +or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if +different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the +submission must include data from human clinical studies. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. An applicant must submit a 510(k) +application at least 90 days before commercial distribution of the affected product commences. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually +takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify +for the 510(k) procedure, either because it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de novo classification +or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists. +Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined to be high risk and must +demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including +the results of preclinical and clinical studies, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, +the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an +independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on +the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, +which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has +submitted false or misleading information in any application or notification, the FDA may refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive +such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of +operations. +23 +Table of Contents +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement +may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for +example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could +significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of +the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These +trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study +meets the requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant +risk medical device studies. If a full IDE is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is +appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does +not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the +continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication +or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require +submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or +may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or +other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these +purposes, although other state and federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through Emergency Use +Authorization, or EUA, that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the +emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral +pathogens that have the potential to affect public health. +Most devices distributed in the United States must comply with the FDA’s Quality System +Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing +as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and postmarket surveillance to +ensure full compliance. +Companies are also subject to other post-market and general requirements, including product listing and establishment +regulations, which help facilitate FDA inspections and other regulatory action, post-market +24 +Table of Contents +surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Device +reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction +of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market +requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may +constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, +product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other +postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +On December 23, 2013, our molecular collection systems subsidiary, DNAG, received a warning letter from the FDA. The warning letter primarily focused on +DNAG’s response to two Form 483 observations issued by the FDA as a result of an inspection of DNAG’s Ottawa, Canada facilities in September 2013. Specifically, the warning letter indicated the need for additional documentation regarding +design and development activities for DNAG’s products and focused in particular on the design planning and design history file for DNAG’s 510(k)-cleared Oragene ® • DX collection +device. In addition, the warning letter requested additional documentation related to finished product acceptance testing activities for DNAG’s ORAcollect ® collection device. The letter +further noted that DNAG does not currently have in place an approved PMA or 510(k) clearance for its ORAcollect ® device. +DNAG submitted a formal response to the FDA to address the issues referenced in the warning letter and the warning letter was cleared in August 2017. In +addition, DNAG received 510(k) clearance of its ORAcollect ® device on April 18, 2016. +The +Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment +of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be +waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for +our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test +and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products that may not have been able to +use them without complying with applicable quality control and other requirements. +Certain of our products may also be affected by state regulations in +the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell +products. +Advertising and Promotion +Advertising and +promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, +25 +Table of Contents +including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are +permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only +market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement +laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training +constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a +warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including +exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from +the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or +cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government +(“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in +compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the +FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in +foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from international public health agencies, such as the World +Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. +governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International +Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in +the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through +production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive +(“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are +accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO +certification creates a rebuttable presumption that the product satisfies the applicable +26 +Table of Contents +requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our +products, without which they may not be placed on the market in the EU. +We have completed the applicable conformity assessment procedures and obtained +the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV +test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as +dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of +medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. +We +have obtained WHO pre-qualification for our OraQuick ® HIV Self Test and OraQuick ® HCV test and +we will likely seek WHO pre-qualification or endorsement for certain other products sold into international markets. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal +Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental +healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as +civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties +Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of +Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, +restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state +laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of +financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil +sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and +application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government +27 +Table of Contents +authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and +requiring the disclosure by medical device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal +reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to +submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care +Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and +federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party +educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain or retain +business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to any +foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and will +continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving +bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will +be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our +current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge +and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or +RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s +Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future +environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable +environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing +discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +28 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/item13.txt b/raw/filings/0001116463/2017/0001193125-18-064054/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..fa3b05268fdc5ab8049d859b909041b730cd76a4 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/item13.txt @@ -0,0 +1,4 @@ +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by +this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance - Director Independence” in the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/item9a.txt b/raw/filings/0001116463/2017/0001193125-18-064054/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..1efa08451459cedcdca04e3d1a4be0af9e6b8b67 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/item9a.txt @@ -0,0 +1,52 @@ +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the +effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of +December 31, 2017. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2017 the Company’s disclosure controls and procedures were effective to provide reasonable +assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive +Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in +Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our +principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework +(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2017. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public +accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2017 that have materially affected, +or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting +Firm . +The Board of Directors and Stockholders +OraSure +Technologies, Inc.: +We have audited OraSure Technologies, Inc.’s internal control over financial reporting as of December 31, 2017, based on +criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of +79 +Table of Contents +Sponsoring Organizations of the Treadway Commission (COSO). OraSure Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting +and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the +Company’s internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public +Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. +Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the +assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit +preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and +(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +In our opinion, OraSure Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, +based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of +OraSure Technologies, Inc. and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended +December 31, 2017, and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Philadelphia, Pennsylvania +February 28, 2018 \ No newline at end of file diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/rp_note.txt b/raw/filings/0001116463/2017/0001193125-18-064054/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2017/0001193125-18-064054/rpt_disclosure.txt b/raw/filings/0001116463/2017/0001193125-18-064054/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5a8377d548e9bff3d0003e3c047ef6d5c41f1792 --- /dev/null +++ b/raw/filings/0001116463/2017/0001193125-18-064054/rpt_disclosure.txt @@ -0,0 +1,3 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2018, there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/filing.txt b/raw/filings/0001116463/2018/0001564590-19-005491/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5ec4904b7dea697c7dfeab51b263ce2221d4d9f3 --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/filing.txt @@ -0,0 +1,4333 @@ +10-K +1 +osur-10k_20181231.htm +10-K +osur-10k_20181231.htm +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15( d ) of the Securities Exchange ACT OF 1934 +For the fiscal year ended December 31, 2018 +or +☐ +Transition report pursuant to Section 13 or 15( d ) of the Securities Exchange Act of 1934 +F or the transition period from to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC. +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem, Pennsylvania +18015 +(Address of Principal Executive Offices) +(Zip Code) +(610) 882-1820 +(Registrant’s Telephone Number, Including Area Code): +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +State the aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2018) : $1,004,924,956 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 21, 2019: 61,663,044 shares. +Documents Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report. +Table of Contents +PART I +Page +ITEM 1. +Business +2 +ITEM 1A. +Risk Factors +23 +ITEM 1B. +Unresolved Staff Comments +48 +ITEM 2. +Properties +48 +ITEM 3. +Legal Proceedings +48 +ITEM 4. +Mine Safety Disclosures +48 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +49 +ITEM 6. +Selected Consolidated Financial Data +51 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +52 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +64 +ITEM 8. +Financial Statements and Supplementary Data +65 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +65 +ITEM 9A. +Controls and Procedures +65 +ITEM 9B. +Other Information +66 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +67 +ITEM 11. +Executive Compensation +67 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +67 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +67 +ITEM 14. +Principal Accountant Fees and Services +67 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +68 +ITEM 16. +Form 10-K Summary +70 +This Report contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of op erations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to successfully manage and integrate acquisitions of other companies in a manner that complements or leverages our existing business, or otherwise expands or enhances our portfolio of products and our end-to-end service offerings, and the diversion of management’s attention from our ongoing business and regular business responsibilities to effect such integration; the expected economic benefits of acquisitions (and increased returns for our stockholders), including that the anticipated synergies, revenue enhancement strategies and other benefits from the acquisitions may not be fully realized or may take longer to realize than expected and our actual integration costs may exceed our estimates; ability to market and sell products, whether through our internal, direct sales force or third parties; impact of significant customer concentration in the genomics business; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (“FDA”) or other regulators; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; ability to meet increased demand for the Company’s products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives and continue to increase its revenues, including the ability to expand international sales; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; impact of increased reliance on U.S. government contracts impact of negative economic conditions; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of oral fluid or urine testing, collection or other products; market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention (“CDC”) or other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; ability to maintain sustained profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to meet financial covenants in credit agreements; ability to attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References in this Annual Report to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +1 +PART I +ITEM 1. +Business. +The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business is made up of two principal segments. The first is our “OSUR” business, which consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +The second segment is our “DNAG” or molecular collection systems business and is operated primarily through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada. In the DNAG business we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers in many countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website and the information contained in or connected to that website are not intended to be incorporated by reference into this Annual Report. +Recent Developments +In early January 2019, we acquired two privately-held, early-stage companies, CoreBiome, Inc. (“CoreBiome”) and Novosanis N.V. (“Novosanis”), in order to add differentiated products and services to our molecular collection systems business. +CoreBiome, a spin-off from the University of Minnesota, is based in St. Paul, Minnesota and provides microbiome laboratory and analytical services that can accelerate research and discovery for customers in the pharmaceutical, agricultural and academic research communities. These services provide optimal analytical algorithms to deliver speed and scalability in the lab with highly precise analytics. CoreBiome was co-founded in 2016 by Dr. Dan Knights, a globally-recognized expert in microbiome informatics who has developed leading methods for analyzing microbiome data, along with Dr. Daryl Gohl and Dr. Kenny Beckman, domain experts in genomics methods and clinical lab operations. +Novosanis was a Belgian company founded as a spin-off from the University of Antwerp, Belgium in 2013. Novosanis is an early commercial stage producer and distributor of urine sample collection devices targeting the liquid biopsy and sexually transmitted infection screening markets. Novosanis’ primary product is Colli-Pee, an easy to use device designed for the standardized collection of first-void urine which can be used in the privacy of the user’s home or in a clinic. Product validation and clinical trials are also under way with various sexually transmitted infection test manufacturers. +The acquisitions of both CoreBiome and Novosanis were structured with modest up-front payments and potential additional payments based on future performance of each company. These acquisitions are the first steps in the execution against our long-term strategy of becoming a growth company focused on innovation, both internally and through acquisitions of companies and technologies outside of our existing core businesses. +2 +Products +The following is a summary of our principal products and services and their regulatory and commercial status, excluding those of CoreBiome and Novosanis: +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood and plasma. +Marketed +Registered in various other countries. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV1/2”) that can be visually read in approximately 20 minutes. +World Health Organization (“WHO”) pre-qualification. +Marketed +Registered in various foreign countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +CE Mark (European Union) approved for OTC use. +Marketed +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care qualitative and oral fluid HIV-1/2 Self-Test that can be visually read in approximately 20 minutes. +Registered in various countries. +WHO pre-qualification. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +Registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid samples from cadavers. +Marketed +3 +Product/Service +Description +Regulatory Status +Commercial +Status +OraSure QuickFlu ® Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® • DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including consumer use. +Marketed +Oragene ® • DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® • RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® • DX +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +ORAcollect ® • DNA +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various foreign countries. +Marketed +OMNIgene ® • +ORAL +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene TM +All-in-one non-invasive swab kit for the collection, stabilization and transportation of animal DNA samples. +Animal research use only. +Marketed +PerformaBiome TM • GUT +All-in-one system for easy collection and stabilization of DNA for animal microbiome profile analysis. +Animal research use only. +Marketing +OMNIgene ® • GUT +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving tuberculosis bacteria in sputum samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +OMNIgene ® •VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +4 +Product/Service +Description +Regulatory Status +Commercial +Status +Hemagene ® +Reagent to stabilize high molecular weight DNA in buffy coat samples at ambient temperature +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +GenoFIND TM +End-to-end services for genomics and microbiome analysis +Provided by CLIA and College of American Pathologists (“CAP”) certified lab. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems – Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types +of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts and skin tags, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +Marketed +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names and for skin tags under CryoTag name. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk assessment, substance abuse testing and forensic toxicology applications. +5 +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received WHO pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark for the OraQuick ® In-Home HIV test, although this product is not currently sold in the European Union. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test uses the same diagnostic technology as our U.S. approved OraQuick ADVANCE ® HIV test but is sold into certain foreign countries at a lower cost to meet the needs of those markets. For the past several years, we have worked with Population Services International (“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from several African countries to deploy our Self-Test through the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. The OraQuick ® Self-Test has labeling and instructions specifically tailored for the African marketplace. The purpose of the STAR project was to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public health impact of self-testing will be. Our OraQuick ® Self-Test was chosen by PSI because of its quality, ease-of-use and oral fluid option. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. During 2018, a majority of the sales of our OraQuick ® HIV Self-Test occurred outside of the STAR project. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and +6 +venous whole blood samples collected from live patients, as well as oral fluid specimens c ollected from cadavers. The WHO has also issued an Emergency Use Assessment and Listing for this product with respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® Rapid Flu A&B test is an FDA 510(k) cleared rapid qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as 10 minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. PBM has also obtained a CLIA waiver for this test for use with nasal and nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with either a western blot confirmatory test or a blood based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Tuberculosis (“TB”) Products +OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily mixing and quality control. We believe OMNIGENE ® • SPUTUM can improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product is being offered to TB laboratories for evaluation. +The OMNIgene ® • SPUTUM product is CE marked and is gaining greater interest for tuberculosis testing. Healthcare providers from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their product evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +Genomics Products. We sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to collect DNA from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. +Our genomic products are available in several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the lid of the container are mixed +7 +with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at am bient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +Microbiome Products. We also market several microbiome collection products designed to collect, stabilize and transport the microbial profile from multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and preserves (“snapshots”) the microbiome after collection until analysis is required. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in clinical laboratory and research settings. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. Our product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. We have also begun marketing other microbiome collection kits for DNA or RNA collected from the vagina and oral cavity. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high-quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Molecular Services. Our molecular business also offers customers our GenoFIND TM services, a suite of genomic and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. Our GenoFIND TM offering has become an increasingly valuable tool for meeting the needs of our molecular customers. With the acquisition of CoreBiome, we believe we can offer enhanced laboratory service offerings for our customers in the microbiome market. +Regulatory Approvals . Our molecular collection products historically have been sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® • DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® • DNA, ORAcollect ® and OMNIgene ® • GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold under the name Intercept ® , and is used to collect oral mucosal transudate or OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo Fisher”). +8 +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin lesions, and this product has been CE-marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS tradename, in Mexico and a number of South and Central American countries. We sell a CE-marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We previously entered into an agreement with Thermo Fisher under which Thermo Fisher would develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® device. Under this agreement, we are currently selling a NIDA-5 panel of assays supplied by Thermo Fisher in the U.S. forensic market. The parties are discussing certain changes to this agreement and assessing their ability to complete development of several additional assays and pursue FDA 510(k) clearance, CE marking and other regulatory approvals of the Intercept i2 ® device for use with a 12-assay panel. Subject to these further discussions with Thermo Fisher, we believe the offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +9 +Products Under Development +Infectious Disease +One recent area of focus for product development has been our OraQuick ® Ebola rapid antigen test. In July 2015, we received an Emergency Use Authorization or EUA for our Ebola test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live patients. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised an option to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola test. +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. The WHO has issued an Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the product, particularly in Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in the future. +Our recent product development efforts also focused on addressing global concerns regarding the Zika virus. As a result, we began developing a rapid Zika antibody test on our OraQuick ® platform. In August 2016, we entered into a contract with BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and certain clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in additional funding for our rapid Zika test. +During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. +Molecular Collections +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for RNA collection and stabilization. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA and RNA from multiple sample types including gut, skin, and saliva. We are also evolving the physical design and features of our products to further enable high throughput processing through improved interoperability with automated platforms. +Research and Development +Research and development expenses were $16.3 million in 2018, $13.4 million in 2017, and $9.8 million in 2016. These expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +10 +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were $ 136.8 million, $121.5 million and $9 9.8 million in 2018, 2017 and 2016 , respectively. Consolidated net revenues attributable to international customers amounted to $ 44.9 million, $45.6 million and $28.4 million , or 25 %, 27% and 22% of our total revenues, in 2018, 2017 and 2016, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note s 2 and 11 to our consolidated financial statements included elsewhere in this Annual Report. +Infectious Disease Testing - Professional +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by pharmacies. In addition, we distribute our OraQuick ® HIV test in certain other foreign countries. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. A focus for our HCV business has been, and will continue to be, to market our test to foreign countries that intend to implement broad scale testing programs. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date has been the CDC, which has purchased the product for field testing in Africa. There were no Ebola sales in 2018. Our ability to expand sales of this test to other customers will likely depend on the timing and extent of future outbreaks of the disease, the availability of government or other funding and whether we are able to obtain FDA 510(k) clearance and pre-qualification with the WHO for our product. +We market the OraSure ® oral fluid collection device for HIV-1 testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +We have distribution rights to an FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. hospital and public health markets. +We have also been working to commercialize the OMNIgene ® • SPUTUM product. TB is a major global health issue, with long established relationships among public health agencies, NGOs, and suppliers. We have a focused sales and market development team working with these key players to have our product evaluated and adopted where possible. +Infectious Disease Testing - OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. +To support individuals that purchase and use our test, we offer toll-free customer support on a 24/7, 365-day per year basis. This service provides consumers with access to trained representatives who can answer questions about HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling our OraQuick ® HIV Self-Test to PSI (Population Services International) for use in a self-testing pilot program called the HIV Self-Testing in Africa, or STAR, project. Under Phase I of the project, 750,000 OraQuick ® HIV Self-Tests were sold to PSI for use in three African countries, Malawi, Zambia and Zimbabwe. More recently, we were selected to participate in Phase II of the project under which approximately 4 million HIV Self-Tests are expected to be deployed over a two-year period. +11 +In June 2017, we entered into a C haritable S upport A greement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that has enable d us to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia wit h funding from the Gates Foundation. The funding consist s of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement has a four-year term and enable s non-governmental organizations in the eligible co untries that receive funding from government or public sector agencies and donors to access our HIV Self - Test at reduced pricing. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20.0 million over the four-year term or $6 .0 million each year of the agreement. +In July 2017, our OraQuick ® HIV Self-Test was prequalified by the WHO. WHO prequalification aims to ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Molecular Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. DNAG also has customers in the livestock and companion animal markets. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. DNAG’s primary product offering in the microbiome market, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. In addition, DNAG is offering laboratory and analytics services in order to more fully meet the needs of its customers. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we also sell our next generation Intercept i2 ® collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. Subject to our further discussions with Thermo Fisher, we plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +12 +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and retu rn-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We sell our product in the U.K. through another distributor, Appia, under the CryoTag tradename, for the removal of skin tags. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada and for the removal of warts in the U.S. +Insurance Risk Assessment +We currently market the OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product revenues (dollars in thousands). +For the years ended December 31, +2018 +2017 +2016 +Oragene ® +$ +75,850 +$ +69,184 +$ +29,454 +OraQuick ® HIV +41,457 +35,148 +33,067 +OraQuick ® HCV +12,394 +25,409 +14,066 +Cryosurgical systems +10,767 +12,279 +13,234 +One of our customers accounted for approximately 24% and 25% of our net consolidated revenues in 2018 and 2017, respectively. Another customer accounted for approximately 15% of our net consolidated revenues in 2016. +13 +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product and our OTC cryosurgical products are assembled by a U.S. vendor with certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event that our current suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2018, we had 398 full-time employees (including 146 employees at our subsidiary, DNAG). Of this total, there were 128 in sales, marketing and client services; 50 in research and development; 149 in operations, manufacturing, quality control, information systems, purchasing and shipping; 37 in quality assurance and regulatory affairs; and 35 in administration and finance. This compares to 377 employees as of December 31, 2017. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +14 +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors in the domestic infectious disease testing market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The OraQuick ® HIV Self-Test that we sell in certain international markets is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our OraQuick ® Ebola test includes government and commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under an FDA EUA. Our Ebola test is the only product with regulatory authorization for use on both whole blood samples from living patients and oral fluid samples from cadavers. +15 +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® product is also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM product is unique and has no direct competition in terms of a comparable product. The primary competition for this product is the incumbent methodologies that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially over a number of years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations +16 +and licensing opportunities to pr ovide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effe ctively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have four United States patents and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from November 2021 to December 2026. We have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire from March to July 2019 and the fifth in July 2028. +We hold, through our subsidiary, DNAG, eighteen United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2019 through March 2034. +We have three United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to February 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ? , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , Oragene ® , ORAcollect ® , OMNIgene ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, +17 +failure to comply with the FDA’s requirements can lead to signific ant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. +There are several mechanisms by which regulated devices can be placed on the market in the United States. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified by the FDA; or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) application at least 90 days before commercial distribution of the affected product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de novo classification or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists. Clearance of a de novo request generally takes 15 months from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined to be high risk and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study meets the +18 +requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which in clude a subset of the requirements applicable to significant risk medical device studies. If a full IDE is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientif ic soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regul ations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through an EUA that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral pathogens that have the potential to affect public health. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance. +Companies are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products that may not have been able to use them without complying with applicable quality control and other requirements. +19 +Certain of our products may also be affected by state regulation s in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell p roducts. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +20 +In addition, the EU has adopted the EU Medical device Regulation (the “EU MDR”) and the In Vitro Diagnostic Regulation (the “EU IVDR”), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR and until May 2022 to meet the EU IVDR. Compliance with these regulations may be expensive and time -consuming. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. +We have completed the applicable conformity assessment procedures and obtained the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. +We have obtained WHO pre-qualification for our OraQuick ® HIV Self-Test and OraQuick ® HCV test and we will likely seek WHO pre-qualification or endorsement for certain other products sold into international markets. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +21 +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical T echnology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe th at our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +22 +ITEM 1A. +Ris k Factors +You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Customer Concentration and Purchase Seasonality Creates Risk for Our Business. +We have experienced strong revenue growth during the past several years, primarily due to increasing sales of our OraQuick ® rapid HCV test and our Oragene ® saliva DNA collection kit. The higher sales of these products have been driven by increased demand by an increasing number of large customers. +Our molecular collections sales grew from $75.1 million in 2017 to $86.5 million in 2018, largely as a result of increased orders of our Oragene ® collection systems by our largest customer serving the consumer genomics market. In November 2017, we announced the execution of a multi-year purchase agreement for the sale of $144 million of our Oragene ® product to a large consumer genomics customer. Since the inception of the contract and through December 31, 2018, we have recognized approximately $52.8 million of revenue under this contract. +In our infectious disease business, sales of our HCV test fell from $25.4 million in 2017 to $12.4 million in 2018. This decline in sales was primarily attributable to sales under a previously announced $18.0 million contract with a foreign government in support of a country-wide HCV elimination program. This agreement was largely completed in 2017 and this customer unexpectedly decided not to renew the agreement for an additional 12 months. +We expect that sales to the large consumer genetics customer will continue to be a significant growth driver for our molecular business. It is also possible that other countries implementing broad based HCV testing or elimination programs could have a significant impact on our business. As a result, certain parts of our business will likely continue to have a high customer concentration and depend disproportionately on a few large customers. In addition, demand from a large consumer genomics customer increased significantly in 2016 and 2017 due to special retail promotions and holiday shopping towards the end of these years. To the extent that such a large customer fails to meet its purchase commitments, does not continue such promotional programs, changes its ordering patterns or business strategy, or otherwise reduces its purchases or stops purchasing our products, or if we experience difficulty in meeting the high demand by these customers for our products, our revenues and results of operations could be adversely affected. +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products. +We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch thereafter. Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our OraQuick ® HIV Self-Test , OraQuick ® Ebola test, OMNIgene ® • GUT and OMNIgene ® • SPUTUM product offerings, and other new products or technologies that may be developed or acquired. To achieve market acceptance, we and/or our distributors will likely be required to undertake substantial marketing efforts and spend significant funds to inform potential customers and the public of the existence and perceived benefits of these products. In addition, governmental funding for the purchase of our products may be needed to help create market acceptance and expand the use of our products. +There may be limited evidence on which to evaluate the market reaction to products that may be developed and our marketing efforts for new products may not be successful. It is also possible that governmental funding may be limited for new products, such as our OraQuick ® Ebola test or the new sample collection and stabilization products being commercialized by DNAG. As such, there can be no assurance that any products will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. +23 +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +Our Customers May Resist Adoption of Rapid Point-of-Care Diagnostic Testing. +Sales of our rapid point-of-care diagnostic products, such as our OraQuick ADVANCE ® HIV-1/2, OraQuick ® HCV, OraQuick ® In-Home HIV test and OraQuick ® HIV Self-Test products, are an important part of our business. Rapid point-of-care tests are beneficial because, among other things, they can be administered by healthcare providers in their own facilities or used by consumers at home without sending samples to central laboratories and can help ensure that test results are delivered to the individuals being tested. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on our future sales growth. +We Expect to Face Intense Competition From Other Providers of Diagnostic Tests and Sample Collection Products. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test. In addition, the Oragene ® product line sold by our subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs. There are a number of competitors making investments in competing technologies and products, and a number of our competitors may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines, aggressively discount prices for their products and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created or may decide to create, their own products to compete with ours. If our competitors’ products take market share from our products through more effective marketing or competitive pricing, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers internally develop or acquire their own sample collection devices and use those devices in place of our products in order to reduce costs. +Our Inability to Carry Out Certain of Our Marketing and Sales Plans May Make it Difficult for Us to Grow or Maintain Our Business. +We have implemented in the past, and we intend to implement in the future, an aggressive sales and marketing plan to expand sales of our products. If we are unable to successfully implement these programs or modify these programs in response to evolving market and economic conditions, we may be unable to grow and our business could suffer. +Our Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. More recently, we sold large +24 +quantities of our OraQuick ® HCV test to foreign governments and agencies for use in broad-based or country-wide HCV elimination programs. There can be no assurance that purchases or funding from these agencies will occur or continue. As a resu lt, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Regardless of merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling cryosurgical products in the consumer or OTC market in the United States and certain countries and we may expand OTC sales of these products into other countries. We also sell the OraQuick ® In-Home HIV test in the United States OTC market, and we offer HIV self-tests to consumers internationally. We believe the sale of products in the OTC market increases our potential exposure to product liability and other claims. +The Insurance We Purchase to Cover Our Potential Business Risks May be Inadequate. +Although we believe that our present product liability and other insurance coverage is sufficient to cover our current estimated exposures, we cannot be sure that we will not incur liabilities in excess of our policy limits. In addition, although we believe that we will be able to continue to obtain adequate coverage in the future, there is no assurance that we will be able to do so at acceptable costs. +We Could Suffer Monetary Damages, Incur Substantial Costs or be Prevented From Using Technologies Important to Our Products as a Result of Legal Proceedings. +We have been, and in the future may become, involved in various legal proceedings arising out of our businesses. These may include commercial disputes, negligence claims or various other lawsuits arising in the ordinary course of our business, including employment matters. Such lawsuits can seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include claims for punitive or other special damages. An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, result in the termination or modification of a material contract or otherwise have a material adverse effect on our sales, operations or financial performance. +Performance of Our Products May Affect Our Revenues, Stock Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding +25 +such performance could have an adverse effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Inability To Expand International Sales Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. While we believe international sales of our HIV Self-Test and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will continue or increase. Among other factors, competition from other cheaper products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not continue or increase or if we are otherwise unable to expand international sales of our other products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If we are unable to obtain or continue this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $44.9 million or 25% of consolidated net revenues in 2018, $45.6 million or 27% of consolidated net revenues in 2017 and $28.4 million or 22% of consolidated net revenues in 2016. In addition, our molecular collection systems business, which accounted for $86.5 million or 48% of consolidated net revenues in 2018, is operated in Canada. We also recently acquired Novosanis, a company based in Belgium and we may acquire other foreign companies as part of our business development efforts. +A number of factors could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements (including compliance with applicable customs regulations) and the need for reimbursement approvals; +• +Trade protection measures, additional trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to obtain or maintain regulatory approvals or registrations for our products; +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Multiple jurisdictions and differing tax laws, as well as changes in those laws; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +26 +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our OraQuick ® HIV-1/2 tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our Risk and Liability. +We are currently receiving funding from the U.S. government related to our OraQuick ® Ebola rapid antigen test and we sell some of our products to the federal government. As a result of our U.S. government funding and product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of impropriety related to such contracts are made against us. +Our U.S. Government Contracts May Affect our Intellectual Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including our contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States. +27 +Our U.S. Government Contracts Are Subject to Future Funding and the Government’s Choice to Exercise Options, and May be Terminated for the Government’s Convenience. +Our contracts with the U.S. government are subject to future funding and are subject to the right of the government to terminate the contracts in whole or in part for its convenience. There is pressure for the U.S. government to reduce spending. The non-appropriation of funds or the termination for the government’s convenience of our contracts could negatively affect our financial results. +For U.S. government contracts that include options, such as our BARDA contracts, the U.S. government generally has the unilateral right not to exercise such options and may not exercise an option if the agency is not satisfied with our performance under the contract or does not receive funding to continue the program, among other reasons. If levels of U.S. government expenditures and authorizations for emerging diseases decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options under its contracts with us, our business, revenue and operating results would suffer. +Our U.S. Government Contracts Are Subject To Numerous Requirements in Order to be Reimbursed by the Federal Government. +Our current contracts with BARDA are cost plus fixed fee contracts and potential future contracts with the U.S. government may also be structured this way. Under our cost plus fixed fee contracts, we are allowed to recover our approved costs plus a fixed fee. The total price on a cost plus fixed fee contract is based primarily on allowable costs incurred, but generally is subject to contract funding limitations. U.S. government regulations require us to notify our customer of any cost overruns or underruns on a cost plus contract. If we incur costs in excess of the funding limitation specified in the contract we may not be able to recover those cost overruns. +Our U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on our business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +Risks Relating to Our Industry, Business and Strategy +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products enter the market, our products may become obsolete or a competitor’s products may be more effective or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products that would render our technologies and products obsolete or otherwise commercially unattractive, or introduce or commercialize such products, before we can do so. If we fail to convince our customers of the advantages and economic value of our products or otherwise maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition and results of operations. +28 +We also face competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. We may not be able to compete successfully in such a consolidated industry. We believe industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful Products. +In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new or enhanced products. The research and development process generally takes a significant amount of time from product inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product in which we have invested substantial time and money. +Successful products require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not approve these products for commercial sale or may substantially delay or condition approval. Even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product and entry into or development of new markets for our products may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product. Other factors that could affect the success of our efforts include our ability to manufacture products in a cost-effective manner, whether we can obtain necessary intellectual property rights and protection and our ability to obtain reimbursement authorizations in the markets where the product will be sold. +Accordingly, if we fail to develop and gain commercial acceptance for our products, or if competitors develop more effective products or a greater number of successful new products, customers may decide not to purchase our products or may purchase and use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flow and business. +Failure to Successfully Commercialize a Rapid Point–of-Care Ebola Test Could Adversely Affect Our Results of Operations and Business Prospects. +We have completed development of a rapid Ebola antigen test using our OraQuick ® technology platform. In 2015 and 2016, under an EUA received from the FDA, we sold $2.5 million of product to the CDC for field testing. There were minimal sales of this product during 2017 and no sales in 2018. It is uncertain whether, and to what extent, we will be successful in obtaining additional or sustainable purchase commitments for our Ebola test. Significant efforts are under way to develop a vaccine for the Ebola virus. If a vaccine is developed and widely deployed in the countries at risk for Ebola, the need for testing could be reduced as could the demand for our product. +There is also no assurance that our Ebola test will perform at a level necessary to receive all of the regulatory approvals required for its use. In addition, it is possible that the FDA may revoke our EUA if it is determined that Ebola is no longer an emergency warranting that authorization. Failure to successfully obtain the required regulatory approvals or receive sustainable and significant purchase commitments for our Ebola test could adversely affect our revenues and results of operations. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products or continue growing our business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our +29 +business operations. If our business slows and we ha ve less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, clinical and market development efforts are unsuccessful or del ayed. Furthermore, our failure to successfully introduce new or enhanced products and develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and scientific staff. Our business may be harmed by the loss of a significant number of our executive officers or senior managers. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We generally do not enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +We may pursue strategic acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +We may have difficulties in coordinating geographically separate organizations; +• +We may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• +An acquisition may result in a diversion of resources from our existing products, business and technologies; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +30 +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, li ability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regula tory environments. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +Risks Relating To Our Acquisitions of CoreBiome and Novosanis +The integration of the CoreBiome and Novosanis businesses may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the CoreBiome and Novosanis acquisitions may not be realized in full or at all. +The success of the CoreBiome and Novosanis acquisitions will depend, in part, on our ability to successfully combine and integrate our legacy business with the businesses of CoreBiome and Novosanis. The integration of CoreBiome and Novosanis’ businesses with our existing business is a complex, costly and time-consuming process. It is possible that a number of factors, including, without limitation, the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruptions of ongoing businesses or inconsistencies in standards, controls, procedures and policies, could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisitions. If we experience difficulties with the integration process, the anticipated benefits of the CoreBiome and Novosanis acquisitions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the Company for an undetermined period following the acquisitions. +The Future results of the Combined Companies May Be Adversely Impacted if We Do Not Effectively Manage Our Expanded Operations . +Following the completion of the CoreBiome and Novosanis acquisitions, the size of our business has increased and these acquisitions are expected to enhance our growth in future periods. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of the two companies, but also the increased scale and scope of the combined businesses with its associated increased costs and complexity. There can be no assurances that we will be successful and the CoreBiome and Novosanis acquisitions may have an adverse effect on the Company. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +31 +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to l ower overall federal healthcare spending. The U.S. government recently enacted legislation that eliminated what is known as the “individual mandate” under the Affordable Care Act and may enact other changes in the future. The ultimate content and timing of any of these types of changes in other healthcare reform legislation and the resulting impact on us are impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may incr ease our costs or otherwise have an adverse effect on our financial condition and results of operations. +The Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many medical devices, which includes domestic sales of certain of our products. This new tax became effective in January 2013. However, the Consolidated Appropriations Act of 2016, which was enacted late 2015, suspended the tax beginning January 1, 2016, and this suspension was recently extended through December 31, 2019. Absent further legislative action, this tax will be reinstated in 2020, which could have an adverse effect on our financial condition and results of operations. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention, or CDC, issue diagnostic testing guidelines or recommendations, which can affect the usage of our HIV and HCV testing products. For example, domestic professional OraQuick ® HIV sales have decreased in recent years in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which our OraQuick ® rapid HIV and HCV testing products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use our products. In international markets, we often sell our products to or through foreign governmental agencies or parties funded by such agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government funding as a result of legislative or regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products. +Certain Changes by the Current Administration Could Affect our Business. +Recent changes by the United States federal government have caused uncertainty about the future of trade partnerships and treaties, such as the North American Free Trade Agreement (“NAFTA”). The current administration has initiated negotiations with Canada and Mexico aimed at re-negotiating NAFTA. The U.S., Mexico and Canada have reached a preliminary U.S.-Mexico-Canada Agreement (“USMCA”) which would replace NAFTA. The USMCA maintains duty-free access for most products and leaves most key provisions of the NAFTA agreement largely intact. The USMCA still requires approval by the U.S. Congress, by Mexico’s National Assembly, and by Canada’s Parliament before it enters into force. In addition, the USMCA is still undergoing a legal review and, if past U.S. free trade agreements are any indication, this could result in follow-up negotiations which could lead to modifications of certain provisions. It is uncertain what the outcome of the Congressional approval process, legal review and any follow-up negotiations will be, but it is possible that revisions to NAFTA or failure to secure Congressional approval could adversely affect the Company’s operations. For example, changes in the level of reimbursement or the availability of funding for health care could create +32 +uncertainty for our business and negatively impact our reven ues and results of operations. Similarly a substantial part of DNAG’s revenues represent sales of product from Canada into the United States. The imposition of tariffs or other changes in the trade relationship between Canada and the United States could ne gatively impact DNAG’s performance. Economic and regulatory changes could also affect foreign currency exchange rates which, in turn, could affect our reported financial results and our competitiveness on a worldwide basis. +New Tariffs and Other Trade Measures Could Adversely Affect Our Financial Position, Results of Operations and Cash Flows . +The current U.S. Administration has expressed strong concerns about imports from countries that it perceives as engaging in unfair trade practices, and it is possible the administration could impose import duties or other restrictions on products, components or raw materials sourced from those countries, which may include countries from which we import components or raw materials. Any such import duties or restrictions could have a material adverse effect on our business, results of operations or financial condition. Moreover, these new tariffs, or other changes in U.S. trade policy, could trigger retaliatory actions by affected countries. Certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. +Other foreign governments are considering the imposition of sanctions that will deny U.S. companies access to critical raw materials. A “trade war” of this nature or other governmental actions related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the economic environments in which we operate and, thus may adversely impact our businesses. In addition, there may be changes to existing trade agreements, like NAFTA and its anticipated successor agreement, the USMCA, which are still subject to approval by the United States, Mexico and Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. Any changes to NAFTA (or subsequent trade agreements) could impact our operations in countries where we manufacture or sell products or source components, or materials, which could adversely affect our operating results and our business. +Developments Related To The U.K.’s Referendum On Membership in The EU Could Adversely Affect Us. +In June 2016, a majority of voters in the United Kingdom (“U.K.”) elected to withdraw from the EU in a national referendum. The U.K. is currently negotiating the terms of its exit from the EU (“Brexit”), which is currently scheduled for March 29, 2019. In November 2018, the U.K. and the EU agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K. and a transition period from March 29, 2019 through December 31, 2020 to allow time for a future trade deal to be agreed. On January 15, 2019, the draft Withdrawal Agreement was rejected by the U.K. Parliament creating significant uncertainty about the terms and timing under which the U.K. will leave the EU. +If the U.K. leaves the EU with no agreement, it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the EU and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the EU will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. These changes to the trading relationship between the U.K. and EU would likely result in increased costs of goods imported into and exported from the U.K. +Until the precise terms and timing of the U.K.’s exit from the EU are determined, it will be difficult to predict the impact of the Brexit referendum. Our business in the U.K., the EU and world-wide could be affected during this period of uncertainty, and perhaps longer, by the impact of the Brexit referendum. The U.K.’s decision to exit the EU could cause volatility in global financial markets, including in global currency exchange rates, resulting in a slow-down in economic activity in the U.K., Europe or globally, negatively impact new trade agreements between the U.K and other countries, including the United States, and result in significant regulatory changes and uncertainty. One or more of these events could make it more difficult or costly to sell our products, particularly in the U.K. and Europe, and negatively affect our revenues and results of operations. The Brexit referendum may also influence other countries and result in additional countries deciding to leave the EU This in turn could result in additional changes and uncertainty, any or all of which could negatively impact our business. +Increases in Demand for Our Products Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new machinery or new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be +33 +unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing equipment or facilities may require FDA approval before they can be used to manufacture our products. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products could be adversely affected. +If we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our sales could be adversely affected. If we fail to increase production volumes in a cost effective manner or if we experience lower than anticipated yields or production problems as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, we could experience shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, including for management of inventory, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of our operations. Significant expenditures could be required to remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +Cyber-attacks could result in unauthorized access to our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. Sphere phishing has occurred and is a growing threat that the Company is facing. If successful, these activities could lead to the disclosure of intellectual property or personally identifiable information, which could lead to financial harm and cause reputational damage. We have taken additional steps designed to improve the security of our networks and computer systems. +In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. +34 +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched a gainst a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential bus iness information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt our operations, require significant management attention and resources to remedy a ny damages that result, and damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business. +As our activities continue to evolve and expand, we may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact our business either directly or indirectly. Our failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact our business and future business plans. +Risks Relating to Collaborators +The Use of Sole Supply Sources or Third-Party Suppliers For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third-party suppliers. +We have contracted with a third party in Thailand for the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, our subsidiary, DNAG, uses two third-party manufacturers to supply virtually all of its products, including its Oragene ® line of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +35 +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Our strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +Our collaborators may be acquired by another company, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Our collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +36 +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and gross profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. However, there have been changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, which may impact our ability to protect our technology and enforce our intellectual property rights. For example, in 2011, the U.S. enacted sweeping changes to the U.S. patent system under the Leahy-Smith America Invents Act (the “AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. +We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical information derived from our collaboration with them. +37 +To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and ma intaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonex clusive, and therefore our competitors may have access to the same technology licensed to us. +We May Become Involved in Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, our involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop or acquire; +• +We may be required to alter our product, given the proprietary rights of others; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products. +We may indemnify some customers and strategic partners under our agreements with such parties if our products or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products may contain technology provided to us by other parties, such as contractors, suppliers or customers, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under the AIA, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +38 +Regulatory Risks +The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. Our practice is to train our employees on the legal requirements applicable to our business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances or premarket authorizations can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances and other premarket authorizations can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, or other premarket authorization that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive such approvals, clearances or other premarket authorization could have a material adverse effect on our business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential requirements of the IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. We may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable our customers to access interested funding sources for our products. We may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit our ability to market and sell our products in the relevant country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +39 +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for clinical diagnostic use and they are labeled “For Research Use Only ”, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. +Our Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. In addition, the FDA may revoke an Emergency Use Authorization under which our products are sold, where it is determined that the underlying health emergency no longer exists or warrants such authorization. Such revocation would preclude the sale of our affected products unless and until a further regulatory approval or authorization is obtained. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Our Inability to Manufacture Products in Accordance With Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which we advertise our products. As a device manufacturer, we are required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value we have made to physicians and teaching hospitals and any physician ownership or investment interest in the Company. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +40 +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +The Company believes it is neither a covered entity nor a business associate of a covered entity and is not responsible for complying with the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). However, the Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Failure to Comply With New European Data Protection Requirements Could Increase Our Costs . +The European Union (“EU”) has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are evaluating these new requirements and implementing a plan to ensure compliance. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as the uncertainties that accompany new, comprehensive legislation. +Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive. +Many laws and regulations impose obligations on public companies, and these obligations have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. Examples include the Sarbanes-Oxley Act of 2002, the requirements of The NASDAQ Global Market, The Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language (“XBRL”), and the International Financial Reporting Standards conversion requirements. Our implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs. We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs. These laws and regulations are also subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Although we are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against us, which may adversely affect our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies will be adopted with respect to regulating LDTs. +41 +Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that in volve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDT’s and reduce demand for DNAG’s products and adversely impact our revenues. +Evolving Legislative, Judicial and Ethical Standards on the Use of Technology and Biotechnology Could Affect Our Molecular Collection Systems Business. +The adoption of genetic testing is occurring within the broader context of a myriad of decisions related to genetic patenting and genotyping. Issues associated with regulatory requirements, health insurance, data access and privacy, intellectual property protection, national and international legislative initiatives and other variables impact the widespread adoption of genetic testing or specific segments or tests within the genetic testing market. These developments could impact sales of our molecular collection systems products. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +Our International Sales Create Potential Exposure Under Anti-Corruption Laws . +We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the “FCPA”) and similar foreign laws. In 2018, approximately $44.9 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject us to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. We have operations, enter into agreements with third parties and make sales in countries known to experience corruption. Further international expansion may create increased exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of operations and financial condition. +42 +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption Could Adversely Affect Our Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers. +Volatile economic conditions may occur again or continue in the future. These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute our products or supply us with necessary equipment, raw materials or components. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery. +We Have Experienced Losses in the Past and May Not Be Able To Maintain Profitable Operations . +We experienced annual net losses during the five years prior to 2015. In addition, as of December 31, 2018, the Company had an accumulated deficit of $99.2 million. Even though we achieved profitability since 2015, there can be no assurance that we will be able to sustain his profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• +Our ability to continue growing our molecular collection systems business; +• +Changes in customer buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and +• +Our ability to mitigate declining sales of our OraQuick ADVANCE ® HIV 1/2 test in the United States and expand sales of our OraQuick ® HIV Self-Test internationally; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• +Failure to achieve our revenue growth targets; +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or against us. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +43 +Customers in certain of the m arkets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +Changes in Foreign Currency Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and certain of its international sales are denominated in local currencies, including the Euro, British Pound and Australian Dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the DNAG business will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect DNAG’s revenues and expenses and the translation of DNAG’s financial results into U.S. dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Tax Matters, Including the Changes in Corporate Tax Rates, Disagreements with Taxing Authorities and Imposition of New Taxes Could Impact our Results of Operations and Financial Condition. +We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives. On December 22, 2017, the U.S. Government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). This legislation makes broad and complex changes to the U.S. tax code, including but not limited to reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and accelerating first year expensing of certain capital expenditures. The Tax Act also introduces new tax laws that may impact our taxable income, which will include, but not be limited to, a new provision designed to tax global intangible low taxed income (“GILTI”), limitations on the deductibility of certain executive compensation, creating a base erosion anti-abuse tax (“BEAT”) and modifying or repealing many deductions and credits. The ultimate impacts of the Tax Act may differ from the Company’s estimates due to changes in the interpretations and assumptions made. The Tax Act could also impact changes to our valuation of deferred tax assets and liabilities. Any such change in valuation could have a material impact on our income tax expense and deferred tax balances. Changes in the political makeup of the U.S. Congress could also result in the reversal of some or all of the effects of the Tax Act. +We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position. +We also need to comply with new, evolving or revised tax laws and regulations. The enactment of new or revised foreign or domestic tax regulations or increases in tariffs or changes in the application or interpretation of the Tax Act, could have an adverse effect on our business or on our results of operations. +44 +Our Revolving Credit Facility Contains Certain Financial Covenants Which, if Not Satisfied, Could Limit Our Ability to Borrow in the Future or Result in the Acceleration of the Amounts Borrowed Under This Facility. +Our revolving credit facility with a commercial bank contains various financial and other covenants with which we must comply on an ongoing or periodic basis. If we enter into new or additional credit facilities or loan agreements, we would expect those arrangements would contain similar types of covenants. Although we do not expect to violate these covenants and obligations, if such a violation were to occur, our ability to borrow funds in the future may be adversely affected. To the extent we borrow funds and a subsequent violation occurs, the outstanding debt under our credit facility or other arrangement could become immediately due and payable and our lender(s) could proceed against any collateral securing such indebtedness. +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products; +• +The costs and timing of the expansion of our manufacturing capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments. +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks or Natural Disasters May Adversely Affect Our Business. +Terrorist attacks or natural disasters, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for our products. These events could disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. +Although we have business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. Various types of disasters, including earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities and computer systems. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. Moreover, we may incur incremental costs following an unforeseen event which could adversely affect our results of operation. +45 +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick® HIV, HCV and molecular collection systems products and our OraQuick® In-Home HIV test and HIV Self-Test; +• +Future announcements concerning us and our products, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions; +• +Clinical results with respect to our products or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products; +• +Legislative developments and industry or competitive trends; +• +Biological or medical discoveries; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +46 +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Direct ors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Investor Confidence and Share Value May be Adversely Impacted if We and/or Our Independent Registered Public Accounting Firm Conclude That Our Internal Control Over Financial Reporting is Not Effective. +As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring us, as a public company, to include a report in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must report on the effectiveness of these internal controls. +We expect that our internal controls will continue to evolve as our business activities change. Although we seek to diligently and vigorously review our internal control over financial reporting in an effort to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. In addition, the overall quality of our internal controls may be affected by the internal control over financial reporting implemented by any business we acquire and our ability to assess and successfully integrate the internal controls of any such business. +If, during any year, our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue a report that is qualified. We also could conclude that our internal control over financial reporting is not effective. These events could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our Common Stock. +Our Business Could Be Negatively Impacted as a Result of Stockholder Activism or an Unsolicited Takeover Proposal or a Proxy Contest . +In recent years, proxy contests and other forms of stockholder activism have been directed against numerous public companies. If a proxy contest or an unsolicited takeover proposal is made with respect to us, we could incur significant costs in defending our Company, which would have an adverse effect on our financial results. Stockholder activists may also seek to involve themselves in the governance, strategic direction and operations of our Company. Such proposals may disrupt our business and divert the attention of our management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. In addition, actions of activist stockholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. +47 +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +Future Sales of Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. +Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary corporate office and manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for manufacturing activities. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis, including a 70,000 square foot warehouse in Bethlehem Township, Northampton County, Pennsylvania. In addition, our subsidiary, DNAG, leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, manufacturing, distribution, research and development, and regulatory and quality operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +48 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol “OSUR”. On February 19, 2019, there were 360 holders of record and approximately 13,015 holders in street name of our Common Stock, and the closing price of our Common Stock was $11.53 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number of shares purchased +Average price paid per Share +Total number of shares purchased as part of publicly announced plans or programs +Maximum number (or approximate dollar value) of shares that may yet be repurchased under the plans or programs (1, 2) +October 1, 2018 - October 31, 2018 +27,738 +(3) +$ +14.81 +— +11,984,720 +November 1, 2018 - November 30, 2018 +— +— +— +11,984,720 +December 1, 2018 - December 31, 2018 +— +— +— +11,984,720 +27,738 +— +(1) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no commitment to purchase any shares under this plan. +(3) +Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted shares and performance stock units, these shares were retired to satisfy minimum tax withholdings. +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the period from December 31, 2013 through December 31, 2018. The graph assumes that $100 was invested on December 31, 2013 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +49 +The NASDAQ Composite Index was chosen because it is a broad index of companies whose equity securities are traded on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +* +$100 invested on 12/31/13 in stock or index, including reinvestment of dividends. +Fiscal year ending December 31, +2013 +2014 +2015 +2016 +2017 +2018 +OraSure Technologies, Inc. +100.00 +161.21 +102.38 +139.59 +299.84 +185.69 +NASDAQ Composite +100.00 +114.62 +122.81 +133.19 +172.11 +165.84 +NASDAQ Biotechnology +100.00 +131.71 +140.56 +112.25 +133.67 +121.24 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +50 +ITEM 6. +Selected Consoli dated Financial Data. +The following table sets forth selected consolidated financial data of the Company. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 15 and the information set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” +Selected Consolidated Financial Data +(In thousands, except per share data) +Years ended December 31, +2018 +2017 +2016 +2015 +2014 +Operating Results: +Net revenues +$ +181,743 +$ +167,064 +$ +128,198 +(3) +$ +119,719 +$ +106,464 +Costs and expenses +153,314 +(1) +126,826 +(2) +107,933 +111,661 +111,266 +(4) +Operating income (loss) +28,429 +40,238 +20,265 +8,058 +(4,802 +) +Other income, net +3,287 +794 +58 +774 +531 +Income tax expense +11,320 +10,084 +603 +665 +343 +Net income (loss) +20,396 +30,948 +19,720 +8,167 +(4,614 +) +Earnings (loss) per share +Basic +$ +0.33 +$ +0.52 +$ +0.35 +$ +0.14 +$ +(0.08 +) +Diluted +$ +0.33 +$ +0.51 +$ +0.35 +$ +0.14 +$ +(0.08 +) +Shares used in computing earnings (loss) per share +Basic +61,112 +59,050 +55,615 +56,397 +55,949 +Diluted +62,532 +61,024 +56,513 +56,846 +55,949 +Cash Flow: +Cash flows provided by operating activities +$ +39,090 +$ +28,156 +(2) +$ +24,598 +$ +15,773 +$ +7,526 +(4) +December 31, +2018 +2017 +2016 +2015 +2014 +Financial Position: +Cash, cash equivalents, and investments +$ +201,324 +$ +176,587 +$ +120,950 +$ +101,319 +$ +97,867 +Working capital +191,332 +189,668 +139,106 +111,480 +104,752 +Total assets +315,571 +296,201 +207,935 +189,321 +189,633 +Accumulated deficit +(99,189 +) +(119,510 +) +(150,458 +) +(170,178 +) +(178,345 +) +Stockholders' equity +283,378 +258,081 +185,850 +159,436 +158,701 +(1) +Includes $9.6 million of transition costs associated with our change in management and $1.2 million of transaction costs associated with our acquisitions of CoreBiome and Novosanis. +( 2 ) +Includes a $12.5 million gain associated with the settlement of our litigation with Ancestry.com DNA LLC and its contract manufacturer, which was recorded as a reduction of operating expenses in the indicated period. +( 3 ) +Includes an additional $5.4 million of exclusivity payments recognized in other revenues as a result of the early termination of our HCV co-promotion agreement with AbbVie, bringing total exclusivity payments recognized in 2016 to $18.9 million. +( 4 ) +Includes a $5.5 million gain from the termination of the Company’s oral fluid assay agreement with Roche Diagnostics, which was recorded as a reduction of operating expenses in the indicated period. +51 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. +Overview and Business Segments +Our business is comprised of two segments. Our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. +Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +Our DNAG or molecular collection systems business is operated by our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada. DNAG’s Oragene® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only sample collection products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services, that range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers worldwide, including many leading research universities and hospitals. +Recent Developments +Management Succession Plan +In January 2018, we announced the planned retirement of Douglas A. Michels, our then President and Chief Executive Officer (“CEO”), and Ronald H. Spair, our then Chief Financial Officer (“CFO”) and Chief Operating Officer. Stephen S. Tang, Ph.D., who served as Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective April 1, 2018. Dr. Tang replaced Mr. Michels, who retired as President and CEO, and as a member of the Board, on March 31, 2018. In addition, Roberto Cuca was appointed as the Company’s new CFO, effective June 8, 2018. Mr. Cuca replaced Mr. Spair, who retired as CFO and Chief Operating Officer, and as a member of our Board of Directors, on the same date. Included in our 2018 financial results are $9.6 million in transition costs associated with these changes in management. These costs largely consist of non-cash stock compensation charges. +Business Acquisitions +On January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of CoreBiome, Inc. (“CoreBiome”), pursuant to the terms of a Merger Agreement, dated January 3, 2019. CoreBiome is a Minnesota-based early-stage microbiome laboratory services provider that accelerates research and discovery for customers in the pharmaceutical, agricultural, and research communities. These services provide optimal analytical algorithms to deliver speed and scalability in the lab with precise analytics. +Also on January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of Novosanis NV (“Novosanis”), pursuant to a Share Purchase Agreement, dated January 3, 2019. Novosanis is a Belgian company founded as a spinoff company from the University of Antwerp, Belgium, in 2013. Novosanis is an early commercial-stage producer and distributor of urine +52 +sample collection devices targeted p rimarily at the liquid biopsy and s exually t ransm itted i nfection screening market s . Novosanis’ primary product is Colli-Pee, an easy to use device designed for the standardized collection of first-void urine which can be used in the privacy of the user’s home or in a clinic. The initial commercial appl ication of this product is for liquid biopsy in the prostate and bladder cancer markets. Product validation and clinical trials are also under way with various sexually transmitted infection test manufacturers. +Through December 31, 2018, we have incurred a total of $1.2 million of acquisition related costs, including investment banking fees and accounting, legal and other professional fees, related to both acquisitions, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of income for the year ended December 31, 2018. +BARDA Contract +In August 2016, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and certain clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in additional funding for our rapid Zika test. During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of work covered by this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. +Current Consolidated Financial Results +During the year ended December 31, 2018, our consolidated net revenues of $181.7 million rose 9%, compared to $167.1 million for the year ended December 31, 2017. Net product revenues during the year ended December 31, 2018 increased 2% when compared to 2017, primarily due to higher sales of our molecular collection systems products and higher international sales of our OraQuick ® HIV Self-Test, partially offset by lower sales of our OraQuick ® HCV products, lower domestic sales of our professional OraQuick ® HIV product and lower sales of our cryosurgical products. Royalty income was $9.7 million for the year ended December 31, 2018. Other revenues for 2018 were $6.7 million compared to $5.1 million in 2017. Other revenues in 2018 included $5.0 million of funding received from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our Ebola and Zika products and $1.7 million of cost reimbursement under our Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”). Other revenues in 2017 included $4.4 million of BARDA funding and $689,000 of cost reimbursement. +Our consolidated net income for the year ended December 31, 2018 was $20.4 million, or $0.33 per share on a fully-diluted basis, compared to consolidated net income of $30.9 million, or $0.51 per share on a fully-diluted basis for the year ended December 31, 2017. Results for the current year include $1.2 million of pre-tax transaction costs associated with the recent acquisitions discussed above, and $9.6 million of pre-tax transition costs associated with the executive management changes also noted above. Net income for 2017 included a pre-tax gain of $12.5 million associated with the settlement of our litigation against Ancestry.com DNA LLC and its contract manufacturer. +Cash provided by operating activities for the year ended December 31, 2018 was $39.1 million. Cash provided by operating activities during the year ended December 31, 2017 was $28.2 million and included the $12.5 million litigation settlement noted above. As of December 31, 2018, we had $201.3 million in cash (including restricted cash), cash equivalents, and available-for-sale securities, compared to $176.6 million at December 31, 2017. +53 +Results of Operations +YEAR ENDED DECEMBER 31, 2018 COMPARED TO DECEMBER 31, 2017 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +2018 +2017 +% Change +2018 +2017 +OSUR +$ +78,973 +$ +86,889 +(9 +) +% +43 +% +52 +% +DNAG +86,455 +75,099 +15 +48 +45 +Net product revenues +165,428 +161,988 +2 +91 +97 +Royalty income +9,653 +- +N/A +5 +- +Other +6,662 +5,076 +31 +4 +3 +Net revenues +$ +181,743 +$ +167,064 +9 +% +100 +% +100 +% +Consolidated net product revenues increased 2% to $165.4 million in 2018 from $162.0 million in 2017. Higher sales of our molecular collection systems products and higher international sales of our OraQuick ® HIV Self-Test were partially offset by lower sales of our OraQuick ® HCV products, lower domestic sales of our OraQuick ® HIV products and lower sales of our cryosurgical products. We recorded $9.7 million in royalty income under a litigation settlement agreement with Ancestry.com DNAG LLC and its contract manufacturer. We also recognized $5.0 million as other revenues in connection with funding from BARDA related to our Ebola and Zika products and $1.7 million of cost reimbursement under the Gates Foundation Charitable Support Agreement. Other revenues in 2017 included $4.4 million of BARDA funding and $689,000 of cost reimbursement. +Consolidated net revenues from products sold to customers outside of the United States were $44.9 million and $45.6 million, or 25% and 27% of total net revenues, during the years ended December 31, 2018 and 2017, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +Market +2018 +2017 +% Change +2018 +2017 +Infectious disease testing +$ +56,148 +$ +61,951 +(9 +) +% +65 +% +67 +% +Risk assessment testing +12,058 +12,659 +(5 +) +14 +14 +Cryosurgical systems +10,767 +12,279 +(12 +) +13 +13 +Net product revenues +78,973 +86,889 +(9 +) +92 +94 +Other +6,662 +5,076 +31 +8 +6 +Net revenues +$ +85,635 +$ +91,965 +(7 +) +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market decreased 9% to $56.1 million in 2018 from $62.0 million in 2017. This decrease resulted from lower domestic and international sales of our OraQuick ® HCV product and lower domestic sales of our OraQuick ® HIV product, partially offset by higher international sales of our OraQuick ® HIV Self-Test. +54 +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 201 8 and 201 7 . +Years Ended December 31, +Market +2018 +2017 +% Change +Domestic HIV +$ +19,663 +$ +23,847 +(18 +) +% +International HIV +21,794 +11,301 +93 +Net HIV revenues +41,457 +35,148 +18 +Domestic HCV +7,490 +8,448 +(11 +) +International HCV +4,904 +16,961 +(71 +) +Net HCV revenues +12,394 +25,409 +(51 +) +Net OraQuick® revenues +$ +53,851 +$ +60,557 +(11 +) +% +Domestic OraQuick ® HIV sales decreased 18% to $19.7 million for the year ended December 31, 2018 from $23.8 million for the year ended December 31, 2017. This decrease was primarily the result of competition from point-of-care HIV tests perceived to be more sensitive than our product and competition from fourth generation automated HIV immunoassays performed in a laboratory. +International sales of our OraQuick ® HIV products during 2018 rose 93% to $21.8 million from $11.3 million in 2017. This increase was largely due to the continued shipment of product in support of an HIV self-testing program in Africa, and higher sales of our professional product into certain areas of Europe, Africa, Asia, and Latin America, partially offset by a decline in sales in the Middle East. Funding under the Charitable Support Agreement with the Gates Foundation began in the third quarter of 2017 and product revenues in 2018 and 2017 included approximately $4.4 million and $1.0 million of support payments under that agreement, respectively. +Domestic OraQuick ® HCV sales decreased 11% to $7.5 million in 2018 from $8.4 million in 2017 primarily due to customer ordering patterns and to the non-renewal of, or reductions in, grant funding of HCV testing programs. International OraQuick ® HCV sales decreased 71% to $4.9 million in 2018 from $17.0 million in 2017, due to the non-renewal of a supply contract with a foreign government in support of a countrywide HCV eradication program and the loss of a multi-national humanitarian organization customer that switched to a competitive product due to pricing. +Risk Assessment Market +Sales to the risk assessment market decreased 5% to $12.1 million for the year ended December 31, 2018 from $12.6 million for the year ended December 31, 2017, primarily as a result of a large customer who stopped performing pre-employment drug testing. +Cryosurgical Systems Market +Sales of our cryosurgical systems products decreased 12% to $10.8 million in 2018 from $12.3 million in 2017 due to lower sales of our domestic Histofreezer® product to physicians’ offices due to competitive losses from lower-priced products that have entered the market as result of the expiration of the patents associated with our cryosurgical technology and lower sales of our international OTC cryosurgical products. +Other revenues +Other revenues in 2018 increased 31% to $6.7 million from $5.1 million in 2017. Revenue from BARDA funding increased to $5.0 million in 2018 compared to $4.4 million in 2017 as a result of increased efforts related to our Ebola and Zika products. Other revenues in 2018 also included $1.7 million in reimbursement of certain costs under our Charitable Support Agreement with the Gates Foundation. Reimbursement of these costs began in the third quarter of 2017 and other revenue in 2017 included $689,000 of such cost reimbursement. +DNAG Segment +Molecular Collection Systems +Sales of our molecular collection systems products increased 28% to $96.1 million in 2018 from $75.1 million in 2017. +55 +The table below shows a breakdown of our total net molecular collection systems revenues (dollars in thousands) during 2018 and 2017 . +Years Ended December 31, +Market +2018 +2017 +% Change +Genomics +$ +79,765 +$ +71,611 +11 +% +Microbiome +6,690 +3,488 +92 +Net molecular collection systems product revenues +86,455 +75,099 +15 +% +Royalty income +9,653 +- +N/A +Net molecular collection systems revenues +$ +96,108 +$ +75,099 +28 +% +Sales of our genomics products rose 11% to $79.8 million in 2018 compared to $71.6 million in 2017, largely as a result of higher customer demand primarily from a large consumer genetics customer, higher sales to academic customers, increased demand of our genomics business in Asia, and higher sales of our ORAcollect ® product. Microbiome sales increased 92% to $6.7 million in 2018 compared to $3.5 million in 2017 as interest in our microbiome product offering continues to grow with both new and existing customers. +Early in 2019, we learned that our largest commercial genomics customer intends to change its purchasing patterns and promotional strategies, which would reduce purchases of our products. While this change in purchasing patterns may significantly impact results in the first quarter of 2019, we expect that the effect of these changes will be moderated over the course of the full year 2019 by growth in other genomic accounts. +We recorded $9.7 million of royalty income in 2018 earned under a litigation settlement agreement. This royalty agreement was entered into in 2017 and required royalty payments beginning in the first quarter of 2018. There were no revenues of this nature in 2017. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit percentage was 63% for the year ended December 31, 2018 compared to 59% for 2017. Gross profit percentage in 2018 benefited from improved product mix associated with an increase in higher gross profit percentage sales, lower manufacturing costs associated with our Oragene ® product, increased royalty income and other revenues which have a gross profit percentage of 100%, lower scrap and spoilage costs and lower royalty expense. +Consolidated operating income in 2018 was $28.4 million, an $11.8 million decline from $40.2 million of operating income reported in 2017. Operating income in 2017 included a pre-tax gain of $12.5 million associated with the settlement of our litigation against Ancestry.com DNA LLC and its contract manufacturer. In addition, our results for 2018 were negatively impacted by the inclusion of $9.6 million of transition costs associated with executive management changes, $1.2 million of transaction costs associated with our recent acquisitions, and increased spending on research and development and sales and marketing. +OPERATING INCOME (LOSS) BY SEGMENT +OSUR Segment +OSUR’s gross profit percentage was 56% in 2018 compared to 58% in 2017. OSUR’s gross profit percentage in 2018 was negatively impacted by an increase in lower profit percentage revenues as a result of higher international sales, partially offset by the increase in BARDA funding and cost reimbursement from the Gates Foundation, and lower scrap and spoilage costs and royalty expense. +Research and development expenses increased 21% to $12.7 million in 2018 from $10.5 million in 2017, due to increased spending on our Ebola and Zika products, higher staffing costs, and increased product registration fees related to our expansion in more international markets. +Sales and marketing expenses increased 5% to $19.9 million in 2018 from $18.9 million in 2017, primarily as a result of increased consulting costs associated with our international sales contractors and increased staffing costs associated with higher headcount. +General and administrative expenses increased 35% to $35.3 million in 2018 from $26.1 million in 2017 as a result of the inclusion of $9.6 million of transition costs associated with executive management changes, $1.2 million of transaction costs associated with our recent acquisitions, and higher consulting costs partially offset by a decrease in other staffing related costs. +56 +All of the above contributed to OSUR’ s operating loss of $ 20.1 million for 2018 , which included non-cash charges of $ 3 . 8 million for depreciation and amortization and $ 14.7 million for stock-based compensation. +DNAG Segment +DNAG’s gross profit percentage was 69% in 2018 compared to 61% in 2017. This increase was attributable to the royalty income recorded in 2018 and improved product mix associated with an increase in higher gross profit percentage sales and lower manufacturing costs associated with our Oragene ® product. No royalty income was recorded in 2017. +Research and development expenses increased 25% to $3.5 million in 2018 from $2.8 million in 2017 due to higher staffing costs associated with the development of new product and service offerings. +Sales and marketing expenses increased 12% to $10.7 million in 2018 compared to $9.6 million in 2017 due to higher staffing and commission expenses. +General and administrative expenses decreased 4% to $3.1 million in 2018 compared to $3.2 million in 2017, due to lower legal costs. +Operating expenses in 2017 were offset by the $12.5 million pre-tax gain associated with the settlement of the Ancestry litigation. +All of the above contributed to DNAG’s operating income of $48.6 million for 2018, which included non-cash charges of $3.4 million for depreciation and amortization and $540,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against OSUR’s total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2018, we recorded state income tax expense of $155,000 compared to $0 in the year ended December 31, 2017. Canadian income tax expense of $11.2 million and $10.1 million was recorded in 2018 and 2017, respectively. The increase in income tax expense was largely a result of the increase in income before taxes generated by DNAG partially offset by the additional taxes recorded during 2017 related to the $12.5 million litigation settlement which did not re-occur in 2018. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”) that instituted fundamental changes to the taxation on multinational corporations. The impact of the Tax Act on our financial results is not material given OSUR has a full valuation allowance against its total U.S. deferred tax assets and due to the net operating losses (“NOLs”) and tax credits that are being generated by the U.S. entity. +YEAR ENDED DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +2017 +2016 +% Change +2017 +2016 +OSUR +$ +86,889 +$ +74,710 +16 +% +52 +% +58 +% +DNAG +75,099 +32,214 +133 +45 +25 +Net product revenues +161,988 +106,924 +51 +97 +83 +Other +5,076 +21,274 +(76 +) +3 +17 +Net revenues +$ +167,064 +$ +128,198 +30 +% +100 +% +100 +% +Consolidated net product revenues increased 51% to $162.0 million in 2017 from $106.9 million in 2016. Higher sales of our molecular and OraQuick ® HCV products and higher international sales of our OraQuick ® HIV Self-Test were partially offset by lower domestic sales of our professional OraQuick ® HIV product and lower domestic and OTC sales of our cryosurgical products. In 2017, we recognized $4.4 million as other revenues in connection with funding from BARDA related to our Ebola and Zika products and $689,000 of cost reimbursement under the Gates Foundation agreement. Other revenues in 2016 included $18.9 million in exclusivity payments received under our AbbVie HCV co-promotion agreement and $2.3 million in BARDA funding. Our co-promotion +57 +agreement with AbbVie was terminated on December 31, 2 016 and no further revenues were recognized under this agreement after that date. +Consolidated net revenues from products sold to customers outside of the United States were $45.6 million and $28.4 million, or 27% and 22% of total net revenues, during the years ended December 31, 2017 and 2016, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +Net Revenues by Segment +OSUR Segment +The table below shows the amount of total net revenues (dollars in thousands) generated by our OSUR segment. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +Market +2017 +2016 +% Change +2017 +2016 +Infectious disease testing +$ +61,951 +$ +48,408 +28 +% +67 +% +50 +% +Risk assessment testing +12,659 +13,068 +(3 +) +14 +14 +Cryosurgical systems +12,279 +13,234 +(7 +) +13 +14 +Net product revenues +86,889 +74,710 +16 +94 +78 +Other +5,076 +21,274 +(76 +) +6 +22 +Net revenues +$ +91,965 +$ +95,984 +(4 +) +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market increased 28% to $61.9 million in 2017 from $48.4 million in 2016. This increase resulted from higher sales of our OraQuick ® HCV product and higher international sales of our OraQuick ® HIV Self-Test, partially offset by a decline in domestic sales of our professional OraQuick ® HIV product. +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2017 and 2016. +Years Ended December 31, +Market +2017 +2016 +% Change +Domestic HIV +$ +23,847 +$ +27,819 +(14 +) +% +International HIV +11,301 +5,248 +115 +Net HIV revenues +35,148 +33,067 +6 +Domestic HCV +8,448 +7,436 +14 +International HCV +16,961 +6,630 +156 +Net HCV revenues +25,409 +14,066 +81 +Net OraQuick® revenues +$ +60,557 +$ +47,133 +28 +% +Domestic OraQuick ® HIV sales decreased 14% to $23.8 million for the year ended December 31, 2017 from $27.8 million for the year ended December 31, 2016. This reduction was primarily the result of competitive losses tied to pricing, the loss of sales to point-of-care HIV tests perceived to be more sensitive, and the testing guidelines issued by the Centers for Disease Control and Prevention (“CDC”) recommending the use of competing fourth generation automated HIV immunoassays performed in a laboratory. An increase in sales of our OraQuick ® In-Home HIV test partially offset the decrease in sales of our professional HIV product. +International sales of our OraQuick ® HIV products during 2017 rose 115% to $11.3 million from $5.2 million in 2016. This increase was largely due to the continued shipment of product in support of an HIV self-testing program in Africa, and higher sales of our professional product into certain areas of Africa, Asia, and Latin America, partially offset by a decline in sales in the Middle East and Europe. Funding under the Ch aritable Support Agreement with the Gates Foundation began in the third quarter of 2017 and product revenues in 2017 included approximately $1.0 million of support payments under that agreement. +Domestic OraQuick ® HCV sales increased 14% to $8.4 million in 2017 from $7.4 million in 2016 primarily due to higher sales to our U.S. public health customers in support of HCV testing program expansion, higher sales to non-acute healthcare offices, and increased +58 +sales to hospitals. International OraQuick ® HCV sales increased 156% to $17.0 million in 2017 from $6.6 million in 2016, largely due to continued product shipments to a foreign government to support a nationwide HCV testing and treatment program a nd increased sales in Asia and Africa, partially offset by the loss of a multi-national humanitarian organization customer who switched to a competitive product due to pricing. O ur supply contract with the foreign government was not renewed. During 2017, w e recorded $11.8 million in revenue from this contract. +Risk Assessment Market +Sales to the risk assessment market decreased 3% to $12.6 million for the year ended December 31, 2017 from $13.1 million for the year ended December 31, 2016, primarily as a result of a reduction of inventory maintained by one of our largest customers and lab closings due to consolidations occurring in the laboratory service industry, partially offset by higher sales resulting from increased drug testing in the pain management and drug treatment markets. +Cryosurgical Systems Market +Sales of our cryosurgical systems products decreased 7% to $12.3 million in 2017 from $13.2 million in 2016 due to a decrease in sales of our Histofreezer ® product to physicians’ offices in the United primarily due to timing of orders placed by our distributors and loss of sales due to competing private label products. These declines in sales were partially offset by increased sales into new markets and additional business generated by our new mid-tier distributors. In addition, sales of our international OTC cryosurgical products during 2017 decreased largely due to lower sales into Europe as a result of competitive pressures and lower sales in Latin America due to the economic instability of certain countries in that region. +Other revenues +Other revenues in 2017 decreased 76% to $5.1 million from $21.3 million in 2016. Other revenues in 2016 included AbbVie exclusivity revenues of $18.9 million. There were no similar revenues in 2017 due to the termination of our AbbVie HCV co-promotion agreement on December 31, 2016. Revenues related to funding from BARDA increased to $4.4 million in 2017 compared to $2.3 million in 2016. Revenues in 2017 also include $689,000 in reimbursement of certain costs under our Charitable Support Agreement with the Gates Foundation. No such cost reimbursement occurred in 2016. +DNAG Segment +Molecular Collection Systems +Sales of our molecular collection systems products increased 133% to $75.1 million in 2017 from $32.2 million in 2016. +The table below shows a breakdown of our total net molecular collection systems revenues (dollars in thousands) generated during 2017 and 2016. +Years Ended December 31, +Market +2017 +2016 +% Change +Genomics +$ +71,611 +$ +31,079 +130 +% +Microbiome +3,488 +1,135 +207 +Net molecular collection systems product revenues +75,099 +32,214 +133 +% +Genomics sales were up 130% to $71.6 million in 2017 compared to $31.1 million in 2016, largely as a result of higher customer demand primarily from a large customer in the consumer genetics market. Microbiome sales increased 207% to $3.5 million in 2017 compared to $1.1 million in 2016 as interest in our microbiome product offering continued to grow with both new and existing customers. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit percentage was 59% for the year ended December 31, 2017 compared to 69% for the comparable period of 2016. Gross profit percentage for 2017 decreased primarily due to the absence of AbbVie exclusivity revenues, an increase in lower gross profit percentage international product sales, and higher scrap and spoilage costs. +Consolidated operating income in 2017 was $40.2 million, a $19.9 million improvement from $20.3 million of operating income reported in 2016. Operating income in 2017 benefited from increased product revenues, the Ancestry litigation settlement gain, and +59 +lower sales and marketing costs, partially offset by the loss of AbbVie exclusivity revenues recorded in the prior year and higher research and development and general and administrative expenses. +OPERATING INCOME (LOSS) BY SEGMENT +OSUR Segment +OSUR’s gross profit percentage was 58% in 2017 compared to 69% in 2016. OSUR’s gross profit percentage was negatively impacted in 2017 primarily by the absence of exclusivity revenues under our AbbVie agreement ($18.9 million was recorded in 2016 versus none in 2017), an increase in lower gross profit percentage international product sales, and an increase in scrap and spoilage costs. +Research and development expenses increased 50% to $10.5 million in 2017 from $7.0 million in 2016, largely as a result of the inclusion in 2016 of a $1.4 million payment received to settle a claim against one of our raw material suppliers. This settlement was recorded as a reduction in research and development expense in 2016. During 2017, research and development expenses also increased due to higher supply costs associated with the development of our Ebola and Zika products and increased staffing expenses. +Sales and marketing expenses decreased 11% to $18.9 million in 2017 from $21.3 million in 2016, primarily as a result of the termination of our AbbVie HCV co-promotion agreement on December 31, 2016. During 2016, we incurred $1.1 million of detailing and co-promotion expenses associated with the AbbVie agreement. No such costs were incurred for 2017. For the year ended December 31, 2017, we also experienced lower staffing costs, partially offset by higher external commissions payable to certain international distributors. +General and administrative expenses increased 16% to $26.1 million in 2016 from $22.6 million in 2016 due to higher staffing costs and an increase in accrued employee bonuses as a result of the Company’s strong performance. +All of the above contributed to OSUR’s operating loss of $2.7 million for 2017, which included non-cash charges of $3.2 million for depreciation and amortization and $6.4 million for stock-based compensation. +DNAG Segment +DNAG’s gross profit percentage was 61% in 2017 compared to 67% in 2016. The decline in gross profit percentage was primarily due to an increase in lower gross profit percentage sales in 2017 as compared to 2016. +Research and development expenses increased 4% to $2.8 million in 2017 from $2.7 million in 2016 due to higher staffing costs. +Sales and marketing expenses increased 15% to $9.6 million in 2017 compared to $8.3 million in 2016 due to higher staffing and commission expenses. +General and administrative expenses decreased 45% to $3.2 million in 2017 compared to $5.7 million in 2016, largely due to lower legal costs as our lawsuit with Ancestry and its contract manufacturer was settled in the first quarter of 2017. +Operating expenses in 2017 were offset by the $12.5 million pre-tax gain associated with the settlement of the Ancestry litigation. +All of the above contributed to DNAG’s operating income of $43.0 million for 2017, which included non-cash charges of $3.2 million for depreciation and amortization and $543,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +For the year ended December 31, 2017, we recorded state income tax expense of $0 compared to $250,000 in the year ended December 31, 2016. Canadian income tax expense of $10.1 million and $353,000 was recorded in 2017 and 2016, respectively. Canadian taxes in 2017 included the additional taxes due as a result of the $12.5 million Ancestry litigation settlement gain and DNAG’s increased pre-tax income. +60 +Liquidity and C apital Resources +December 31, +2018 +2017 +(In thousands) +Cash, cash equivalents and restricted cash +$ +88,438 +$ +72,869 +Available for sale securities +112,886 +103,718 +Working capital +191,332 +189,668 +Our cash, cash equivalents, restricted cash and available-for-sale securities increased to $201.3 million at December 31, 2018 from $176.6 million at December 31, 2017. Our working capital increased to $191.3 million at December 31, 2018 from $189.7 million at December 31, 2017. +During 2018, we generated $39.1 million in cash from operating activities. Our net income of $20.4 million included non-cash charges for stock-based compensation expense of $15.2 million, depreciation and amortization expense of $7.2 million, and other non-cash benefits of $1.3 million. Additional sources of cash included a $6.6 million decrease in accounts receivable as a result of the collection of large outstanding balances, and a $2.2 million increase in deferred revenue due to the revenue recognition associated with a multi-year contract with variable pricing. Offsetting these sources of cash were a decrease in accrued expenses and other liabilities of $7.3 million largely due to the submission of tax payments to the Canadian taxing authorities, payment of our 2017 management incentive bonuses offset by current year accruals for 2018 taxes and bonuses, and payment of our 2017 royalty obligations. An additional use of cash is attributable to an increase in inventory of $3.9 million due to the timing of raw material purchases at the end of the year. +Net cash used in investing activities was $17.4 million for the year ended December, 2018, which reflects $163.8 million used to purchase investments and $6.3 million to acquire property and equipment partially offset by $152.7 million in proceeds from the maturities and redemptions of investments. +Net cash used in financing activities was $1.9 million in 2018, which resulted from $3.6 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted and performance award shares partially offset by $1.7 million in proceeds received from the exercise of stock options. +In September 2016, we entered into a credit agreement (the “Credit Agreement”) with a commercial bank, which was amended in December 2017. The Credit Agreement provides for revolving extensions of credit in an initial aggregate amount of up to $10.0 million (inclusive of a letter of credit subfacility of $2.5 million). Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings under this facility at December 31, 2018 or 2017. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement will be subject to an unused line fee of 0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2018 and 2017, we were in compliance with all applicable covenants under the Credit Agreement. +Our current balances of cash and cash equivalents and available-for-sale securities and our available borrowing capacity are expected to be sufficient to fund our current operating and capital needs for the foreseeable future. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $72.5 million or 36% of our $201.3 million in cash, cash equivalents, restricted cash and available-for-sale securities belongs to our Canadian subsidiary. Repatriation of such cash into the United States exceeding certain levels could have adverse tax consequences. +61 +Contractua l Obligations and Commercial Commitments +The following sets forth our approximate aggregate obligations as of December 31, 2018 (in thousands) for future payments under contracts and other contingent commitments, for the year 2019 and beyond: +Payments due by December 31, +Contractual Obligations +Total +2019 +2020 +2021 +2022 +2023 +Thereafter +Operating leases 1 +$ +4,775 +$ +903 +$ +902 +$ +877 +$ +850 +$ +506 +$ +737 +Employment contracts 2 +4,538 +1,779 +1,779 +980 +— +— +— +Purchase obligations 3 +10,140 +9,683 +402 +19 +19 +17 +— +Total contractual obligations +$ +19,452 +$ +12,365 +$ +3,083 +$ +1,876 +$ +869 +$ +523 +$ +737 +1 +Represents payments required under our operating leases. See Note 12 of the Notes to the consolidated financial statements included herein. +2 +Represents salary payments payable under the terms of employment agreements executed by us with certain executives. See Note 12 of the Notes to the consolidated financial statements included herein. +3 +Represents payments required by non-cancellable purchase orders or supply agreements related to inventory, supplies, capital expenditures and other goods or services. The supply agreements are cancellable within a specified number of days of written notice to the supplier. See Note 12 of the Notes to the consolidated financial statements included herein. +Off-Balance Sheet Arrangements . We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make judgements and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +Our net revenues recorded for sales of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of operations. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services. +62 +Other revenues consist primarily of exclusivity revenues, royalty i ncome, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs . Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. On June 30, 2016, we mutually agreed to terminate our agreement effective December 31, 2016. Accordingly, we did not record any revenue from this co-promotion agreement during 2018 and 2017. During 2016, $18.9 million in exclusivity revenues were recognized and recorded as other revenue in our consolidated statements of income. +As part of our litigation settlement agreement with Ancestry.com DNA LLC (“Ancestry”) and its contract manufacturer, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. During the year ended December 31, 2018, we recorded $9.7 million in royalty income under this agreement. +On June 12, 2015, we were awarded a grant for up to $10.4 million in total funding from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® Ebola rapid antigen test. The three-year, multi-phased grant, with an original expiration date of October 2018, was recently amended and extended through December 31, 2019, included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised options to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola test. Amounts related to this grant are recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2018, 2017 and 2016, $3.0 million, $2.0 million and $1.7 million, respectively, were recognized in connection with this grant. +In August 2016, we were awarded a contract for up to $16.6 million in total funding from BARDA related to our rapid Zika test. The initial six-year, multi-phased contract includes an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in additional funding for our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of work covered by this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. During 2018, 2017, and 2016, $2.0 million, $2.4 million and $616,000, respectively, were recognized in connection with this grant. +In June 2017, we entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that enables us to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries with funding from the Gates Foundation. The funding will consist of support payments tied to volume of product sold by us and reimbursement of certain related costs. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20.0 million over the four-year term or $6.0 million each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a component of product revenue. During 2018 and 2017, $4.4 million and $1.0 million, respectively, of support payments were recognized in product revenue in connection with this agreement. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated statements of income. During 2018 and 2017, $1.7 million and $689,000, respectively, was recognized in other revenue in connection with this agreement. +We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2018 and 2017 includes customer prepayments of $2.1 million and $1.0 million, respectively. Deferred revenue as of December, 2018 and 2017 also includes $1.5 million and $269,000, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue is recognized at that rate. +Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. +Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +63 +Other than for sales of our OraQuick® In-Home HIV test to the retail trade, we generally do not grant product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +As a result of the return rights granted to our customers for our OraQuick® In-Home HIV test, we have recorded an estimate of expected returns as a reduction of gross OraQuick® In-Home HIV product revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. As of December 31, 2018 and December 31, 2017, the reserve for sales returns and allowances was $191,000 and $217,000, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract. +Inventories . Our inventories are valued at the lower of cost or net realizable value, with cost determined on a first-in first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories based primarily on the estimated forecast of product sales. When, in the opinion of management, factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we also reserve for unidentified scrap or spoilage under a fixed-formula methodology. During 2018, 2017, and 2016 we wrote-off inventory which had a cost of $1.3 million, $3.3 million and $739,000, respectively. These write-offs were a result of quality, scrap and product expiration issues. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Deferred Tax Assets and Liabilities . We re-measured our federal net deferred tax asset based on the federal rate at which they were expected to reverse in the future which is 21% pursuant to the recently enacted Tax Act. We also re-measured our state net deferred asset since the future federal benefit was reduced to 21%. +At December 31, 2018, we had federal Net Operating Loss (“NOL”) carryforwards of $47.4 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $18.1 million at December 31, 2018. Net operating losses will begin to expire in 2030. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. +We currently have a full valuation allowance recorded against our total U.S. deferred tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax asset in the immediate future. Each year, we continue to reevaluate our valuation allowance position and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized in the immediate future. As such, we maintain a full valuation allowance as of December 31, 2018 and 2017 against our deferred tax assets associated with the operations subject to income tax in the U.S. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes in the ownership of our stock. The Company does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income and the Company continues to review ownership changes on an annual basis. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +64 +As of December 31, 2018, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 2.9% of our total revenues for the year ended December 31, 2018. We do have foreign currency exchange risk related to our operating subsidiary in Canada. While the majority of this subsidiary’s revenues are recorded in U.S. dollars, almost all of this subsidiary’s operating expenses are denominated in Canadian do llars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar could affect year-to-year comparability of operating results and cash flows. Our Canadian subsidiary had net assets, subject to translation, of $146.8 million CAD ($10 7.7 million USD), which are included in the Company’s consolidated balance sheet as of December 31, 2018. A 10% unfavorable change in the Canadian-to-U.S. dollar exchange rate would have decreased our comprehensive income by $10.8 million in the year ended December 31, 2018. +ITEM 8. +Financial Statements and Supplementary Data. +Information with respect to this Item is contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +ITEM 9. +Changes in and Disagreeme nts with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2018. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2018 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2018. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +65 +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries ’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2019 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +February 28, 2019 +ITEM 9B. +Other Information. +Not applicable. +66 +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by this Item is incorporated by reference to the information under the captions “Proposal No. 1. Election of Directors,” “Corporate Governance - Governance Guidelines and Code of Conduct,” “Corporate Governance – Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. +Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. +Executive Compensation. +The information required by this Item is incorporated by reference to the information under the captions “Compensation Committee Matters” (including the “Compensation Committee Report”), “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and Potential Payments Upon Termination or Change in Control,” and “Director Compensation” in the Proxy Statement. +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item with respect to the securities ownership of certain beneficial owners and management, and equity compensation plan information, is incorporated by reference to the information under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance - Director Independence” in the Proxy Statement. +ITEM 14. +Principal Accountant Fees and Services. +The information required by this Item is incorporated by reference to the information under the caption “Audit Committee Matters” in the Proxy Statement. +67 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., as amended and restated as of February 19, 2018, are incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. +10.1 +Employment Agreement dated as of January 3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Employment Agreement, dated as of June 22, 2004, between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.4 +Amendment No. 2 to Employment Agreement, dated as of December 15, 2010, between the Company and Douglas A. Michels, is incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.5 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Douglas A. Michels is incorporated by reference to Exhibit 99.1 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.6 +Retirement Agreement, dated as of January 3, 2018 between OraSure Technologies, Inc. and Douglas A. Michels, is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.7 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Ronald H. Spair, is incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.8 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.9 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Ronald H. Spair, is incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.10 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Ronald H. Spair is incorporated by reference to Exhibit 99.2 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.11 +Retirement Agreement, dated as of January 31, 2018, between OraSure Technologies, Inc. and Ronald H. Spair is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 2, 2018.* +10.12 +Employment Agreement, dated as of May 4, 2018, between the Company and Roberto Cuca is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2018.* +10.13 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +68 +Exhibit +Number +Exhibit +10.14 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.15 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.16 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Jack E. Jerrett is incorporated by reference to Exhibit 99.3 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.17 +Employment Agreement, dated as of January 3, 2011, between the Company and Anthony Zezzo II is incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.18 +Terms of Employment for Michael Reed, Senior Vice President and Chief Science Officer for OraSure Technologies, Inc., is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* +10.19 +Employment Agreement, dated as of January 7, 2008, between DNA Genotek, Inc. and Brian Smith, as amended July 25, 2011 and June 16, 2016, is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.* +10.20 +Retirement Agreement, dated as of January 1, 2019, between DNA Genotek, Inc. and Brian Smith as incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 27, 2018.* +10.21 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc.* +10.22 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed May 11, 2018. * +10.23 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.24 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.25 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective February 21, 2017, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 5, 2017, for the 2017 Annual Meeting of Stockholders.* +10.26 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.27 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.28 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.29 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.30 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.31 +Description of the OraSure Technologies, Inc. 2018 Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed February 22, 2018.* +10.32 +Description of Long-Term Incentive Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed February 24, 2017.* +10.33 +Description of Amendment to Long-Term Incentive Policy is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed August 17, 2018.* +10.34 +Description of Long-Term Incentive Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed February 14, 2019.* +69 +Exhibit +Number +Exhibit +10.35 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.36 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.37 +Credit Agreement, between Wells Fargo Bank, National Association, and OraSure Technologies, Inc., is incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. +10.38 +First Amendment to Credit Agreement, dated as of December 20, 2017, by and among OraSure Technologies, Inc., Wells Fargo Bank, National Association, and the Lending Parties thereto, is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-k filed December 21, 2017. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney . +31.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended . +31.2 +Certification of Roberto Cuca required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended . +32.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Roberto Cuca required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase document +* +Management contract or compensatory plan or arrangement. +ITEM 16. +Form 10-K Summary. +None +70 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2019. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Stephen S. Tang +Stephen S. Tang, Ph.D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 28, 2019, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Stephen S. Tang +President, Chief Executive Officer and Director +(Principal Executive Officer) +Stephen S. Tang, Ph.D. +/s/ Roberto Cuca +Chief Financial Officer +(Principal Financial Officer) +Roberto Cuca +/s/ Michele Miller +Vice President, Finance and Controller +(Principal Accounting Officer) +Michele Miller +*MARA ASPINALL +Mara Aspinall +Director +*MICHAEL CELANO +Michael Celano +Director +*EAMONN P. HOBBS +Eamonn P. Hobbs +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*CHARLES W. PATRICK +Charles W. Patrick +Director +*ARADHANA SARIN +Aradhana Sarin +Director +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +71 +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Income +F-4 +Consolidated Statements of Comprehensive Income +F-5 +Consolidated Statements of Stockholders’ Equity +F-6 +Consolidated Statements of Cash Flows +F-7 +Notes to the Consolidated Financial Statements +F-8 +REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +February 28, 2019 +F-2 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2018 +December 31, 2017 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ +88,438 +$ +71,029 +Restricted cash +— +1,840 +Short-term investments +68,134 +83,028 +Accounts receivable, net of allowance for doubtful accounts of $418 and $471 +34,842 +42,521 +Inventories +22,888 +19,343 +Prepaid expenses +1,925 +1,658 +Other current assets +3,085 +2,486 +Total current assets +219,312 +221,905 +PROPERTY AND EQUIPMENT, net +24,299 +21,372 +INTANGIBLE ASSETS, net +5,137 +8,223 +GOODWILL +18,521 +20,083 +LONG TERM INVESTMENTS +44,752 +20,690 +OTHER ASSETS +3,550 +3,928 +TOTAL ASSETS +$ +315,571 +$ +296,201 +LIABILITIES AND STOCKHOLDERS' EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +10,598 +$ +10,228 +Deferred revenue +3,521 +1,314 +Accrued expenses +13,861 +20,695 +Total current liabilities +27,980 +32,237 +OTHER LIABILITIES +3,312 +3,932 +DEFERRED INCOME TAXES +901 +1,951 +COMMITMENTS AND CONTINGENCIES (Note 12) +STOCKHOLDERS' EQUITY +Preferred stock, par value $.000001, 25,000 shares authorized, none issued +— +— +Common stock, par value $.000001, 120,000 shares authorized, 61,276 and +60,662 shares issued and outstanding +— +— +Additional paid-in capital +401,273 +387,931 +Accumulated other comprehensive loss +(18,706 +) +(10,340 +) +Accumulated deficit +(99,189 +) +(119,510 +) +Total stockholders' equity +283,378 +258,081 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY +$ +315,571 +$ +296,201 +See accompanying notes to the consolidated financial statements. +F-3 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF INCOME +(in thousands, except per share amounts) +For the years ended December 31, +2018 +2017 +2016 +NET REVENUES: +Product +$ +165,428 +$ +161,988 +$ +106,924 +Royalty +9,653 +- +- +Other +6,662 +5,076 +21,274 +181,743 +167,064 +128,198 +COST OF PRODUCTS SOLD +68,130 +68,108 +40,171 +Gross profit +113,613 +98,956 +88,027 +OPERATING EXPENSES: +Research and development +16,250 +13,365 +9,754 +Sales and marketing +30,609 +28,532 +29,652 +General and administrative +38,325 +29,321 +28,356 +Gain on litigation settlement +— +(12,500 +) +— +85,184 +58,718 +67,762 +Operating income +28,429 +40,238 +20,265 +OTHER INCOME +3,287 +794 +58 +Income before income taxes +31,716 +41,032 +20,323 +INCOME TAX EXPENSE +11,320 +10,084 +603 +NET INCOME +$ +20,396 +$ +30,948 +$ +19,720 +EARNINGS PER SHARE: +BASIC +$ +0.33 +$ +0.52 +$ +0.35 +DILUTED +$ +0.33 +$ +0.51 +$ +0.35 +SHARES USED IN COMPUTING EARNINGS PER SHARE: +BASIC +61,112 +59,050 +55,615 +DILUTED +62,532 +61,024 +56,513 +See accompanying notes to the consolidated financial statements. +F-4 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(in thousands) +For the years ended December 31, +2018 +2017 +2016 +NET INCOME +$ +20,396 +$ +30,948 +$ +19,720 +OTHER COMPEHENSIVE INCOME (LOSS) +Currency translation adjustments +(8,003 +) +4,433 +1,419 +Unrealized loss on marketable securities +(363 +) +(553 +) +— +COMPREHENSIVE INCOME +$ +12,030 +$ +34,828 +$ +21,139 +See accompanying notes to the consolidated financial statements. +F-5 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2018, 2017 and 2016 +(in thousands) +Common Stock +Additional +Paid-in +Accumulated +Other +Comprehensive +Accumulated +Shares +Amount +Capital +Loss +Deficit +Total +Balance at January 1, 2016 +55,705 +$ +— +$ +345,253 +$ +(15,639 +) +$ +(170,178 +) +$ +159,436 +Common stock issued upon exercise +of options +405 +— +2,656 +— +— +2,656 +Vesting of restricted stock +446 +— +— +— +— +— +Purchase and retirement of common shares +(555 +) +— +(3,444 +) +— +— +(3,444 +) +Compensation cost for restricted stock +— +— +2,861 +— +— +2,861 +Compensation cost for stock option +grants +— +— +2,691 +— +— +2,691 +Compensation cost for performance +stock units +— +— +511 +— +— +511 +Net income +— +— +— +— +19,720 +19,720 +Currency translation adjustments +— +— +— +1,419 +— +1,419 +Balance at December 31, 2016 +56,001 +— +350,528 +(14,220 +) +(150,458 +) +185,850 +Common stock issued upon exercise +of options +4,413 +— +31,670 +— +— +31,670 +Vesting of restricted stock +378 +— +— +— +— +— +Purchase and retirement of common shares +(130 +) +— +(1,240 +) +— +— +(1,240 +) +Compensation cost for restricted stock +— +— +2,705 +— +— +2,705 +Compensation cost for stock option grants +— +— +2,045 +— +— +2,045 +Compensation cost for performance +stock units +— +— +2,223 +— +— +2,223 +Net income +— +— +— +— +30,948 +30,948 +Currency translation adjustments +— +— +— +4,433 +— +4,433 +Unrealized loss on marketable securities +— +— +— +(553 +) +— +(553 +) +Balance at December 31, 2017 +60,662 +— +387,931 +(10,340 +) +(119,510 +) +258,081 +Adoption of ASU 2014-9 +(75 +) +(75 +) +Common stock issued upon exercise +of options +227 +— +1,697 +— +— +1,697 +Vesting of restricted stock and performance stock units +578 +— +— +— +— +— +Purchase and retirement of common shares +(191 +) +— +(3,592 +) +— +— +(3,592 +) +Compensation cost for restricted stock +— +— +6,357 +— +— +6,357 +Compensation cost for stock option grants +— +— +2,163 +— +— +2,163 +Compensation cost for performance stock units +— +— +6,717 +— +— +6,717 +Net income +— +— +— +— +20,396 +20,396 +Currency translation adjustments +(8,003 +) +(8,003 +) +Unrealized loss on marketable securities +— +— +— +(363 +) +— +(363 +) +Balance at December 31, 2018 +61,276 +$ +— +$ +401,273 +$ +(18,706 +) +$ +(99,189 +) +$ +283,378 +See accompanying notes to the consolidated financial statements. +F-6 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2018 +2017 +2016 +OPERATING ACTIVITIES: +Net income +$ +20,396 +$ +30,948 +$ +19,720 +Adjustments to reconcile net income to net cash provided by +operating activities: +Stock-based compensation +15,237 +6,973 +6,063 +Depreciation and amortization +6,451 +6,075 +5,687 +Other non-cash amortization +771 +327 +(47 +) +Unrealized foreign currency (gain) loss +(400 +) +156 +122 +Loss (gain) on sale of fixed assets +- +(25 +) +(28 +) +Deferred income taxes +(919 +) +(649 +) +(529 +) +Changes in assets and liabilities +Accounts receivable +6,635 +(22,116 +) +(576 +) +Inventories +(3,857 +) +(7,391 +) +1,476 +Prepaid expenses and other assets +(366 +) +(384 +) +(652 +) +Accounts payable +208 +5,157 +46 +Deferred revenue +2,240 +(93 +) +(8,350 +) +Accrued expenses and other liabilities +(7,306 +) +9,178 +1,666 +Net cash provided by operating activities +39,090 +28,156 +24,598 +INVESTING ACTIVITIES: +Purchases of investments +(163,763 +) +(161,269 +) +(34,133 +) +Proceeds from maturities and redemptions of investments +152,680 +69,253 +30,421 +Purchases of property and equipment +(6,344 +) +(4,337 +) +(4,353 +) +Net cash used in investing activities +(17,427 +) +(96,353 +) +(8,065 +) +FINANCING ACTIVITIES: +Payments for debt issue costs +— +- +(367 +) +Proceeds from exercise of stock options +1,701 +31,675 +2,656 +Repurchase of common stock +(3,592 +) +(1,240 +) +(3,444 +) +Net cash provided by (used in) financing activities +(1,891 +) +30,435 +(1,155 +) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +(4,203 +) +841 +318 +NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, +AND RESTRICTED CASH +15,569 +(36,921 +) +15,696 +CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, +BEGINNING OF PERIOD +72,869 +109,790 +94,094 +CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END +OF PERIOD +$ +88,438 +$ +72,869 +$ +109,790 +See accompanying notes to the consolidated financial statements. +F-7 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. +THE COMPANY: +Our business is comprised of two segments. Our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. +Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +Our DNAG, or molecular collection systems business, is operated by our subsidiary, DNA Genotek Inc., a company based in Ottawa, Canada. DNAG’s Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only sample collection products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers worldwide, including many leading research universities and hospitals. +2. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiary, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +In 2018, 2017 and 2016, we paid income taxes of $17,126, $4,309 and $1,123, respectively. +In 2018, 2017 and 2016, we recorded through the consolidated statements of income an increase (decrease) in our allowance for doubtful accounts of $(27), $172 and $40, respectively. We had $11, $200 and $369 in write-offs against the allowance for doubtful accounts in 2018, 2017, and 2016, respectively. +F-8 +As of December 31, 201 8 , 201 7 and 201 6 , we had accruals for purchases of property and equipment of $ 964 , $ 449 and $ 302 , respectively . +Investments +We consider all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +The following is a summary of our available-for-sale securities as of December 31, 2018 and 2017: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +December 31, 2018 +Guaranteed investment certificates +$ +23,096 +$ +— +$ +— +$ +23,096 +Corporate bonds +90,707 +— +(917 +) +89,790 +Total available-for-sale securities +$ +113,803 +$ +— +$ +(917 +) +$ +112,886 +December 31, 2017 +Guaranteed investment certificates +$ +22,261 +$ +— +$ +— +$ +22,261 +Corporate bonds +82,010 +— +(553 +) +81,457 +Total available-for-sale securities +$ +104,271 +$ +— +$ +(553 +) +$ +103,718 +At December 31, 2018, maturities of our available- +for-sale securities were as follows: +Less than one year +$ +68,702 +$ +— +$ +(568 +) +$ +68,134 +Greater than one year +$ +45,101 +$ +— +$ +(349 +) +$ +44,752 +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we also reserve for unidentified scrap or spoilage under a fixed-formula methodology. +Property and Equipment +Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of income. +F-9 +Intangible Assets +Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of seven to fifteen years. +Impairment of Long-Lived Assets +We assess the recoverability of our long-lived assets, which include property and equipment and intangible assets, by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. +Goodwill +Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +We performed our annual impairment assessment as of July 31, 2018 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. As of December 31, 2018, we believe no indicators of impairment exist. +Revenue +In January 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method applied to contracts existing as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. +Upon adoption, we recorded a reduction of $75 to the opening balance of accumulated deficit as of January 1, 2018. This adjustment is related to the change in revenue recognition associated with our drug testing kit sales. Sales of our drug testing kits include two performance obligations: sales of the device and laboratory services. Under this new accounting standard, we adjusted the allocation of the transaction price to the performance obligations and the estimate of unexercised rights (“breakage”) associated with the contracts. Prior to the adoption of the new guidance, we used the residual value method to allocate the transaction prices. With the adoption of ASU 2014-09, we allocated transition prices based upon the stand-alone selling price, or fair value method. This change in methodology also impacted our estimated breakage amount. +The following table summarizes the impact of the new revenue standard adjustment on our opening balance sheet: +Balance at +New Revenue +Balance at +December 31, 2017 +Standard Adjustment +January 1, 2018 +LIABILITIES AND STOCKHOLDERS' EQUITY +CURRENT LIABILITIES: +Deferred revenue +1,314 +75 +1,389 +STOCKHOLDERS' EQUITY +Accumulated deficit +(119,510 +) +(75 +) +(119,585 +) +The adoption of this new standard had an immaterial impact on our 2018 reported total revenues and operating income, as compared to what would have been reported under the prior standard. We expect the impact of adoption in future periods to continue to be immaterial. Our accounting policies under the new standard were applied prospectively and are noted below. +F-10 +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the c onsideration we are entitled to, net of allowances for any discounts or rebates. +Our net revenues recorded for sales of the OraQuick ® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of operations. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services. +Other revenues . Other revenues consist primarily of exclusivity revenues, royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® HCV test in the United States. On June 30, 2016, we mutually agreed to terminate our agreement effective December 31, 2016. Accordingly, we did not record any revenue from this co-promotion agreement during 2018 and 2017. During 2016, $18,951 in exclusivity revenues were recognized and recorded as other revenue in our consolidated statements of income. +As part of our litigation settlement agreement with Ancestry.com DNA LLC (“Ancestry”) and its contract manufacturer, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. During the year ended December 31, 2018, we recorded $9,653, in royalty income under this agreement. +On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® Ebola rapid antigen test. The three-year, multi-phased grant, with an original expiration date of October 2018, was recently amended and extended through December 31, 2019, included an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised options to provide $7,200 and $1,330, respectively, in additional funding for our OraQuick ® Ebola test. Amounts related to this grant are recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2018, 2017 and 2016, $2,988, $1,999 and $1,707, respectively, were recognized in connection with this grant. +In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid Zika test. The initial six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of work covered by this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. During 2018, 2017, and 2016, $1,963, $2,388 and $616 respectively, were recognized in connection with this grant. +F-11 +In June 2017, we entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that wi ll enable us to offer our OraQuick ® HIV S elf- T est at an affordable price in 50 developing countries with funding from the Gates Foundation. The funding will consist of support payments tied to volume of product sold by us and reimbursement of certain relat ed costs. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20,000 over the four-year term or $6,000 each year of the agreement. Funding received under this agreement in the form of support payments for product purchases i s recorded as a component of product revenue. During 201 8 and 2017 , $4,429 and $1,047 , respectively, of support payments were recognized in product revenue in connection with this agreement. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated statements of income. During 201 8 and 2017 , $1,711 and $689 , respectively, w as recognized in other revenue in connection with this agreement. +Deferred Revenue +We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2018 and 2017 includes customer prepayments of $2,057 and $1,045, respectively. Deferred revenue as of December 31, 2018 and 2017 also included $1,464 and $269, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined and revenue is recognized at that rate when the product is delivered to the customer. +Financing and Payment . Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Other than for sales of our OraQuick® In-Home HIV test to the retail trade, we generally do not grant product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +As a result of the return rights granted to our customers for our OraQuick® In-Home HIV test, we have recorded an estimate of expected returns as a reduction of gross OraQuick® In-Home HIV product revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. As of December 31, 2018 and December 31, 2017, the reserve for sales returns and allowances was $191 and $217, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract. +F-12 +Revenues by product. The following table represents total net revenues by product line: +Twelve Months Ended December 31, +2018 +2017 +2016 +OraQuick® +$ +53,851 +$ +60,558 +$ +47,134 +Oragene® +75,850 +69,184 +29,454 +Intercept® +7,709 +8,125 +8,351 +Histofreezer® +8,983 +10,312 +11,628 +Other products +19,035 +13,809 +10,357 +Net product revenues +165,428 +161,988 +106,924 +Royalty income +9,653 +- +- +AbbVie exclusivity +- +- +18,951 +BARDA funding +4,951 +4,387 +2,323 +Charitable support reimbursement +1,711 +689 +- +Other revenues +16,315 +5,076 +21,274 +Net revenues +$ +181,743 +$ +167,064 +$ +128,198 +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +December 31, +2018 +2017 +2016 +United States +$ +136,847 +$ +121,458 +$ +99,758 +Europe +11,062 +11,827 +11,646 +Other regions +33,834 +33,779 +16,794 +$ +181,743 +$ +167,064 +$ +128,198 +Customer and Vendor Concentrations +One of our customers accounted for 7% and 37% of our accounts receivable as of December 31, 2018 and 2017, respectively. The same customer accounted for approximately 24% and 25% of our net consolidated revenues for the year ended December 31, 2018 and 2017, respectively. Another customer accounted for approximately 15% of our net consolidated revenues for the year ended December 31, 2016. +We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2018, 2017, and 2016, we incurred $763, $717, and $626, respectively, in advertising expenses. +F-13 +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than purchase shares in the open market. +Income Taxes +We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our consolidated statements of income in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income (expense) in our consolidated statements of income were $831, $(1,442), and $(607) for the years ended December 31, 2018, 2017, and 2016, respectively. +Earnings Per Share +Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. +F-14 +The computations of basic and diluted earnings per share are as follows: +Year ended December 31, +2018 +2017 +2016 +Net income +$ +20,396 +$ +30,948 +$ +19,720 +Weighted average shares of common stock outstanding: +Basic +61,112 +59,050 +55,615 +Dilutive effect of stock options, restricted stock, and +performance stock units +1,420 +1,974 +898 +Diluted +62,532 +61,024 +56,513 +Earnings per share: +Basic +$ +0.33 +$ +0.52 +$ +0.35 +Diluted +$ +0.33 +$ +0.51 +$ +0.35 +For the years ended December 31, 2018, 2017, and 2016, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 291, 180, and 2,546 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets. +We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2018 consists of $17,789 of currency translation adjustments and $917 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio. Accumulated other comprehensive loss at December 31, 2017 consists of $9,787 of currency translation adjustments and $553 of net unrealized losses on marketable securities. +Fair Value of Financial Instruments +As of December 31, 2018 and 2017, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: +Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: +Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: +Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +All of our available-for-sale debt securities are measured as Level 1 instruments as of December 31, 2018 and 2017. +Included in cash and cash equivalents at December 31, 2018 and 2017, was $21,631 and $40,760 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. +F-15 +We offer a nonquali fied deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant t o reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 201 8 and 201 7 was $3, 88 4 and $ 3 , 514 , respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both c urrent assets and other assets with the same amount s included in accrued expenses and other liabilities in the accompanyi ng consolidated balance sheets . +In 2017, we purchased certificates of deposit (“CDs”) from a commercial bank. The CDs bear interest at rates ranging from 0.89% to 1.03% and matured periodically through January 22, 2018. The carrying values of the CDs approximate their fair value. These CDs served as collateral for certain standby letters of credit and are reported as restricted cash on the accompanying consolidated balance sheets as of December 31, 2017. We have no restricted cash as of December 31, 2018. +Recent Accounting Pronouncements +In February 2016, the FASB issued ASU 2016-02, Leases , which requires entities to begin recording assets and liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach by recognizing a cumulative effect adjustment to the opening balance of retained earnings. Early adoption is permitted. In July 2018, companies were provided with an option to apply the modified retrospective approach as of either the date of adoption or as of the earliest date presented. We adopted this guidance effective January 1, 2019 by applying the modified retrospective approach as of the date of adoption with the available practical expedients. +We continue to utilize a comprehensive approach to assess the impact of this guidance on our financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet. We are substantially complete with our comprehensive review of our lease portfolio including significant leases by geography and by asset type that will be impacted by the new guidance, and enhancing our controls. In addition, we are progressing on the implementation of a new application for administering our leases and facilitating compliance with the new guidance. The new guidance will require us to record all leases, including operating leases, on the consolidated balance sheet as a right-of-use asset and corresponding liability for future payment obligations. Adoption of the standard will result in the estimated recognition of right-of-use assets of less than 2% of total assets and lease liabilities of less than 16% of total liabilities, and will not have a material impact to the consolidated income statement. +In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017. We adopted ASU 2016-15 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements. +In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities , which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing of the underlying securities. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted ASU 2017-08 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements. +In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting , to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting as described in Topic 718. This update is effective for annual periods and interim periods in fiscal years beginning after December 15, 2017 with early adoption permitted. We adopted ASU 2017-09 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements . +F-16 +3. +INVENTORIES: +December 31, +2018 +2017 +Raw materials +$ +14,092 +$ +10,299 +Work in process +544 +199 +Finished goods +8,252 +8,845 +$ +22,888 +$ +19,343 +4. +PROPERTY AND EQUIPMENT: +December 31, +2018 +2017 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +22,480 +20,726 +Machinery and equipment +29,017 +26,685 +Computer equipment and software +9,632 +9,131 +Furniture and fixtures +2,681 +2,194 +Construction in progress +2,168 +897 +67,096 +60,751 +Less accumulated depreciation +(42,797 +) +(39,379 +) +$ +24,299 +$ +21,372 +Depreciation expense was $3,828, $3,434, and $3,149 for 2018, 2017, and 2016, respectively. +5. +GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2018 +2017 +Balance as of January 1 +$ +20,083 +$ +18,793 +Change related to foreign currency translation +(1,562 +) +1,290 +Balance as of December 31 +$ +18,521 +$ +20,083 +Intangible assets consist of the following: +December 31, 2018 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,186 +$ +(6,532 +) +$ +2,654 +Patents and product rights +10 +5,400 +(4,708 +) +692 +Acquired technology +7 +7,135 +(7,135 +) +- +Tradename +15 +3,521 +(1,730 +) +1,791 +$ +25,242 +$ +(20,105 +) +$ +5,137 +December 31, 2017 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer list +10 +$ +9,960 +$ +(6,112 +) +$ +3,838 +Patents and product rights +10 +5,400 +(4,258 +) +1,142 +Acquired technology +7 +7,737 +(6,690 +) +1,047 +Tradename +15 +3,818 +(1,622 +) +2,196 +$ +26,915 +$ +(18,692 +) +$ +8,223 +F-17 +Patents and products rights are made up of the following: +December 31, +2018 +2017 +HIV-related +$ +900 +$ +900 +HCV-related +4,500 +4,500 +5,400 +5,400 +Less accumulated amortization +(4,708 +) +(4,258 +) +$ +692 +$ +1,142 +Amortization expense for 2018, 2017, and 2016 was $2,623, $2,641, and $2,538, respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2019 +1,617 +2020 +1,409 +2021 +1,165 +2022 +245 +2023 +245 +Beyond +456 +$ +5,137 +6. +ACCRUED EXPENSES: +December 31, +2018 +2017 +Payroll and related benefits +$ +8,926 +$ +9,265 +Professional fees +1,541 +1,064 +Income taxes payable +1,447 +6,469 +Royalties +— +845 +Other +1,947 +3,052 +$ +13,861 +$ +20,695 +7. +CREDIT FACILITY: +On September 30, 2016, we entered into a credit agreement (the “Credit Agreement”) with a commercial bank. The Credit Agreement, as amended on December 20, 2017, provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit sub-facility of $2,500). Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings under the facility during 2018 and 2017. +Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the Company, plus 2.50% per year. The Credit Agreement is subject to an unused line fee of 0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019. +In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of December 31, 2018 and 2017, we were in compliance with all applicable covenants in the Credit Agreement. +F-18 +8. +INC OME TAXES: +Income before income tax expense consists of the following: +Years Ended December 31, +2018 +2017 +2016 +United States +$ +(11,728 +) +$ +2,270 +$ +18,492 +Canada +43,444 +38,762 +1,831 +$ +31,716 +$ +41,032 +$ +20,323 +The components of income tax expense are as follows: +Years Ended December 31, +2018 +2017 +2016 +Current +Federal +$ +— +$ +— +$ +— +State +155 +— +250 +Canada +12,084 +10,733 +882 +12,239 +10,733 +1,132 +Deferred +Federal +9,200 +10,297 +6,508 +State +1,011 +(827 +) +569 +Canada +(919 +) +(649 +) +(529 +) +9,292 +8,821 +6,548 +Decrease in valuation allowance +(10,211 +) +(9,470 +) +(7,077 +) +(919 +) +(649 +) +(529 +) +Total income tax expense +$ +11,320 +$ +10,084 +$ +603 +For the years ended December 31, 2018, 2017, and 2016 we recorded foreign income tax expense of $11,165, $10,084, and $353, respectively. +The Tax Cuts and Jobs Act +On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”) that instituted fundamental changes to the taxation on multinational corporations. Although the Tax Act is generally effective January 1, 2018, U.S. generally accepted accounting principles requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. Among the numerous provisions, the Tax Act includes three provisions in particular which require consideration for financial reporting: a permanent reduction in the corporate tax rate to 21%, a one-time tax on undistributed foreign earnings, and a new U.S. tax on global intangible low taxed income (“GILTI”) which is a tax on certain earnings of foreign affiliates. +The reduction in the U.S. corporate tax rate to 21% became effective in 2018. This change resulted in a re-measurement of our net deferred tax balance at the end of 2017 with no net financial statement impact due to a comparable decrease in our deferred tax valuation allowance. +The one-time tax on undistributed and previously untaxed post-1986 foreign earnings and profits (E&P) of foreign affiliates owned by U.S. shareholders as of December 31, 2017 was analyzed for our Canadian subsidiary. For the 2017 federal tax return filed during 2018 our U.S. federal taxable loss exceeded and offset the provisional mandatory repatriation net inclusion and as such, no additional taxes were due as a result of the deemed repatriation of these foreign earnings. +In addition, the Tax Act also included changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion and promote U.S. production. The Tax Act also included repeal of the corporate alternative minimum tax, expensing of capital investment, changes to the Federal net operating loss (“NOL”) utilization and carryforward rules, and limitations of the deduction for interest expense and certain employee compensation. +F-19 +As a result of the complex impact of the Tax Act, the SEC provided guidance under Staff Accounting Bulletin No. 118 (“SAB 118”) that allow ed the Company to rec ord provisional amounts as of December 31, 2017 for the impact of the Tax Act, provided that the provisional amounts c ould be reasonably determined and with the requirement that the final accounting be completed in a period not to exceed one year from the date of enactment. As of December 31, 201 8 , the Company has completed the accounting for the tax effects of the Tax Act, and therefore, has recorded final amounts which include: +(a) +The impact of the one-time transition tax on existing net operating loss and foreign tax credit carryforwards generated, as well as the related offsetting valuation allowances. The final one-time transitioned income reported on the 2017 federal tax return filed in 2018 was $17,724. This amount decreased both the net operating loss carryforward as well as the corresponding valuation allowance. Based on updated guidance, in 2018 the Company elected to deduct foreign taxes and therefore did not generate foreign tax credits. As such the deferred tax asset recorded as of December 31, 2017 associated with foreign tax credits was reversed in 2018. +(b) +The valuation allowance for the Company’s deferred tax assets as of December 31, 2017, was primarily dependent on forecasted future taxable income in the U.S. and Canada and was impacted by the provisions of the Tax Act. The primary impact of the Tax Act was the lowering of the statutory rate to 21%. This lowered the deferred tax assets and corresponding valuation allowance by $11,273. +The Tax Act imposed a U.S. tax on GILTI that is earned by certain foreign affiliates owned by a U.S. shareholder effective in 2018. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying tangible property. The GILTI computation for 2018 was completed and is reflected in this year’s income tax provision. The Company has made a policy election related to its treatment of GILTI and will treat it as a current period expense in the reporting period in which the tax is incurred. +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each of the years ended December 31, 2018, 2017, and 2016 is as follows: +2018 +2017 +2016 +Statutory U.S. federal income tax rate +21.0 +% +34.0 +% +34.0 +% +Deemed repatriation tax +10.9 +7.8 +— +GILTI tax +22.2 +— +— +Statutory rate change, deferred tax impact +— +29.4 +— +Nondeductible executive compensation +4.8 +— +— +Impact of share-based payment awards +0.6 +(16.0 +) +— +Tax effect of Canadian items +6.8 +(8.3 +) +(1.9 +) +State income taxes, net of federal benefit +2.8 +(1.1 +) +2.0 +Nondeductible expenses and other +(1.2 +) +1.9 +3.7 +Change in valuation allowance, federal and state +(32.2 +) +(23.1 +) +(34.8 +) +Effective tax rate +35.7 +% +24.6 +% +3.0 +% +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2018 and 2017 are as follows: +2018 +2017 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +10,812 +$ +15,338 +Inventories +1,005 +1,179 +Capitalized research and development costs +1,697 +2,402 +Accruals and reserves currently not deductible +3,767 +3,103 +Acquired intangible assets +(1,153 +) +(1,825 +) +Depreciation and amortization +(1,082 +) +(621 +) +Stock-based compensation +1,248 +976 +Tax credit carryforwards +1,819 +6,722 +Net deferred tax asset +18,113 +27,274 +Valuation allowance +(19,014 +) +(29,225 +) +Net deferred tax liability +$ +(901 +) +$ +(1,951 +) +F-20 +In assessing the realizability of our deferred tax asset, we consider all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of December 31, 201 8 and 201 7 since the facts and circ umstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 201 8 , 201 7 , or 201 6 . The valuation allowance primarily decreased by $ 10 , 211 in 201 8 due to utilization of federal and state net operating losses due to the GILTI inclusion in taxable income. +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2030 - 2034 +$ +36,100 +2035 - 2037 +11,260 +$ +47,360 +The new accounting guidance under ASU 2016-09 allows for the recognition of excess tax benefits associated with stock-based compensation awards regardless of whether the deduction reduces taxes payable. On January 1, 2017, we recorded a cumulative adjustment to retained earnings of $3,391 to recognize the increase in our net operating loss carryforwards from the cumulative excess tax benefits not recognized in periods prior to January 1, 2017. A corresponding $3,391 increase to our valuation allowance associated with this tax benefit was also recorded to retained earnings thereby resulting in no impact to retained earnings. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. We do not believe that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income. We continue to review ownership changes on an annual basis and we do not believe we have had a subsequent ownership change that would impact the NOLs. +Effective January 1, 2018, there is a transition to a participation exemption system whereby distributions from foreign subsidiaries to U.S. shareholders are generally exempt from taxation. Our intention is to continue to permanently reinvest the historical undistributed earnings of our Canadian subsidiary to the extent that we will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the Canadian subsidiary. +As of December 31, 2018, our gross unrecognized tax benefits totaled $1,676, and based upon the valuation allowance for our U.S. operations, the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2018, 2017 and 2016. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2018. +A reconciliation of our unrecognized tax benefits is as follows: +2018 +2017 +2016 +Balance as of January 1 +$ +1,663 +$ +2,084 +$ +2,088 +Additions for tax positions of prior periods +44 +— +- +Reductions for tax positions of prior periods +(31 +) +(421 +) +(4 +) +Balance as of December 31 +$ +1,676 +$ +1,663 +$ +2,084 +9. +STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +F-21 +As of December 31, 201 8 , 3 , 704 shares were available for futu re grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including our officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years, with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2018 +2017 +2016 +Risk-free interest rate (1) +2.60 +% +2.22 +% +1.76 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +43 +% +43 +% +46 +% +Expected life of stock options (in years) (2) +6 +7 +7 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2018, 2017 and 2016 was $9.15, $4.71 and $2.91, respectively. +Compensation expense recognized in the financial statements related to stock options was as follows: +Years Ended December 31, +2018 +2017 +2016 +Total compensation cost during the year +$ +2,163 +$ +2,045 +$ +2,691 +Amounts capitalized into inventory during the year +(420 +) +(371 +) +(270 +) +Amounts recognized in cost of products sold for amounts previously capitalized +396 +276 +212 +Amounts charged against income +$ +2,139 +$ +1,950 +$ +2,633 +The aggregate intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $2,314, $35,631, and $763, respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +(in years) +Aggregate +Intrinsic +Value +Outstanding on January 1, 2018 +1,201 +8.04 +Granted +171 +20.35 +Exercised +(227 +) +7.47 +Expired +(38 +) +6.05 +Forfeited +(24 +) +7.53 +Outstanding on December 31, 2018 +1,083 +$ +10.19 +6.2 +$ +3,047 +Vested or expected to vest as of December 31, 2018 +1,083 +$ +10.19 +6.2 +$ +3,047 +Exercisable on December 31, 2018 +776 +$ +8.81 +5.3 +$ +2,434 +As of December 31, 2018, there was $1,677 of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 1.9 years. +F-22 +Net cash proceeds from the exercise of stock options were $1, 701 , $ 31 ,6 75 and $ 2,656 for the years ended December 31, 201 8 , 201 7 , and 201 6 , respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2018: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$ +5.37 +121 +6.9 +$ +5.37 +64 +$ +5.37 +$ +5.47 +3 +6.7 +5.47 +2 +5.47 +$ +5.71 +120 +4.4 +5.71 +120 +5.71 +$5.79 - $7.28 +114 +5.4 +7.06 +112 +7.06 +$7.33 - $8.63 +74 +3.2 +8.30 +73 +8.32 +$ +8.87 +137 +8.0 +8.87 +53 +8.87 +$ +8.93 +6 +8.0 +8.93 +3 +8.93 +$ +9.31 +218 +5.3 +9.31 +208 +9.31 +$9.78 - $14.95 +119 +4.9 +12.45 +109 +12.22 +$16.8 - $21.9 +171 +9.1 +20.35 +32 +19.74 +1,083 +6.2 +$ +10.19 +776 +$ +8.81 +The Stock Plan also permits us to grant restricted shares and restricted units of our common stock to eligible employees, including officers, and our outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by our Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the restrictions lapse. Compensation cost of $6,357, $2,705 and $2,861 related to restricted shares was recognized during the years ended December 31, 2018, 2017, and 2016, respectively. +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2018 +671 +7.83 +Granted +226 +19.17 +Vested +(531 +) +9.49 +Forfeited +(9 +) +11.48 +Issued and unvested, December 31, 2018 +357 +$ +12.14 +Issued and expected to vest, December 31, 2018 +357 +$ +12.14 +As of December 31, 2018, there was $2,556 of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 2.2 years. +In connection with the vesting of restricted shares during the years ended December 31, 2018, 2017 and 2016, we purchased and immediately retired 171, 130 and 132 shares with aggregate values of $3,291, $1,240 and $784, respectively, in satisfaction of minimum tax withholding and exercise obligations. +F-23 +Commencing in 2016, we granted performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of performance-based metrics during a one-year or three-year perio d, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in our service for three years from the grant date. Performance during the one-year period will be based on a one-year earnings per s hare or income before taxes target. If the one-year target is achieved, the PSUs will then vest three years from grant date. Performance during the three-year period will be based on achievement of a three-year compound annual growth rate for consolidated product revenues. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $6,717, $2,223 and $511 related to the PSUs was recognized during the years ended December 31, 2018, 2017 and 2016, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2018 +576 +6.76 +Granted (1) +124 +20.90 +Performance adjustment (2) +14 +6.44 +Vested +(47 +) +7.55 +Forfeited +(6 +) +15.77 +Issued and unvested, December 31, 2018 +661 +$ +9.26 +Issued and expected to vest, December 31, 2018 +661 +$ +9.26 +1. +Grant activity for all PSU’s disclosed at target. +2. +Reflects the performance adjustment based on actual performance measured at the end of the performance period. +In connection with the vesting of performance stock units during the year ended December 31, 2018, we purchased and immediately retired 20 shares with aggregate values of $301. No performance stock units vested in 2017 or 2016. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 of our outstanding common shares. No shares were purchased and retired in 2018 and 2017. During the year ended December 31, 2016 we purchased and retired 423 shares of common stock at an average price of $6.29 per share for a total cost of $2,660. +10 . +TRANSITION COSTS +In January 2018, we announced the retirement of our President and CEO and our CFO and Chief Operating Officer. Stephen S. Tang, Ph.D., who served as Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018. Dr. Tang replaced Douglas A. Michels, who retired as President and CEO, and as a member of the Board, on March 31, 2018. In addition, Roberto Cuca was appointed as the Company’s new CFO, effective June 8, 2018. Mr. Cuca replaced Ronald H. Spair, our former CFO and Chief Operating Officer, who retired on that same date. Charges associated with these transitions were $9,602 during 2018 and are included in general and administrative expenses in the consolidated statement of income. These charges primarily reflect non-cash charges associated with modifications to existing stock grants held by the retiring executives and expenses associated with the onboarding of the Company’s new President and CEO. +1 1 . +BUSINESS SEGMENT INFORMATION: +Our business is comprised of two segments: Our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types, and medical devices used to remove benign skin lesions by cryotherapy or “freezing.” Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing +F-24 +in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics market s. +We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income. We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +The following table summarizes operating segment information for the years ended December 31, 2018, 2017, and 2016, and asset information as of December 31, 2018 and 2017: +Years Ended December 31, +2018 +2017 +2016 +Net revenues: +OSUR +$ +85,635 +$ +91,965 +$ +95,984 +DNAG +96,108 +75,099 +32,214 +Total +$ +181,743 +$ +167,064 +$ +128,198 +Operating income (loss): +OSUR +$ +(20,123 +) +$ +(2,706 +) +$ +15,606 +DNAG +48,552 +42,944 +4,659 +Total +$ +28,429 +$ +40,238 +$ +20,265 +Depreciation and amortization: +OSUR +$ +3,755 +$ +3,170 +$ +2,751 +DNAG +3,467 +3,232 +2,889 +Total +$ +7,222 +$ +6,402 +$ +5,640 +Capital expenditures: +OSUR +$ +4,893 +$ +2,752 +$ +2,145 +DNAG +1,451 +1,585 +2,208 +Total +$ +6,344 +$ +4,337 +$ +4,353 +December 31, +2018 +2017 +Total assets: +OSUR +$ +190,178 +$ +192,352 +DNAG +125,393 +103,849 +Total +$ +315,571 +$ +296,201 +The following table represents total long-lived assets by geographic area: +December 31, +2018 +2017 +United States +$ +18,776 +$ +16,160 +Canada +5,192 +5,083 +Other regions +331 +129 +$ +24,299 +$ +21,372 +F-25 +1 2 . +COMMITMENTS AND CONTINGENCIES: +Leases +We lease office space for our Canadian subsidiary, domestic warehouse facilities and smaller pieces of equipment under operating lease agreements. Future payments required under these non-cancelable leases are as follows: +2019 +$ +903 +2020 +902 +2021 +877 +2022 +850 +2023 +506 +Thereafter +737 +$ +4,775 +Rent expense for 2018, 2017 and 2016 was $1,461, $852, and $715, respectively. +Purchase Commitments +As of December 31, 2018, we had outstanding non-cancelable purchase commitments related to inventory, supplies, capital expenditures, and other goods or services as follows: +2019 +9,683 +2020 +402 +2021 +19 +2022 +19 +2023 +17 +$ +10,140 +Employment Agreements +Under terms of employment agreements with certain employees, which extend through 2021, we are required to pay each individual a base salary for continuing employment with us. The agreements require payments totaling $1,779, $1,779 and $980 in 2019, 2020 and 2021, respectively. +Litigation +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +1 3 . +RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for us to match employee contributions up to $4 per year. We contributed $721, $617 and $619 to the 401(k) Plan, net of forfeitures, in 2018, 2017, and 2016, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2018 and 2017, the value of the assets associated with this plan was $3,884 and $3,514, respectively, and is included in current assets and other assets in our consolidated balance sheets. Our obligation related to the deferred compensation plan is included in accrued expenses and other liabilities in our consolidated balance sheets. As of December 31, 2017 and 2016, our total obligation under this plan was $3,884 and $3,514, respectively. +F-26 +Substantially al l regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive ta x preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee contributions up to $2 per year. We contributed $1 63 , $1 45 and $134 to the RRSP in 201 8 , 201 7 , and 201 6 , respectively. +1 4 . +QUARTERLY DATA (Unaudited): +The following tables summarize the quarterly results of operations for each of the quarters in 2018 and 2017. These quarterly results are unaudited, but in the opinion of management, have been prepared on the same basis as our audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information set forth herein. +2018 Results +Three months ended +March 31, 2018 +June 30, +2018 +September 30, 2018 +December 31, 2018 +Net revenues +$ +41,987 +$ +43,625 +$ +45,885 +$ +50,246 +Costs and expenses +42,485 +38,067 +35,028 +37,734 +Operating income (loss) +(498 +) +5,558 +10,857 +12,512 +Other income, net +412 +736 +510 +1,629 +Income (loss) before income taxes +(86 +) +6,294 +11,367 +14,141 +Income tax expense +2,033 +2,173 +3,271 +3,843 +Net income (loss) +$ +(2,119 +) +$ +4,121 +$ +8,096 +$ +10,298 +Earnings (loss) per share +Basic +$ +(0.03 +) +$ +0.07 +$ +0.13 +$ +0.17 +Diluted +$ +(0.03 +) +$ +0.07 +$ +0.13 +$ +0.16 +2017 Results +Three months ended +March 31, 2017 +June 30, +2017 +September 30, 2017 +December 31, 2017 +Net revenues +$ +32,546 +$ +40,176 +$ +42,314 +$ +52,028 +Costs and expenses +16,675 +(1 +) +33,289 +34,995 +41,867 +Operating income +15,871 +(1 +) +6,887 +7,319 +10,161 +Other income, net +467 +96 +113 +118 +Income before income taxes +16,338 +6,983 +7,432 +10,279 +Income tax expense +3,897 +1,555 +1,669 +2,963 +Net income +$ +12,441 +$ +5,428 +$ +5,763 +$ +7,316 +Earnings per share +Basic +$ +0.22 +$ +0.09 +$ +0.10 +$ +0.12 +(2 +) +Diluted +$ +0.21 +$ +0.09 +$ +0.09 +$ +0.12 +(2 +) +(1) Includes a $12,500 gain associated with the settlement of our litigation with Ancestry.com DNA LLC and its contract manufacturer, which was recorded as a reduction of operating expenses in the indicated period. +F-27 +(2) The summation of the quarterly amounts may not equal the year-end amounts as included in the consolidated financial statements due to the use of weighted-average shares for each period. +1 5 . +SUBSEQUENT EVENTS: +On January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of CoreBiome, Inc. (“CoreBiome”), pursuant to the terms of a Merger Agreement, dated January 3, 2019. CoreBiome is a Minnesota-based early-stage microbiome laboratory services provider that accelerates research and discovery for customers in the pharmaceutical, agricultural, and research communities. These services provide optimal analytical algorithms to deliver speed and scalability in the lab with precise analytics. +Also on January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of Novosanis NV (“Novosanis”), pursuant to a Share Purchase Agreement, dated January 3, 2019. Novosanis is a Belgian company founded as a spinoff company from the University of Antwerp in 2013. Novosanis is an early commercial-stage producer and distributor of urine sample collection devices targeted primarily at the liquid biopsy, sexually transmitted infection screening market. Novosanis’ primary product is Colli-Pee, an easy to use device designed for the standardized collection of first-void urine which can be used in the privacy of the user’s home or in a clinic. The initial commercial application of this product is for liquid biopsy in the prostate and bladder cancer markets. Product validation and clinical trials are also under way with various sexually transmitted infection test manufacturers. +The initial aggregate purchase price for both of these transaction approximated $12,014, adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into escrow accounts for a limited period after closing, pursuant to indemnification obligations under each agreement noted above. Both agreements include contingent payments to be paid based on the future performance of each company through a specified period of time as defined under the agreements. +Through December 31, 2018, we incurred a total of $1,235 million of acquisition related costs, including investment banking fees and accounting, legal and other professional fees, related to both acquisitions, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of income for the year ended December 31, 2018. +F-28 \ No newline at end of file diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/filing_metadata.csv b/raw/filings/0001116463/2018/0001564590-19-005491/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..98d6012bf7d96e94f5708ec990e063ab11e5b7ef --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2019-02-28,2018-12-31,2019-02-28T21:31:47.000Z,0001564590-19-005491,osur-10k_20181231.htm,10-K,14903689,1,0,https://www.sec.gov/Archives/edgar/data/1116463/000156459019005491/osur-10k_20181231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000156459019005491/,2018,2018,1 diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/item1.txt b/raw/filings/0001116463/2018/0001564590-19-005491/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..637fd7dff6a4cf2eabef1bc2aacba6a43b29f1ee --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/item1.txt @@ -0,0 +1,452 @@ +ITEM 1. +Business. +The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business is made up of two principal segments. The first is our “OSUR” business, which consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. +The second segment is our “DNAG” or molecular collection systems business and is operated primarily through our subsidiary, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada. In the DNAG business we manufacture and sell kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our Oragene ® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva. We also sell research use only products into the microbiome and tuberculosis markets and we offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers in many countries worldwide, including many leading research universities and hospitals. +OraSure was formed in May 2000 under Delaware law solely for the purposes of combining two companies, STC Technologies, Inc. (“STC Technologies”) and Epitope, Inc. (“Epitope”), and changing the state of incorporation of Epitope from Oregon to Delaware. STC Technologies and Epitope were merged into OraSure on September 29, 2000. Our principal offices are located at 220 East First Street, Bethlehem, Pennsylvania 18015, and our telephone number is (610) 882-1820. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website and the information contained in or connected to that website are not intended to be incorporated by reference into this Annual Report. +Recent Developments +In early January 2019, we acquired two privately-held, early-stage companies, CoreBiome, Inc. (“CoreBiome”) and Novosanis N.V. (“Novosanis”), in order to add differentiated products and services to our molecular collection systems business. +CoreBiome, a spin-off from the University of Minnesota, is based in St. Paul, Minnesota and provides microbiome laboratory and analytical services that can accelerate research and discovery for customers in the pharmaceutical, agricultural and academic research communities. These services provide optimal analytical algorithms to deliver speed and scalability in the lab with highly precise analytics. CoreBiome was co-founded in 2016 by Dr. Dan Knights, a globally-recognized expert in microbiome informatics who has developed leading methods for analyzing microbiome data, along with Dr. Daryl Gohl and Dr. Kenny Beckman, domain experts in genomics methods and clinical lab operations. +Novosanis was a Belgian company founded as a spin-off from the University of Antwerp, Belgium in 2013. Novosanis is an early commercial stage producer and distributor of urine sample collection devices targeting the liquid biopsy and sexually transmitted infection screening markets. Novosanis’ primary product is Colli-Pee, an easy to use device designed for the standardized collection of first-void urine which can be used in the privacy of the user’s home or in a clinic. Product validation and clinical trials are also under way with various sexually transmitted infection test manufacturers. +The acquisitions of both CoreBiome and Novosanis were structured with modest up-front payments and potential additional payments based on future performance of each company. These acquisitions are the first steps in the execution against our long-term strategy of becoming a growth company focused on innovation, both internally and through acquisitions of companies and technologies outside of our existing core businesses. +2 +Products +The following is a summary of our principal products and services and their regulatory and commercial status, excluding those of CoreBiome and Novosanis: +Product/Service +Description +Regulatory Status +Commercial +Status +OraQuick +ADVANCE ® HIV-1/2 +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV-1/2”) that can be visually read in approximately 20 minutes. +Premarket approval (“PMA”) by the FDA for use with oral fluid, finger-stick and venous whole blood, and plasma. +CLIA (Clinical Laboratory Improvement Amendments of 1988) waived for use with oral fluid, finger-stick and venous whole blood. +Marketed +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood and plasma. +Marketed +Registered in various other countries. +Marketed +OraQuick ® +HIV – 1/2 +(Export Only) +A rapid, point-of-care qualitative test for antibodies to the Human Immunodeficiency Virus Type 1 (“HIV-1”) and Type 2 (“HIV-2” and together with HIV-1, “HIV1/2”) that can be visually read in approximately 20 minutes. +World Health Organization (“WHO”) pre-qualification. +Marketed +Registered in various foreign countries. +Marketed +OraQuick ® In-Home HIV Test +A rapid, point-of-care qualitative oral fluid HIV-1/2 test for OTC use that can be visually read in approximately 20 minutes. +PMA approved for OTC use. +CE Mark (European Union) approved for OTC use. +Marketed +Not Marketed +OraQuick ® HIV Self-Test +Rapid point-of-care qualitative and oral fluid HIV-1/2 Self-Test that can be visually read in approximately 20 minutes. +Registered in various countries. +WHO pre-qualification. +Marketed +OraQuick ® HCV +A rapid, point-of-care qualitative test for antibodies to the hepatitis C virus (“HCV”) that can be visually read in approximately 20 minutes. +PMA approved and CLIA waived for use with venous whole blood and finger-stick whole blood specimens. +Marketed +CE mark (European Union) approved for use with oral fluid, finger-stick and venous whole blood, serum and plasma. +Marketed +Registered in various other countries. +Marketed +WHO pre-qualification. +Marketed +OraQuick ® Ebola +A rapid point-of-care qualitative test for Ebola antigen that can be visually read in approximately 30 minutes. +Emergency Use Authorization (“EUA”) for use with finger stick and venous whole blood specimens from live patients. +Marketed +EUA for use with oral fluid specimens from cadavers. +Marketed +Emergency Use Assessment and Listing by WHO for whole blood samples and oral fluid samples from cadavers. +Marketed +3 +Product/Service +Description +Regulatory Status +Commercial +Status +OraSure QuickFlu ® Rapid Flu +A&B Test +A rapid, point-of-care qualitative test for antibodies to influenza (flu) Types A and B, including H1N1 infections, with results available in 10 minutes. +FDA 510(k) cleared for use with nasal swab, nasopharyngeal swab and nasal aspirate/wash. +CLIA waived for use with nasal and nasopharyngeal swabs. +Marketed +Marketed +OraSure ® +Oral fluid collection device for detection of HIV-1 antibodies, cocaine and cotinine in a laboratory setting. +PMA approved for detection of HIV-1 antibodies with approved laboratory enzyme immunoassay test and registered as a Class I Medical device in the U.S. for detection of cocaine and cotinine. +Marketed +Oragene ® • DX +Non-invasive all-in-one system for the collection, stabilization, transportation and storage of human DNA from saliva. +FDA 510(k) cleared for use with FDA-cleared or exempt molecular tests, including consumer use. +Marketed +Oragene ® • DNA +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device in Canada. +Registered in various other countries. +Marketed +Oragene ® • RNA +Non-invasive all-in-one system for the collection, stabilization and transportation of RNA from human saliva. +Research use only product. +Marketed +ORAcollect ® • DX +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +FDA 510(k) cleared. +Marketed +ORAcollect ® • DNA +All-in-one system for the collection, stabilization, transportation, and storage of human DNA from saliva. +CE marked and registered as Class 1 Medical Device. +Marketed +Registered in various foreign countries. +Marketed +OMNIgene ® • +ORAL +Non-invasive all-in-one system for the collection, stabilization, transportation, and storage of microbial DNA from saliva. +Research use only product. +Marketed +Performagene TM +All-in-one non-invasive swab kit for the collection, stabilization and transportation of animal DNA samples. +Animal research use only. +Marketed +PerformaBiome TM • GUT +All-in-one system for easy collection and stabilization of DNA for animal microbiome profile analysis. +Animal research use only. +Marketing +OMNIgene ® • GUT +All-in-one system for the collection, stabilization, transportation and storage of microbial DNA in stool samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +Marketed +OMNIgene ® • SPUTUM +Reagent for liquefying, decontaminating, transporting and preserving tuberculosis bacteria in sputum samples. +Research use only product. +CE marked and registered in certain countries. +Marketed +OMNIgene ® •VAGINAL +Device for self-collection and stabilization of DNA and RNA from the vagina. +Research use only. +Marketed +OMNIgene ® • ORAL +Device for self-collection and stabilization of DNA and RNA from the mouth. +Research use only. +Marketed +4 +Product/Service +Description +Regulatory Status +Commercial +Status +Hemagene ® +Reagent to stabilize high molecular weight DNA in buffy coat samples at ambient temperature +Research use only. +Marketed +PrepIT ® +Reagents for extraction and preparation of DNA from saliva. +CE marked and registered in the U.S., Canada and various other countries. +Marketed +GenoFIND TM +End-to-end services for genomics and microbiome analysis +Provided by CLIA and College of American Pathologists (“CAP”) certified lab. +Marketed +Intercept ® +Oral fluid collection device for oral fluid drugs-of-abuse (“DOA”) testing in a laboratory setting. +FDA 510(k) cleared for use with nine MICRO-PLATE DOA assays. +Marketed +CE marked and registered in certain countries. +Marketed +MICRO-PLATE DOA Assays +Used to detect the following drugs in an oral fluid sample collected with Intercept ® device: tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines, methamphetamines, phencyclidine (“PCP”), benzodiazepines, barbiturates and methadone. +Nine drug assays – FDA 510(k) cleared. +Assays CE marked and registered in certain countries. +Marketed +Marketed +Intercept i2 ® +Oral fluid collection device for oral fluid DOA testing in a laboratory setting using fully-automated, high-throughput oral fluid DOA assays. +Forensic use only product. +Generic device CE marked and registered as Class I Medical Device in the U.S. +Marketed +Marketed +Homogeneous DOA Assays +Fully-automated high-throughput oral fluid DOA assays jointly developed with Thermo Fisher for use on oral fluid samples collected with an Intercept i2 ® device to detect PCP, opiates, cocaine, methamphetamines amphetamines, and THC. +Forensic use only. +Marketed +Cryosurgical Systems – Professional +Cryosurgical (freezing) system for the removal of warts and other benign skin lesions, marketed under the Histofreezer ® tradename primarily to the physicians’ office market. +FDA 510(k) cleared for nine types +of skin lesions. +CE marked and registered in certain countries. +Marketed +Marketed +Cryosurgical Systems – OTC +Cryosurgical system for the removal of common and plantar warts and skin tags, sold in various OTC markets under certain brand names and on a private label basis. +FDA 510(k) cleared for common and plantar warts. +Registered in Canada for warts and skin tags. +Marketed +Marketed +CE marked and registered for warts in certain countries under Scholl Freeze Spray ® and POINTTS ® names and for skin tags under CryoTag name. +Marketed +CE marked for skin tags. +Marketed +In addition to the above products, we sell certain immunoassay tests and reagents for insurance risk assessment, substance abuse testing and forensic toxicology applications. +5 +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and generally requires a confirmation test where an initial positive result is obtained. +This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received PMA approval from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988, or CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received WHO pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an over-the-counter oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark for the OraQuick ® In-Home HIV test, although this product is not currently sold in the European Union. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test uses the same diagnostic technology as our U.S. approved OraQuick ADVANCE ® HIV test but is sold into certain foreign countries at a lower cost to meet the needs of those markets. For the past several years, we have worked with Population Services International (“PSI”), a leading global health organization, along with UNITAID, the WHO and health officials from several African countries to deploy our Self-Test through the UNITAID-PSI HIV Self-Testing in Africa (“STAR”) project. The OraQuick ® Self-Test has labeling and instructions specifically tailored for the African marketplace. The purpose of the STAR project was to generate crucial information about how best to deliver HIV self-testing, how to generate demand for HIV testing in this manner and what the potential public health impact of self-testing will be. Our OraQuick ® Self-Test was chosen by PSI because of its quality, ease-of-use and oral fluid option. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. During 2018, a majority of the sales of our OraQuick ® HIV Self-Test occurred outside of the STAR project. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus, or HCV, in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ® HIV test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +In 2015, we completed development of our new rapid Ebola test. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen. This test has received EUAs from the FDA for emergency use by laboratories and facilities adequately equipped, trained and capable of testing for Ebola infection (including treatment centers and public health clinics) on finger-stick and +6 +venous whole blood samples collected from live patients, as well as oral fluid specimens c ollected from cadavers. The WHO has also issued an Emergency Use Assessment and Listing for this product with respect to the same specimen types. +OraSure QuickFlu ® Rapid Flu A&B Test +The OraSure QuickFlu ® Rapid Flu A&B test is an FDA 510(k) cleared rapid qualitative test for the detection of influenza (flu) Types A and B, including H1N1 viral infections. The test utilizes specimen collected with a nasal swab, nasopharyngeal swab or nasal aspirate/wash. A reagent is first inserted into a test cartridge, the specimen is added and the test is allowed to flow. Results are available in as little as 10 minutes. This product is manufactured for us under an agreement with Princeton BioMeditech Corporation (“PBM”) and is currently sold in certain U.S. markets. PBM has also obtained a CLIA waiver for this test for use with nasal and nasopharyngeal swabs. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with either a western blot confirmatory test or a blood based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Tuberculosis (“TB”) Products +OMNIgene ® • SPUTUM is a non-toxic and highly stable reagent that liquefies and decontaminates sputum samples at the point-of-collection or in the lab while preserving the viability of TB bacteria for at least eight (8) days at ambient temperatures. Optimized samples are compatible with all routine TB tests, enable cost-effective sample transport and simplify laboratory workflows while eliminating the need for lab reagents that require daily mixing and quality control. We believe OMNIGENE ® • SPUTUM can improve laboratory and operational workflows compared to current approaches, and improve overall test results. This product is being offered to TB laboratories for evaluation. +The OMNIgene ® • SPUTUM product is CE marked and is gaining greater interest for tuberculosis testing. Healthcare providers from more than 60 countries have expressed interest in evaluating this product and business entities, ranging from Ministries of Health, non-government organizations, donor agencies and diagnostic test developers, have begun their product evaluations. Our tuberculosis products are well positioned to support the U.S. government’s National Action Plan for combatting multi-drug resistant tuberculosis, by providing much needed solutions to developing countries that are at the highest risk for multi-drug resistant tuberculosis. +Molecular Collection Systems +Genomics Products. We sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. Our lead product is sold under the Oragene ® brand and is used to collect DNA from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. +Our genomic products are available in several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the lid of the container are mixed +7 +with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at am bient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +Microbiome Products. We also market several microbiome collection products designed to collect, stabilize and transport the microbial profile from multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and preserves (“snapshots”) the microbiome after collection until analysis is required. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in clinical laboratory and research settings. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. Our product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. We have also begun marketing other microbiome collection kits for DNA or RNA collected from the vagina and oral cavity. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high-quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +Molecular Services. Our molecular business also offers customers our GenoFIND TM services, a suite of genomic and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. Our GenoFIND TM offering has become an increasingly valuable tool for meeting the needs of our molecular customers. With the acquisition of CoreBiome, we believe we can offer enhanced laboratory service offerings for our customers in the microbiome market. +Regulatory Approvals . Our molecular collection products historically have been sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® • DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. Our ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® • DNA, ORAcollect ® and OMNIgene ® • GUT collection kits. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® device is sold under the name Intercept ® , and is used to collect oral mucosal transudate or OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo Fisher”). +8 +Cryosurgical Systems (Skin Lesion Removal Products) +The Histofreezer ® cryosurgical removal system is a low-cost alternative to liquid nitrogen and other methods for removal of warts and other benign skin lesions by physicians. The Histofreezer ® product mixes three cryogenic gases in a small aerosol canister. When released, these gases are delivered to a specially designed foam bud, cooling the bud to a maximum of –50°C to –55°C. The frozen bud is then applied to the wart or lesion for 15 to 40 seconds (depending on the type of lesion) creating localized destruction of the target area by freezing. We have received 510(k) clearance for use of the Histofreezer ® product to remove common warts and eight other types of benign skin lesions, and this product has been CE-marked and registered for distribution in Canada, throughout Europe and in certain other foreign countries. We also supply this product on a private label basis for resale by one of our physician office distributors. +Internationally, we sell an OTC cryosurgical product through our distributor Genomma Labs (“Genomma”), under the POINTTS tradename, in Mexico and a number of South and Central American countries. We sell a CE-marked cryosurgical wart removal product into the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser (“Reckitt”), under the Scholl and Dr. Scholl trademarks. Reckitt is the owner of the Scholl and Dr. Scholl trademarks in countries outside North and South America. We also sell OTC cryosurgical products to retailers on a private label basis for the treatment of warts in the U.S., for the treatment of both warts and skin tags in Canada and for the treatment of skin tags in the U.K. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +In a MICRO-PLATE kit, the sample to be tested is placed into a small plastic receptacle, called a microwell, along with the reagents. The result of the test is determined by the color of the microwell upon completion of the reaction. Controlling the reaction involves the use of reagents by laboratory personnel. Test results are analyzed by any of a variety of commercially available laboratory instruments, which we may also provide to our laboratory customers. MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens. +AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents. These reagents are run on commercially available laboratory-based automated analytical instruments, which are manufactured by a variety of third parties. AUTO-LYTE ® is typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. Test results are produced quickly, allowing for high throughput. Our AUTO-LYTE ® tests continue to face strong competition from cheaper “home-brew” tests developed internally by our laboratory customers. As a result, we may eventually stop selling our AUTO-LYTE ® tests. +We previously entered into an agreement with Thermo Fisher under which Thermo Fisher would develop and supply up to 12 fully-automated high-throughput oral fluid drug assays for use with our Intercept i2 ® device. Under this agreement, we are currently selling a NIDA-5 panel of assays supplied by Thermo Fisher in the U.S. forensic market. The parties are discussing certain changes to this agreement and assessing their ability to complete development of several additional assays and pursue FDA 510(k) clearance, CE marking and other regulatory approvals of the Intercept i2 ® device for use with a 12-assay panel. Subject to these further discussions with Thermo Fisher, we believe the offering of an Intercept i2 ® device with a full menu of fully-automated high-throughput oral fluid assays will better meet the needs of our laboratory drug testing customers and allow us to compete more effectively against fully automated urine drug assays that dominate the drug testing market. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +9 +Products Under Development +Infectious Disease +One recent area of focus for product development has been our OraQuick ® Ebola rapid antigen test. In July 2015, we received an Emergency Use Authorization or EUA for our Ebola test from the FDA. This authorization allows the use of the product for the duration of the U.S. Secretary of the Department of Health and Human Services (“HHS”) August 5, 2014 declaration regarding the emergency use of in vitro diagnostic tests for the detection of the Ebola virus. Under this authorization, the test can be used on finger-stick and venous whole blood samples collected from live patients. +In June 2015, we entered into a contract with the Biomedical Advanced Research Development Authority (“BARDA”) within the HHS for up to $10.4 million of funding for our OraQuick ® Ebola test. The three-year, multi-phased contract included an initial commitment of $1.8 million and options for up to an additional $8.6 million to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised an option to provide $7.2 million and $1.3 million, respectively, in additional funding for our OraQuick ® Ebola test. +In March 2016, we received an EUA for use of the Ebola test on oral fluid samples collected from cadavers. The WHO has issued an Emergency Use Assessment and Listing, or EUAL, for use of the product with whole blood samples collected from live patients and with oral fluid samples collected from cadavers. These approvals will allow expanded use of the product, particularly in Africa. We also intend to seek 510(k) clearance of our Ebola test from the FDA in the future. +Our recent product development efforts also focused on addressing global concerns regarding the Zika virus. As a result, we began developing a rapid Zika antibody test on our OraQuick ® platform. In August 2016, we entered into a contract with BARDA for up to $16.6 million of funding for our OraQuick ® Zika test. The six-year, multi-phased contract included an initial commitment of $7.0 million and options for up to an additional $9.6 million to fund the evaluation of additional product enhancements, and certain clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2.6 million in additional funding for our rapid Zika test. +During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. +Molecular Collections +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for RNA collection and stabilization. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA and RNA from multiple sample types including gut, skin, and saliva. We are also evolving the physical design and features of our products to further enable high throughput processing through improved interoperability with automated platforms. +Research and Development +Research and development expenses were $16.3 million in 2018, $13.4 million in 2017, and $9.8 million in 2016. These expenses include our costs associated with research and development, regulatory affairs, clinical trials and product support. +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +10 +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were $ 136.8 million, $121.5 million and $9 9.8 million in 2018, 2017 and 2016 , respectively. Consolidated net revenues attributable to international customers amounted to $ 44.9 million, $45.6 million and $28.4 million , or 25 %, 27% and 22% of our total revenues, in 2018, 2017 and 2016, respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Note s 2 and 11 to our consolidated financial statements included elsewhere in this Annual Report. +Infectious Disease Testing - Professional +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations that are set up primarily for the purpose of encouraging and enabling HIV testing. We also sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. and through distributors into the U.S. physician office market and to retail clinics operated by pharmacies. In addition, we distribute our OraQuick ® HIV test in certain other foreign countries. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. A focus for our HCV business has been, and will continue to be, to market our test to foreign countries that intend to implement broad scale testing programs. +We currently sell our OraQuick ® Ebola test under an EUA and our only customer to date has been the CDC, which has purchased the product for field testing in Africa. There were no Ebola sales in 2018. Our ability to expand sales of this test to other customers will likely depend on the timing and extent of future outbreaks of the disease, the availability of government or other funding and whether we are able to obtain FDA 510(k) clearance and pre-qualification with the WHO for our product. +We market the OraSure ® oral fluid collection device for HIV-1 testing, on its own and as a kit in combination with laboratory testing services. To better serve our public health customers, we have contracted a commercial laboratory to provide prepackaged OraSure ® test kits, with prepaid laboratory testing and specimen shipping costs included. We also sell the OraSure ® device in the international public health market. +We have distribution rights to an FDA 510(k) cleared and CLIA waived rapid flu A&B test, which we market under our proprietary OraSure QuickFlu ® tradename. Under our agreement with the supplier of this product, we are permitted to sell this product into the U.S. hospital and public health markets. +We have also been working to commercialize the OMNIgene ® • SPUTUM product. TB is a major global health issue, with long established relationships among public health agencies, NGOs, and suppliers. We have a focused sales and market development team working with these key players to have our product evaluated and adopted where possible. +Infectious Disease Testing - OTC +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Wal-Mart. The product is also available for purchase on-line through certain retailers and our website, www.oraquick.com . The primary target population for our HIV-OTC test is comprised of young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. +To support individuals that purchase and use our test, we offer toll-free customer support on a 24/7, 365-day per year basis. This service provides consumers with access to trained representatives who can answer questions about HIV/AIDS and the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment. +In 2016, we began selling our OraQuick ® HIV Self-Test to PSI (Population Services International) for use in a self-testing pilot program called the HIV Self-Testing in Africa, or STAR, project. Under Phase I of the project, 750,000 OraQuick ® HIV Self-Tests were sold to PSI for use in three African countries, Malawi, Zambia and Zimbabwe. More recently, we were selected to participate in Phase II of the project under which approximately 4 million HIV Self-Tests are expected to be deployed over a two-year period. +11 +In June 2017, we entered into a C haritable S upport A greement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that has enable d us to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia wit h funding from the Gates Foundation. The funding consist s of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement has a four-year term and enable s non-governmental organizations in the eligible co untries that receive funding from government or public sector agencies and donors to access our HIV Self - Test at reduced pricing. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20.0 million over the four-year term or $6 .0 million each year of the agreement. +In July 2017, our OraQuick ® HIV Self-Test was prequalified by the WHO. WHO prequalification aims to ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Molecular Collection Systems +DNAG sells its products directly to its customers, primarily through its own internal sales force. In some countries distributors are used. Over half of DNAG’s employees work in the areas of sales, marketing, business development or product management. The significant majority of employees who deal directly with customers have molecular science backgrounds, which we believe is useful in selling and marketing molecular collection products, and more importantly, in identifying and evaluating new market and business opportunities. +Most of DNAG’s revenues are derived from product sales to commercial customers and into the academic and research markets. Sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority of DNAG’s revenues. A significant portion of DNAG’s sales are derived from repeat customers, in both markets. DNAG also has customers in the livestock and companion animal markets. +DNAG has expanded its market focus by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. DNAG’s primary product offering in the microbiome market, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). DNAG is leveraging its existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. In addition, DNAG is offering laboratory and analytics services in order to more fully meet the needs of its customers. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we also sell our next generation Intercept i2 ® collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. Subject to our further discussions with Thermo Fisher, we plan to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. We expect that the 510(k) cleared Intercept i2 ® device and related fully-automated high-throughput assays will eventually replace our original Intercept ® collector and MICRO-PLATE assays in the drug testing market. +12 +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and retu rn-to-duty testing. +Cryosurgical Systems +Most of our Histofreezer ® sales occur in the United States to distributors that, in turn, resell the product to primary care physicians and podiatrists in the United States. Our major U.S. distributors include Cardinal Healthcare, McKesson Medical-Surgical, AmerisourceBergen Corporation, and Henry Schein. We have engaged a manufacturers’ representative organization to help our U.S. distributors promote and sell Histofreezer ® . We also provide a private label version of our professional Histofreezer ® product to one of our U.S. distributors. Internationally, we sell the Histofreezer ® product through a network of distributors in more than 20 countries worldwide. +We distribute cryosurgical wart removal products in the OTC foot care market in Europe, Australia and New Zealand through our distributor, Reckitt Benckiser, under its Scholl and Dr. Scholl tradenames, and in the OTC markets in Mexico and several Central and South American countries under the POINTTS tradename through our distributor, Genomma. We sell our product in the U.K. through another distributor, Appia, under the CryoTag tradename, for the removal of skin tags. We also sell OTC private label cryosurgical products for the removal of warts and skin tags in Canada and for the removal of warts in the U.S. +Insurance Risk Assessment +We currently market the OraSure ® oral fluid collection device for use in screening life insurance applicants in the United States and internationally to test for three of the most important underwriting risk factors: HIV-1, cocaine and cotinine (a metabolite of nicotine). Devices are sold to insurance testing laboratories, which in turn sell the devices to insurance companies, usually in combination with testing services. +We also promote use of the OraSure ® device directly to insurance companies for life insurance risk assessment. Insurance companies then make their own decision regarding which laboratory to use to supply their collection devices and testing services. We sell our OraSure ® Western blot confirmatory test directly to insurance testing laboratories for use in confirming oral fluid specimens collected with our OraSure ® device that initially test positive for HIV-1. +There exists a wide range of policy limits where our OraSure ® product is being used. In general, many (but not all) of our insurance company customers use the OraSure ® device in connection with life insurance policies having face amounts of up to $250,000, with some customers using the device for policies of up to $500,000 in amount. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure ® to replace some of their blood and urine-based testing. In recent years, some insurance customers have adopted a “Simplified Issues” policy, where lab testing is no longer required and instead the applicant completes a questionnaire about personal behaviors. +We also sell our AUTO-LYTE ® assays and reagents in the insurance testing market directly to certain laboratories. +Significant Products and Customers +Several different products have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product revenues (dollars in thousands). +For the years ended December 31, +2018 +2017 +2016 +Oragene ® +$ +75,850 +$ +69,184 +$ +29,454 +OraQuick ® HIV +41,457 +35,148 +33,067 +OraQuick ® HCV +12,394 +25,409 +14,066 +Cryosurgical systems +10,767 +12,279 +13,234 +One of our customers accounted for approximately 24% and 25% of our net consolidated revenues in 2018 and 2017, respectively. Another customer accounted for approximately 15% of our net consolidated revenues in 2016. +13 +Supply and Manufacturing +Our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test are all manufactured in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. This supply agreement had an initial term of one year, and automatically renews for additional annual periods unless either party provides a timely notice of termination prior to the end of an annual period. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +Our OraSure QuickFlu ® test is manufactured and supplied by a third party, Princeton BioMeditech. There is no other supply source for this product. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +The Histofreezer ® product and our OTC cryosurgical products are assembled by a U.S. vendor with certain components sourced from international suppliers. We believe that additional suppliers for our cryosurgical products are available on terms no less favorable than the terms of our existing supply agreements in the event that our current suppliers would be unable or unwilling to continue supplying components and manufacturing finished products. +DNAG has two long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Employees +As of December 31, 2018, we had 398 full-time employees (including 146 employees at our subsidiary, DNAG). Of this total, there were 128 in sales, marketing and client services; 50 in research and development; 149 in operations, manufacturing, quality control, information systems, purchasing and shipping; 37 in quality assurance and regulatory affairs; and 35 in administration and finance. This compares to 377 employees as of December 31, 2017. Our employees are not currently represented by a collective bargaining agreement. +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +14 +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. One of our competitors has received FDA approval and a CLIA waiver for a rapid oral fluid HIV test and another sells a rapid HIV antigen/antibody test that is both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors in the domestic infectious disease testing market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. The OraQuick ® HIV Self-Test that we sell in certain international markets is expected to face competition from other blood-based rapid HIV self-tests. +Competition for our OraQuick ® Ebola test includes government and commercially-developed laboratory and point-of-care molecular tests, along with a small number of rapid antigen tests sold under an FDA EUA. Our Ebola test is the only product with regulatory authorization for use on both whole blood samples from living patients and oral fluid samples from cadavers. +15 +The OraSure QuickFlu ® test competes primarily against other rapid flu tests sold by various third parties in the U.S. hospital and public health markets. +Our Oragene ® collection system competes against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® products. Although we believe the Oragene ® device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® product is also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, DNAG is one of the few vendors to offer a solution that fully meets these requirements. +The OMNIgene ® • SPUTUM product is unique and has no direct competition in terms of a comparable product. The primary competition for this product is the incumbent methodologies that are widely adopted for collecting sputum samples and have been used in labs globally for many years. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. In the past, these laboratories have typically had to rely on radioimmunoassay test methods to provide an adequate level of sensitivity. Radioimmunoassays require radioactive materials, which have a short shelf-life and disposal problems. Our MICRO-PLATE tests meet the laboratories’ sensitivity needs, run on automated equipment, are not radioimmunoassays, and are offered to the laboratory as a complete system solution of reagents, instrumentation and software to meet the specific needs of each customer. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Sales of our AUTO-LYTE ® urine assays have declined substantially over a number of years, primarily due to competition from “home-brew” assays developed internally by our laboratory customers, which can be produced at a cost lower than the price typically paid for our products. Many of our customers no longer purchase our AUTO-LYTE ® assays, and we may eventually stop selling this product line. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This product primarily competes against other portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. In addition, certain of our distributors sell private label cryosurgical products that compete with our Histofreezer ® product. Our OTC cryosurgical products compete against other cryosurgical products offered in the U.S. OTC market and certain international OTC markets. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations +16 +and licensing opportunities to pr ovide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effe ctively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have four United States patents and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from November 2021 to December 2026. We have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have five United States patents for our OraQuick ® platform, as well as corresponding related international patents. We also have patent applications pending internationally. Four of the U.S. patents expire from March to July 2019 and the fifth in July 2028. +We hold, through our subsidiary, DNAG, eighteen United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from July 2019 through March 2034. +We have three United States patents and numerous foreign patents issued for apparatuses and methods for the topical removal of skin lesions relating to our cryosurgical wart removal products, and we have pending patent applications related to these products in the United States and in certain foreign countries. These patents expire from September 2025 to February 2032. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ? , Histofreezer ® , OraSure QuickFlu ® , Q.E.D. ® , Oragene ® , ORAcollect ® , OMNIgene ® and AUTO-LYTE ® trademarks. We also own many of these marks and others in several foreign countries. With respect to our international OTC cryosurgical products, the Scholl and Dr. Scholl tradenames are owned by Reckitt Benckiser in Europe, Australia, New Zealand and other countries outside North and South America, and the POINTTS tradename is owned by Genomma. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the U.S. Food and Drug Administration, or the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, +17 +failure to comply with the FDA’s requirements can lead to signific ant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. +There are several mechanisms by which regulated devices can be placed on the market in the United States. Some products may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified by the FDA; or a device that FDA has previously determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) application at least 90 days before commercial distribution of the affected product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a high risk device, the FDA must approve either a request for de novo classification or a premarket approval application, or PMA, before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists. Clearance of a de novo request generally takes 15 months from the time of submission of the de novo request, although it can take longer. PMAs are generally required for devices that are determined to be high risk and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy (AIP). Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +If there are any modifications made to our marketed devices, a new premarket notification or PMA supplement may be required to be submitted to, and cleared or approved by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a specified number of patients, unless the proposed study is deemed to be exempt from the IDE requirements. In addition, if a study meets the +18 +requirements for a non-significant risk study, it may be eligible for compliance with “abbreviated” IDE requirements, which in clude a subset of the requirements applicable to significant risk medical device studies. If a full IDE is required, an IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientif ic soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regul ations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. +Some of our products are used for research only or other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Another option for marketing a product in the U.S. is through an EUA that is granted by the FDA as a result of the Secretary of Health and Human Services declaring an emergency justifying the authorization of emergency use of certain in vitro diagnostic devices to aid in addressing the emergency. Typically, analytical and clinical studies are completed as required by the FDA. Products are exempt from design controls and other quality requirements in order to expedite development of diagnostic tools to aid in the diagnosis of viral pathogens that have the potential to affect public health. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance. +Companies are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +The Clinical Laboratory Improvement Amendments of 1988, or CLIA, prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. Tests may be waived from this regulatory oversight if they meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu ® test has obtained a CLIA waiver for that product. A CLIA waiver allows certain customers to use the waived products that may not have been able to use them without complying with applicable quality control and other requirements. +19 +Certain of our products may also be affected by state regulation s in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell p roducts. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +20 +In addition, the EU has adopted the EU Medical device Regulation (the “EU MDR”) and the In Vitro Diagnostic Regulation (the “EU IVDR”), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR and until May 2022 to meet the EU IVDR. Compliance with these regulations may be expensive and time -consuming. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. +We have completed the applicable conformity assessment procedures and obtained the right to use the CE mark for the OraQuick ADVANCE ® HIV-1/2 test, the OraQuick ® HCV test, our Histofreezer ® product line, our OTC cryosurgical removal product and certain of the Oragene ® collection kits and OMNIgene ® products sold by DNAG. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. +We have obtained WHO pre-qualification for our OraQuick ® HIV Self-Test and OraQuick ® HCV test and we will likely seek WHO pre-qualification or endorsement for certain other products sold into international markets. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the federal anti-kickback statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including false claims laws, marketing conduct laws and laws constraining the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare professionals and providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to new federal reporting and disclosure requirements with regard to payments or other transfers of value made to physicians and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +21 +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical T echnology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe th at our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to use any means of interstate commerce corruptly in the furtherance of any offer, payment, promise to pay or authorization of payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. Those laws include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Restriction of the Use of Hazardous Substances Directive, or RoHS. RoHS prohibits companies from selling products which contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in EU member states. In addition, the EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals Directive also restricts substances of very high concern in products. +Future environmental laws may require us to alter our manufacturing processes, thereby increasing our manufacturing costs. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +22 \ No newline at end of file diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/item13.txt b/raw/filings/0001116463/2018/0001564590-19-005491/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c96a0ed33d20ebd888a868c0fdd44d190d521f6d --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/item13.txt @@ -0,0 +1,3 @@ +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance - Director Independence” in the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/item9a.txt b/raw/filings/0001116463/2018/0001564590-19-005491/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..17f1851e435f0b2e679e2fbba895003f48cf9119 --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2018. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2018 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2018. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +65 +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries ’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2019 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +February 28, 2019 \ No newline at end of file diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/rp_note.txt b/raw/filings/0001116463/2018/0001564590-19-005491/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2018/0001564590-19-005491/rpt_disclosure.txt b/raw/filings/0001116463/2018/0001564590-19-005491/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5a8377d548e9bff3d0003e3c047ef6d5c41f1792 --- /dev/null +++ b/raw/filings/0001116463/2018/0001564590-19-005491/rpt_disclosure.txt @@ -0,0 +1,3 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2018, there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001116463/2020/0001564590-21-009887/filing.txt b/raw/filings/0001116463/2020/0001564590-21-009887/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..96246328688e863fbcde9fb25f338ac164d253cc --- /dev/null +++ b/raw/filings/0001116463/2020/0001564590-21-009887/filing.txt @@ -0,0 +1,4976 @@ +osur-10k_20201231.htm +false +FY +0001116463 +--12-31 +P20Y +P2Y +P2Y +P2Y +P1Y +true +true +P10Y +P1Y +P3Y +P10Y +P9Y +P10Y +P10Y +P8Y4M2D +P10Y +P5Y +P7Y +P5Y +P10Y +P15Y +P10Y +P10Y +P7Y +P5Y +P10Y +P15Y +P4Y5M12D 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+osur:RegisteredRetirementSavingsPlanMember +osur:DNAGenotekMember +2019-01-01 +2019-12-31 +0001116463 +osur:RegisteredRetirementSavingsPlanMember +osur:DNAGenotekMember +2018-01-01 +2018-12-31 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +Annual report pursuant to Section 13 or 15( d ) of the Securities Exchange ACT OF 1934 +For the fiscal year ended December 31, 2020 +or +☐ +Transition report pursuant to Section 13 or 15( d ) of the Securities Exchange Act of 1934 +F or the transition period from to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC . +(Exact Name of Registrant as Specified in Its Charter) +Delaware +36-4370966 +(State or Other Jurisdiction of +Incorporation or Organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem , Pennsylvania +18015 +(Address of Principal Executive Offices) +(Zip Code) +(Registrant’s Telephone Number, Including Area Code): ( 610 ) 882-1820 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Trading Symbol +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +OSUR +The NASDAQ Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +State the aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2020) : $ 829,039,107 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 22, 2021: 71,945,502 shares. +Documents Incorporated by Reference: +Portions of the Registrant’s Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report. +Table of Contents +PART I +Page +ITEM 1. +Business +3 +ITEM 1A. +Risk Factors +22 +ITEM 1B. +Unresolved Staff Comments +49 +ITEM 2. +Properties +49 +ITEM 3. +Legal Proceedings +49 +ITEM 4. +Mine Safety Disclosures +49 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +50 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +52 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +61 +ITEM 8. +Financial Statements and Supplementary Data +61 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +62 +ITEM 9A. +Controls and Procedures +62 +ITEM 9B. +Other Information +63 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +64 +ITEM 11. +Executive Compensation +64 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +64 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +64 +ITEM 14. +Principal Accountant Fees and Services +64 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +65 +ITEM 16. +Form 10-K Summary +67 +Signatures +68 +This Report contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to successfully manage and integrate acquisitions of other companies in a manner that complements or leverages our existing business, or otherwise expands or enhances our portfolio of products and our end-to-end service offerings, and the diversion of management’s attention from our ongoing business and regular business responsibilities to effect such integration; the expected economic benefits of acquisitions (and increased returns for our stockholders), including that the anticipated synergies, revenue enhancement strategies and other benefits from the acquisitions may not be fully realized or may take longer to realize than expected and our actual integration costs may exceed our estimates; impact of increased or different risks arising from the acquisition of companies located in foreign countries; ability to market and sell products, whether through our internal, direct sales force or third parties; impact of significant customer concentration in the genomics business; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (“FDA”) or other regulators; the impact of the novel coronavirus (“COVID-19”) pandemic on our business and our ability to successfully develop new products, validate the expanded use of existing collection products and commercialize such products for COVID-19 testing; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; ability to meet increased demand for the Company’s products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives and continue to increase its revenues, including the ability to expand international sales; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of oral fluid or urine testing, collection or other products; market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention (“CDC”) or other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; impact of contracting with the U.S. government; impact of negative economic conditions; ability to maintain sustained profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could affect our results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Annual Report and we undertake no duty to update these statements. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +1 +References in this Annual Report to “OraSure” mean OraSure Technologies, Inc. References in this Annual Report to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +2 +PART I +ITEM 1. +Business. +The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business is made up of two principal segments. The first is our Diagnostics business, previously named “OSUR”, which consists primarily of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our HIV product is also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business includes the operations of UrSure Inc., which we acquired and merged into OraSure in 2020. This part of the business develops and commercializes products that determine adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV infection. These products include laboratory-based tests that can measure levels of the medication in a patient’s urine or blood, as well as point-of-care products currently in development. +The second segment is our Molecular Solutions business, previously named “DNAG,” which is operated primarily through our subsidiaries, DNA Genotek Inc. (“DNAG”), a company based in Ottawa, Canada, Diversigen, Inc. (“Diversigen”) and Novosanis NV (“Novosanis”). In the Molecular Solutions business, we manufacture and sell kits that are used to collect, stabilize, transport and store biological samples of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. Included in the disease risk management area are pharmacogenomics testing, hereditary disease screening, prenatal or cancer screening, population health initiatives and other molecular testing using DNA or RNA for diagnosis of acute disease. We also sell research use only collection products into the microbiome market. We also offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, Inc. (“CoreBiome”), a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee ® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals. +Additional information about us can be found on our website, www.orasure.com . We make available free of charge through a link provided at such website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), as well as any amendments to those Reports and filings. These Reports and filings are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website and the information contained in or connected to that website are not intended to be incorporated by reference into this Annual Report. +Diagnostics Segment Products +The following is a summary of our principal products for the infectious disease and risk management markets, which comprise the Diagnostics segment of our business: +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and requires a confirmation test where an initial positive result is obtained. +3 +This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received pre-market approval (“ PMA ”) from the U.S. Food and Drug Administration (“ FDA ”) for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988 (“ CLIA ”) , to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered for sale in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received World Health Organization (“WHO”) pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. We have also received a CE mark for the OraQuick ® In-Home HIV test, although this product is not currently sold in the European Union. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries at a lower cost to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +We have received FDA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +We have received 510(k) clearance from the FDA for our rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +4 +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with a blood-based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate or OMT for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific (“Thermo Fisher”). Under the Thermo Fisher agreement, we intend to obtain FDA 510(k) clearance of our device for use with a 12-assay panel of the Thermo Fisher assays that will meet the oral fluid drug testing guidelines issued by the Substance Abuse and Mental Health Services Administration (“SAMHSA”). +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. Our MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and we are selling a NIDA-5 panel of microplate assays supplied by Thermo Fisher to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +5 +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Molecular Solutions Segment +Genomic Products +We sell a number of genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA and/or RNA from human and animal biologic samples. Our lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. +Our genomic products are available in several different configurations and contain proprietary chemical solutions that are optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to simply hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the lid of the container are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology results in high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. Benefits include the reliable collection of high-quality and stable genetic samples, use of simple non-invasive collection methods, the ability to store and transport collected samples for extended periods at ambient temperatures and compatibility with fully-automated laboratory testing systems. +We also sell the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. +COVID Products +During 2020, we actively engaged with several laboratories and researchers to demonstrate the effectiveness of our existing collection products for use with COVID-19 molecular testing. The stabilization solution in our molecular collection products can accommodate a very broad spectrum of microbiome activity spanning bacteria to viruses and we have collected data on the usability of our kits for this purpose. We believe that oral samples collected using devices from our product lines for liquid saliva or oral swab samples are a suitable alternative to more commonly used samples collected with a nasopharyngeal or oropharyngeal swab. Unlike nasopharyngeal and oropharyngeal swabs which cannot be self-administered easily, our products are optimized for self-collection. That means healthcare providers, retailers, and online vendors could ship our kits directly to an individual’s home, eliminating unnecessary trips to hospitals, doctors’ offices and testing facilities. Self-collection would also support the social distancing guidelines already in place in many communities, reduce the burden on testing sites and healthcare facilities, and provide wider access to testing. Moreover, the chemistry in our products stabilizes nucleic acids, including RNA, which is the nucleic acid used by most labs for COVID-19 testing. The usability and form factor of these products are conducive to use in at-home or clinic settings. +As a result, during 2020 we began selling our ORAcollect ® • RNA and OMNIgene ® • ORAL collection devices for use in connection with COVID-19 molecular testing. These products have become an increasingly important part of our business and accounted for 47% of 2020 revenue generated by our Molecular Solutions segment. +6 +Microbiome Products . +We also market several microbiome collection products designed to collect, stabilize and transport the microbial profile from multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environment fluctuations. In order to optimize and standardize sample results, a reliable method that captures and preserves (“snapshots”) the microbiome after collection until analysis is required. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high quality microbial DNA from feces or stool samples for gut microbiome profiling for use in clinical laboratory and research settings. Current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. Our product ensures that the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. We have also begun marketing other microbiome collection kits for skin, vaginal and oral samples. +Laboratory and Data Analytical Services . +Our Molecular Solutions business also offers our customers microbiome laboratory testing and analytical services. These services reflect the collective services of our CoreBiome and Diversigen subsidiaries, which were combined under the Diversigen name during 2020. Our services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities, to unleash the translational potential of the microbiome and provide fast and information-rich characterizations of microbial diversity and function paired with expert analytics. We also provide comprehensive microbiome and metagenomics services focused on solutions to improve human, animal and environmental health. Diversigen has extensive experience with highly diverse microbiome sample types and provides full project life cycle consulting services, including pre-project consulting, study design, extraction and sequencing to complete bioinformatics analysis. Diversigen is at the forefront for setting quality standards for this industry and is in the process of obtaining College of American Pathologists (“CAP”) accreditation at its laboratory facilities. We are also in the process of integrating the services offered through GenoFIND TM , CoreBiome and Diversigen into a unified offering and brand for our customers. +Regulatory Approvals. +Our Molecular Solutions products historically have been sold primarily as Class I medical devices for use by research and academic institutions. We have received FDA 510(k) clearance of the Oragene ® • DX product for use with the eSensor ® Warfarin sensitivity saliva test. A separate 510(k) clearance permits self-collection by consumers when the sample is to be tested with either an exempt or 510(k) cleared molecular test. More recently, we received a generic 510(k) clearance for this product, which we believe will further broaden the use of our Oragene ® • DX device. Our ORAcollect ® product similarly received 510(k) clearance from the FDA. We have also received CE mark approval for the Oragene ® • DNA, ORAcollect ® and OMNIgene ® • GUT collection kits. Diversigen provides molecular services in CLIA-certified laboratories and as noted above, and is in the process of obtaining CAP accreditation. +With respect to COVID testing, our collection devices have been included in FDA Emergency Use Authorizations (“EUAs”) granted to a number of third parties for use with COVID-19 molecular test offerings. These EUAs permit the use of our devices in healthcare settings or in some cases in at-home or unsupervised settings for the collection of samples. Our DNA Genotek subsidiary also received FDA EUAs for the use of its OMNIgene ® •ORAL and ORAcollect ® •RNA collection devices in COVID-19 testing which allows for the unsupervised use of these devices at home or in healthcare settings when used as part of an approved or validated at-home test kit. With these FDA authorizations, the OMNIgene ® • ORAL and ORAcollect ® •RNA devices can be used for the self-collection, transport and laboratory testing of saliva specimens suspected of containing SARS-CoV-2 ribonucleic acid (RNA), without the presence of a healthcare professional, before sending the sample to a lab for analysis. These products are also CE marked for in vitro diagnostic use, including for COVID-19 testing, in the European Union. +Products Under Development +Diagnostic Products +Our research and development efforts include programs targeted at expanding and enhancing our diagnostics business. These programs typically focus on products related to drug monitoring, rapid tests for diseases other than HIV and HCV and drug testing. In 2020, significant time and resources were dedicated to the development of our COVID-19 Rapid Antigen Self-Test. Subject to regulatory approvals, the Company intends to introduce its antigen test to the market for three different uses: +7 +▪ +Professional Test for use at drive-through sites, physician offices, public health testing sites, and employer/university health centers. In this instance, a physician would prescribe the test and the patient would conduct a self-swab in the presence of a healthcare provider who would then interpret the result. +▪ +Prescription Self-Test for use by individual consumers (with prescription) at home or in any location, by employers/universities on- or off-site, or by physicians or public health via remote testing. In this instance, a physician would prescribe the test and the patient would conduct a self-swab at home, or in any location, where they would then interpret their own result. +▪ +OTC Self-Test for use by consumers who would purchase online or at retail without prescription, and conduct the test and receive the result themselves anytime, anywhere. +We have completed development of the COVID-19 Rapid Antigen Self-Test and have collected all clinical study data to submit both the Prescription Self-Test and the Professional Test versions of this product for EUA at the same time, which is expected to occur in the first quarter of 2021. Subject to receipt of EUA, this product would test for active COVID-19 infection using nasal samples self-collected from the lower nostril. After we submit the Professional Test and Prescription Self-Test for EUA, we intend to continue plans to pursue an OTC claim. +During the third quarter of 2020, limit of detection studies for the assay were completed with live coronavirus in a certified third party analytical laboratory, with results comparable to that of another EUA approved, instrument-free, rapid antigen test. The results from the limit of detection comparison provides further confidence that the proprietary chemistries incorporated on OraSure’s lateral flow test strip will deliver the analytical sensitivity needed. Although the timing of EUA approval is subject to FDA review, the Company will be prepared to launch the test, subject to authorization, without delay following such approval. Subject to receipt of EUA, this product would test for active COVID-19 infection using nasal samples collected from the lower nostril. Results would be available at the point of collection, with no special instrumentation needed to interpret result. +In addition to a rapid antigen self-test, we are developing a lab-based oral fluid microplate SARS-CoV-2 antibody enzyme-linked immunosorbent assay (“ELISA”). The OraSure SARS-CoV-2 Antibody ELISA is intended for qualitative detection of total antibodies (including IgM/IgA/IgG) to SARS-CoV-2 in human oral fluid specimens collected with the OraSure Oral Antibody Collection Device. To date, there are no oral fluid antibody tests for COVID-19 authorized for sale in the U.S. Oral sample collection is quick, painless, non-invasive and requires less human contact in comparison to a blood draw, minimizing the need for personal protective equipment and exposure to potentially infected patients. With this test, individuals would use a collection pad to self-collect an oral fluid sample under the observation of a healthcare professional. The sample would then be placed into the OraSure oral antibody collection device buffer for storage and transport, and then later dispensed onto the ELISA microplate for testing in a laboratory. The lab-based antibody test can aid in identifying individuals with an adaptive immune response to SARS-CoV-2, indicating recent or prior infection. Antibody tests are well suited for community surveillance and seroprevalence studies to identify people in a population or community that have antibodies against an infectious disease such as COVID-19. In addition, the OraSure SARS-COV-2 Antibody ELISA can detect antibodies developed from vaccination. +In October 2020, the Company submitted an EUA application to the FDA for its SARS-CoV-2 Antibody ELISA test and in December 2020, the FDA requested additional information as part of its review of our EUA submission. At the FDA’s request, we are performing additional analytical studies on sample collection and stability and, after data from these studies have been obtained, we intend to resubmit two separate EUAs – one for the ELISA and one for the collection device. +During 2020, a significant amount of time was also devoted to the oral fluid drug assay development efforts with Thermo Fisher. Another development area focused on increasing the number of country registrations for our HIV Self-Test. Finally, we are also working to develop a rapid point-of-care assay to determine HIV drug adherence to be sold in the same markets where we currently sell our HIV diagnostic products. +Molecular Solutions +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for RNA collection and stabilization. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. We are also evolving the physical design and features of our products to further enable high throughput processing through improved interoperability with automated platforms. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. Our development efforts are focused on remaining at the forefront of technology, as well as providing new and relevant services to our customers. These development goals are being pursued while we also leverage new sequencing technologies and methodologies to enable scalability for our business. +8 +Sales and Marketing +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were $130.8 million, $107.3 million and $136.8 million in 2020, 2019 and 2018, respectively. Consolidated net revenues attributable to international customers amounted to $40.9 million, $47.3 million and $44.9 million, or 24%, 31% and 25% of our total revenues, in 2020, 2019 and 2018 respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Notes 2 and 13 to our consolidated financial statements included elsewhere in this Annual Report. +Diagnostics - Professional +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. We sell our OraQuick ADVANCE ® test directly to hospitals in the U.S. primarily through distributors. We also use distributors to sell our OraQuick ADVANCE ® test into the U.S. physician office market and to retail clinics operated by pharmacies. In addition, we distribute our OraQuick ® HIV test in certain foreign countries through distributors. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +Diagnostics - OTC and Self-Test +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. Retailers carrying the product include CVS, Walgreens, Rite Aid and Walmart. The product is also available for purchase on-line through certain retailers and from our website, www.oraquick.com . The primary target population for our HIV-OTC test comprises young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. +We also sell our OraQuick ® HIV Self-Test in certain international markets. Under a Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) we are able to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates Foundation. The funding consists of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement was entered into in 2017 and has a four-year term and enables non-governmental organizations in the eligible countries that receive funding from government or public sector agencies and donors to access our HIV Self-Test at reduced pricing. The agreement with the Gates Foundation provides for an aggregate funding amount not to exceed $20.0 million over the four-year term or $6.0 million each year of the agreement. The term of this agreement expires in 2021. +Our OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +9 +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we also sell our next generation Intercept i2 ® collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. Under our Thermo Fisher agreement, we intend to obtain FDA 510(k) clearance of our Intercept i2 ® device for use with the NIDA-5 assay panel, along with an additional six fully-automated high-throughput assays in order to expand sales of this product line into the workplace testing market and other markets that require 510(k) cleared drug tests. These products are expected to meet recent oral fluid drug testing guidelines issued by SAMHSA, which will enable us to expand sales into markets where employee drug testing is federally regulated. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Molecular Solutions +Our Molecular Solutions business sells its products directly to its customers, primarily through its own internal sales force and in many international markets, distributors are used. +Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. Sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority these revenues. A significant portion of total sales are derived from repeat customers in both markets. Molecular Solutions also has customers in the livestock and companion animal markets. +We have expanded the market focus of our Molecular Solutions business by selling certain existing collection products for use in COVID-19 tests and by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). We are leveraging our existing sales force and global research connections to engage microbiome customers around the world to establish itself as the leader in ease-of-collection, stabilization and transport of this challenging sample type. +Our Molecular Solutions segment includes the Colli-Pee ® device, a product developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. +This segment is offering laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of its customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. During 2019, we substantially expanded our ability to offer microbiome laboratory and bioinformatics services with the acquisition of CoreBiome and Diversigen. The laboratory operations of CoreBiome and Diversigen were combined during 2020 so that we can now provide a single-integrated offering to our customers under the Diversigen brand. +Significant Products and Customers +Several different product lines have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands). +For the years ended December 31, +2020 +2019 +2018 +Genomics +$ +37,141 +$ +56,200 +$ +79,765 +OraQuick ® HIV +44,224 +43,092 +41,457 +COVID-19 +49,802 +— +— +One of our customers accounted for approximately 15% and 24% of our net consolidated revenues in 2019 and 2018, respectively. We had no customers in 2020 that accounted for more than 10% of our net consolidated revenues. +10 +Supply and Manufacturing +We manufacture all of our OraQuick ADVANCE ® HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® collection devices, AUTOLYTE and MICRO-PLATE assays and QED ® saliva alcohol test in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +We intend to manufacture our COVID-19 Rapid Antigen Self-Test and OraSure SARS-CoV-2 Antibody ELISA in our Bethlehem, Pennsylvania facilities. In addition, we plan to manufacture our COVID-19 Rapid Antigen Self-Test at a third party in Thailand in order to supply certain international markets. We made significant capital investments during 2020 and will continue to invest to add the manufacturing capacity needed to meet the expected demand for these products. Specifically, we plan to add capacity of 70 million tests per year (which includes tests for HIV, HCV and Ebola) to meet demand for the COVID-19 Rapid Antigen Self-Test in the U.S. by the third quarter of 2021, and capacity for an additional 50 million tests per year by the second quarter of 2022 to support sales of this product outside of the U.S. We expect to add capacity of 20 million tests per year (including existing products) to meet demand for our OraSure SARS-CoV-2 Antibody ELISA by the fourth quarter of 2021. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, including one critical component that is purchased from a sole source supplier. We believe there are other suppliers that can manufacture and supply the raw materials and components for the DNAG products. We are increasing capacity for our molecular collection kits to meet demand for COVID molecular testing to 80 million kits per year (including non-COVID kits) by the third quarter of 2021. +Our Colli-Pee ® device is currently manufactured at our Belgian assembly facility with components supplied by third party vendors. +Our GenoFIND TM genomics laboratory services are provided to our customers by a third party laboratory. We believe there are other laboratories that can also provide these services. Our microbiome laboratory testing and analytical services are provided by our subsidiary, Diversigen. +11 +Human Capital Resources +In order to achieve the goals and expectations of our Company, it is crucial that we continue to attract and retain top talent. To facilitate talent attraction and retention, we strive to make OraSure a safe and rewarding workplace with opportunities for our employees to grow and develop in their careers. +As of December 31, 2020, we had 570 full-time employees, which compares to 472 employees as of December 31, 2019. The increase in employees during 2020 was primarily the result of the need to add manufacturing capacity for our COVID-19 Rapid Antigen Self-Test and molecular collection devices used in COVID-19 molecular testing. Our employees are not currently represented by a U.S. collective bargaining agreement. +We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention to attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +During 2020, in response to the COVID-19 pandemic, we implemented safety protocols and new procedures to protect our employees, our subcontractors and our customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in all aspects of our business, including customer facing activities. Many of our administrative and operational functions during this time have required modification as well, including much of our workforce working remotely. +As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefits programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering a diverse, equitable, and inclusive workplace that reflects and contributes to the global communities in which we do business and the customers and partners we serve. This includes all communities impacted by our corporate presence. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a Code of Conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. We strive to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. We have an active Diversity, Equity and Inclusion Council that strives to drive diversity, equity and inclusion within the workplace. At OraSure, we believe a variety of perspectives are critical to achieving success, and that diversity, equity and inclusion are key drivers to growth-based innovation and profitability. We aim to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgement. We believe that when all voices are heard, we honor and exemplify our core values and best serve our communities. +Competition +Diagnostics Segment +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +12 +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. The increased complexity of the market is expected to force many competitors to enter into joint ventures or license certain products or technologies. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Several companies market or have announced plans to market oral specimen collection devices and tests both within and outside the United States. We expect the number of devices competing with our OraQuick ® , OraSure ® , Intercept ® and Intercept i2 ® devices to increase as the benefits of oral fluid-based testing become more widely accepted. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests. Our competitors sell both a rapid oral fluid HIV test and a rapid HIV antigen/antibody test that are both FDA approved and CLIA waived. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our competitors in the domestic infectious disease testing market include medical diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing tests are often sold at a lower price than we charge for our products. This competition can result in lost sales and degradation of the price (and therefore the applicable profit margins) we can charge for our HIV and HCV tests. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to U.S. systems. Unlike in the U.S., adoption of rapid point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick ® HIV and HCV tests in European and other international markets. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. We compete against one other non-rapid HIV blood test available in the OTC market, which requires consumers to self-collect a blood sample and then send it to a laboratory for testing. We expect that other non-rapid HIV blood tests will eventually compete with our product. The OraQuick ® HIV Self-Test that we sell in certain international markets is facing competition from other blood-based rapid HIV self-tests. +In the United States there are currently four rapid COVID-19 self-tests on the market that are expected to compete against our COVID-19 Rapid Antigen Self-Test. There are several other Professional point of care COVID-19 antigen tests with EUA in the United States which are expected to compete with the Professional use version of our antigen test. In addition, there are a number of COVID-19 blood-based antibody tests sold in the U.S. market that are expected to compete against our OraSure SARS-CoV-2 Oral +13 +Fluid Antibody ELISA. We also expect additional rapid COVID-19 antigen tests and COVID-19 antibody tests to enter the market both in the U.S. and in international markets that will compete against our COVID-19 assays. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +There are at least two competitors that sell fully-automated high-throughput oral fluid drug testing products in unregulated settings in the United States. These competitors sell these assays for use with either their own oral fluid collector or a collector manufactured by another party. These offerings compete against our Intercept ® and Intercept i2 ® collection devices and related oral fluid assays. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. These tests provide strong competitive pressure because they provide the benefits of automation, including lower costs and short turn-around times. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, these tests are qualitative tests that are believed to be substantially lower in quality and provide fewer benefits than our Q.E.D. ® test. +Molecular Solutions Segment +Our Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although we believe the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. With the receipt of authorizations for use in connection with COVID-19 molecular tests, our Oragene ® and ORAcollect ® products now compete against COVID-19 testing systems and the collection methods used in those systems. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, we are one of the few vendors to offer a solution that fully meets these requirements. +Our genomic and microbiome laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have four United States patents and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from May 2021 to December 2026. We have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +14 +We have one United States patent for our OraQuick ® platform expiring in 2028 , as well as corresponding related international patents. We also have patent applications pending internationally. We have two pending patents in the United States for our COVID-19 Rapid Antigen Self-Test and we expect to file additional patent applications for this product in certain international markets. +We hold, through our subsidiary, DNAG, twenty-two granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from February 2022 through March 2035. +We hold through our subsidiary, Novosanis, one granted United States patents and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. +Our subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological samples containing polynucleotide molecules. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® , OraQuick ® , OraQuick ADVANCE ® , OraSure QuickFlu ® , Q.E.D. ® , Oragene ® , DNA Genotek TM , OMNImet TM , ORAcollect ® , OMNIgene ® , Diversigen ® , Colli-Pee ® , AUTO-LYTE ® , prepIT ® and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +15 +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, de novo classification, premarket approval, or emergency use authorization. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been downclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a request for de novo classification or a premarket approval application (“PMA”) before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a de novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. FDA may grant an EUA application for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made following a determination by the Secretary of Health and Human Services that there is a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense +16 +that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to our marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of our products are used for research only or other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and postmarket surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR +17 +regulations and other postmarket requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s postmarket requirements. +The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has obtained a CLIA waiver for that product. +The laboratory services provided by our subsidiary, Diversigen, are subject to CLIA and consist of microbiome and metagenomics sequencing, bioinformatics and analysis. Diversigen has recently received a CLIA certificate of registration in Minnesota, and is pursuing accreditation from the College of American Pathologists (CAP). A CLIA certificate of compliance is issued once a state regulator or the Center for Medicare and Medicaid Services determines that the laboratory is compliant with the applicable CLIA requirements. Under CLIA, certain organizations—including CAP—can accredit laboratories performing testing on specimens from human beings or animals, using methodologies and clinical applications within the expertise of the laboratory accreditation program. +Certain of our products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +18 +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO 13485 certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Medical Devices Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +In addition, the EU has adopted the EU Medical Devices Regulation (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (the “EU IVDR”), which will repeal and replace the MDD and IVDD. The EU MDR and EU IVDR impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2021 to meet the requirements of the EU MDR and until May 2022 to meet the EU IVDR. Compliance with these regulations may be expensive and time-consuming. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. We also note that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to our international strategy. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program (MDSAP). We received this certification for our Diagnostics segment (previously named “OSUR”) in June 2019. +We have obtained WHO pre-qualification for our OraQuick ® HIV Self-Test and OraQuick ® HCV test and we will likely seek WHO pre-qualification or endorsement for certain other products sold into international markets. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +19 +The False Claims Act (“ FCA ”) , imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require us to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to health care providers. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which we are subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. We also are subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which we are subject as a result of our international sales also include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +20 +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require us to alter our manufacturing processes, thereby increasing our manufacturing costs, or may impose other additional obligations on us or our products. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +21 +ITEM 1A. +Risk Factors +Summary of Risk Factors +Below is a summary of the principal factors that could adversely affect our business, operations and financial results . This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this summary, and other risks that we face, can be found below following this summary. +Risks Relating to Products, Marketing and Sales +• +Changes in the genomics market may adversely affect our business. +• +Our future success depends upon market acceptance of our existing and future products and service offerings. +• +We may not realize anticipated revenue from our COVID-19 diagnostic assays. +• +The COVID-19 pandemic has significantly and adversely affected our consolidated results of operations, financial position and cash flows and may continue to do so. +• +Marketing of our COVID-19 tests and collection kits under EUAs from FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of the EUAs is subject to government discretion. +• +If acceptance and adoption of oral fluid testing and collection products does not continue, our future results may suffer. +• +We expect to face increasing competition from other providers of diagnostic tests, sample collection products and molecular laboratory services. +• +Our product sales cycles can be lengthy and may depend on public funding, which can cause variability and unpredictability in our operating results. +• +Our inability to expand international sales could adversely affect our business and results of operations. +• +Our international presence may increase our risks and expose our business to regulatory, cultural or other restraints. +• +Our U.S. government contracts require compliance with numerous laws and increases our risk and liability. +• +Our U.S. government contracts may affect our intellectual property rights. +• +Our U.S. government contracts and related administrative processes are subject to audits and cost adjustments by the federal government. +Risks Relating to Our Industry, Business and Strategy +• +Consolidation in the healthcare industry could adversely affect our future revenues and operating results. +• +Our research, development and commercialization efforts may not succeed and our competitors may develop and commercialize more effective or successful offerings. +• +Acquisitions or investments may not generate the expected benefits and could disrupt our ongoing business, distract our management, increase our expenses and adversely affect our business. +• +There are risks relating to our acquisitions of Diversigen, Novosanis and UrSure. +• +The future results of acquired companies may be adversely impacted if we do not effectively manage our expanded operations. +• +Our revenues could be affected by third-party reimbursement policies and potential cost constraints. +• +Changes in healthcare regulation could affect our revenues, costs and financial condition. +• +New or changed testing guidelines could affect sales of our diagnostic products. +• +Reductions in government funding and research budgets could adversely affect our business and financial results. +Risks Relating to Collaborators +• +The use of third party supply sources for critical components of our products could adversely affect our business. +• +Our failure to maintain existing distribution channels, or develop new distribution channels, may result in lower revenues. +• +We may need strategic partners to assist in developing and commercializing some of our products. +Risks Relating to Intellectual Property +• +Our success depends on our ability to protect our proprietary technology. +• +We may become involved in intellectual property disputes, which could increase our costs and limit or eliminate our ability to sell products, provide services or use certain technologies. +22 +Regulatory Risks +• +The need to obtain regulatory approvals could increase our costs and adversely affect our financial performance. +• +Failure to comply with FDA or other regulatory requirements may require us to suspend production or sale of our products or institute a recall which could result in higher costs and loss of revenues. +• +Our inability to respond to changes in regulatory requirements could adversely affect our business. +• +Our inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect our business. +• +We are subject to numerous government regulations in addition to FDA requirements, which could increase our costs and affect our operations. +• +Failure to comply with privacy, security and breach notification regulations may increase our costs. +• +Failure to comply with data protection requirements or privacy laws could increase our costs. +• +FDA regulation of laboratory-develop tests and genetic testing could affect demand for our products. +• +Our international sales create potential exposure under anti-corruption laws. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +• +Economic volatility and disruption, including those related to the COVID-19 pandemic could adversely affect our business, financial performance, results of operations, cash flow and financial condition or those of our customers and suppliers. +• +An impairment of goodwill and intangible assets could reduce our earnings. +• +We have experienced losses in the past and may not be able to maintain profitable operations. +• +Changes in foreign currency exchange rates could negatively affect our operating results. +Risks Relating to Our Common Stock +• +Our stock price could continue to be volatile. +• +Future sales of our Common Stock by existing stockholders, executive officers or directors could depress the market price of our Common Stock and make it more difficult for us to sell stock in the future. +• +Because we do not intend to pay cash dividends on our Common Stock, an investor in our Common Stock will benefit only if our Common Stock appreciates in value. +• +Certain provisions in our Certificate of Incorporation and Bylaws and under Delaware law could make a third-party acquisition of us difficult. +General Risk Factors +• +We may face product liability claims for injuries resulting from the use of our products. +• +Performance of our products may affect our revenues, stock price and reputation. +• +Our ability to sell products could be adversely affected by competition from new and existing products and services. +• +Failure to achieve our financial and strategic objectives could have a material adverse impact on our business prospects. +• +If we lose our key personnel or are unable to attract and retain qualified personnel as necessary, our business could be harmed. +• +If our essential employees who are unable to telework become ill or otherwise incapacitated our operations may be adversely impacted. +• +Increases in demand for our products and services could require use to expend considerable resources or harm our customer relationships if we are unable to meet that demand. +• +We rely on information technology in our operations and any material failure, inadequacy, interruption or security breach of that technology could harm our ability to efficiently operate our business. +• +Security breaches and other disruptions could compromise our information, expose us to liability and harm our reputation and business. +• +Federal and state laws pertaining to healthcare fraud and abuse could adversely affect our business, financial condition and results of operations. +• +We may experience fluctuations in our financial results or fail to meet our financial projections. +• +We may require future additional capital. +• +Terrorist attacks, natural disasters, public health crises or other catastrophic events outside of our control may adversely affect our business. +• +Future sales of shares of our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new equity offerings. +23 +Risk Factors +You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Annual Report and our other SEC filings, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Changes in the Genomics Market May Adversely Affect our Business . +The genomics market has been the largest component of our overall molecular business segment for some time and the major driver of this market has been ancestry testing which offers products and services to consumers to provide them with genealogical information. The ancestry market is maturing and sales to this market have declined in recent periods. Our genomics revenues have been reduced, primarily due to a change in promotional strategies and purchasing patterns by our largest customer which serves the consumer ancestry and genetic testing market. This trend in the ancestry testing market is continuing and is expected to adversely affect our revenues and results of operations in future periods. +In an effort to increase our molecular revenues, we have devoted increasing time and attention to expanding sales of our genomics products both domestically and internationally, including in the Asia-Pacific and other markets. While we believe these new markets represent large growth opportunities, there is no assurance that we will be successful in capitalizing on these opportunities or that we will be able to increase our international product sales consistent with our expectations. Factors that include, but are not limited to, the market acceptance of our products, available funding, cost containment strategies implemented by customers, increasing competition and regulatory constraints could limit sales of our genomics products into these international markets. To the extent that we are unsuccessful or limited in expanding our business in the Asia-Pacific or other new markets, our revenues and results of operations could be negatively affected. +Despite the challenges that we face in the ancestry market, we believe there is significant growth opportunity for our genomics products in the area of disease risk management (“DRM”). However, during 2019, the U.S. Department of Justice (“DOJ”) investigated several telemedicine companies and individuals for allegedly submitting fraudulent insurance claims to Medicare for cancer genetic screening and pharmacogenomics testing. Several of our customers were included in the DOJ investigation. These activities have had a negative impact on our revenues and to the extent such allegedly fraudulent insurance billing practices continue, our future genomic revenues could be adversely affected. +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products and Service Offerings. +We believe successful new product and service introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product or service and are reluctant to switch thereafter. Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our in-home antigen pan-SARS-coronavirus self-test (“Coronavirus Self-Test”), laboratory-based oral fluid SARS-CoV-2 antibody test (“Coronavirus Antibody Test”), OraQuick ® HIV Self-Test, OraQuick ® Ebola test and OMNIgene ® • GUT product offerings, and other new products or technologies that may be developed or acquired. In addition, our future revenues will depend on market acceptance of new uses for our saliva collection products, including for COVID-19 testing, and our new service offerings, such as the microbiome laboratory testing and analytical services we provide through Diversigen. To commercially market new uses of our products and to achieve market acceptance, we will likely be required to undertake clinical studies to validate the new uses for our products and substantial marketing efforts and spend significant funds to complete product development and clinical studies and inform potential customers and the public of the existence and perceived benefits of these products and services. In addition, governmental funding may be needed to help complete development, obtain required regulatory approvals, clearances or EUAs and create market acceptance and expand the use of these products and services. +There may be limited evidence on which to evaluate the market reaction to products and services that may be developed and our marketing efforts for new products and services or products with new uses may not be successful. The market for microbiome products and services is in its early stages and its future development and acceptance by our customers is uncertain. It is also possible that governmental funding may be limited for new products, such as our Coronavirus Self-Test and Coronavirus Antibody Test or the new sample collection and stabilization products being commercialized by DNAG. Also, we are still in the process of developing and seeking regulatory authorization for the Coronavirus Self-Test and Coronavirus Antibody Test and validating the use of existing products for pan-SARS-coronavirus testing, and it is uncertain whether we will be successful in our development and validation efforts or whether these products will prove effective, receive applicable regulatory approvals, clearances or EUAs and gain +24 +widespread acceptance in the marketplace. As such, there can be no assurance that any products or services will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. In addition, it is possible that our expenses to develop and market any such products, including, without limitation our Coronavirus Self-Test and Coronavirus Antibody Test, will exceed any benefit in revenues, which may be short-lived, or that other products that compete with ours achieve commercial acceptable earlier than we do. +We May Not Realize Anticipated Revenue From Our COVID-19 Diagnostic Assays . +We are developing assays to detect antigen and antibodies to the coronavirus, which causes the infectious disease known as COVID-19. While we expect to see significant demand for our COVID-19 assays, other companies are working to produce or have produced tests for COVID-19 which may lead to the diversion of customers, including governmental and quasi-governmental entities, away from us and toward other companies. Moreover, the dangers posed by COVID-19 may subside over time. A number of preventative vaccines have recently been approved for use in human populations by regulatory agencies in the U.S. and Europe. The anticipated effectiveness of these vaccines will likely limit the spread of COVID-19 and potentially reduce the market size for COVID-19 testing. +We expect that, if and when the current COVID-19 pandemic subsides, there may be a significantly reduced demand for ongoing testing, and thus, for our COVID-19 assays. There is no guarantee that current or anticipated demand will continue, or if demand does continue, that we will be able to produce our COVID-19 assays in quantities to meet the demand. A significant decline in demand for our COVID-19 assays without a corresponding increase in our other businesses could have a material, adverse effect on our results of operations, cash flow and financial position. +The COVID-19 Pandemic Has Significantly And Adversely Affected Our Consolidated Results of Operations, Financial Position and Cash Flows, and May Continue To Do So . +Although we have experienced heavy demand for certain specimen collection devices for use in COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on our performance, the duration and level of the demand for COVID-19 molecular testing is uncertain. We believe the COVID-19 pandemic’s adverse impact on its our consolidated results of operations, financial position and cash flows will be primarily driven by: (i) the severity and duration of the COVID-19 pandemic; (ii) the COVID-19 pandemic’s impact on the U.S. healthcare system and the U.S. economy; and (iii) the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic, including the development and deployment of vaccines. +Marketing of Our COVID-19 Tests and Collection Kits Under EUAs From FDA Is Subject To Certain Limitations and We Are Required To Maintain Compliance With The Terms of The EUA, Among Other Things, And The Continuance of The EUAs Is Subject To Government Discretion. +On February 4, 2020, the U.S. Department of Health and Human Services (“HHS”) issued a declaration that the threat to public health posed by COVID-19 justifies the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of SARS-CoV-2. Under Section 564 of the Food, Drug, and Cosmetic Act (“FDCA”), because HHS has issued this declaration, the FDA Commissioner is authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA reflects an FDA conclusion that based on the totality of scientific evidence available to the FDA, it is reasonable to believe that the product may be effective in diagnosing COVID-19, the known potential benefits of the product outweigh the known and potential risks, and there is no adequate, approved, and available alternative to the emergency use of the product. +During 2020, our ORAcollect ® •RNA and OMNIgene ® •ORAL collection devices were included in EUAs granted by the FDA to certain third parties for use in the detection of SARS-CoV-2 and we have separately obtained EUAs for these products. Several other laboratories are pursuing the inclusion of our specimen collection devices for use with their SARS-CoV-2 assays. In addition, we intend to obtain EUAs for our new COVID-19 Rapid Antigen Self-Test and OraSure SARS-CoV-2 antibody ELISA. Although there are certain regulatory requirements the FDA has waived for the duration of the EUAs, we remain subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events. +As with other FDA-regulated products, issues could emerge during the course of the marketing and use of our products under an EUA that could impact our ability to continue the sale and distribution of these products (for example, compliance or product performance issues). The applicable EUA’s remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety. If that were to occur then in order market our diagnostic products or collection kits for the purpose of detecting COVID-19, we would be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations for device manufacturers, including the Quality System Regulation under 21 CFR Part 820. It is possible +25 +that we may not be able to obtain those clearances or approvals in a timely manner, or at all, and tha t one or more of our competitors may obtain the necessary clearances or approvals for their products before we do. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications including testing for SARS-CoV-2. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. We expect that clinical reference and other hospital-based laboratories will continue to compete vigorously against our rapid point-of-care products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. In addition, demand for our new rapid tests for SARS-CoV-2 or PrEP adherence may not develop consistent with our expectations. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on our future sales growth. +We Expect to Face Increasing Competition From Other Providers of Diagnostic Tests, Sample Collection Products and Molecular Laboratory Services. +Our rapid point-of-care tests compete with similar point-of-care products made by our competitors. This competition is particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test and our HIV Self-Test. The Oragene ® product line sold by our subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs and will likely face additional competition from collection devices similar in design and operation to our Oragene ® and ORACollect ® products. There are a number of products currently in or expected to enter the market for the detection of antibodies or antigen to SARS-CoV-2 that will compete with our COVID -19 diagnostic products once completed and authorized for sale. +Our genetic and microbiome laboratory services business is expected to face increasing competition, primarily from large commercial reference laboratories, hospital-based laboratories and specialty laboratories. We believe there is significant opportunity in the markets for these services, particularly the microbiome market which is still in the early stages. As these markets evolve and expand, we expect competition for genomic and microbiome laboratory services to intensify. +There is significant competition, including from other companies and governmental organizations, to create rapid tests for COVID-19. Many of these entities have substantially greater resources (including capital and personnel) than we do. In addition, some of these entities are or may be further ahead in the development and commercialization of tests than we are. Even if we are successful in developing and marketing tests for COVID-19, there is no guarantee that competitors will not take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority. +A number of our competitors are making investments in competing technologies, products and services, and several may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and service offerings, aggressively discount prices for their products and services and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created, or may decide to create, their own products to compete with ours. If our competitors take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers use internally developed or acquired sample collection devices or services in order to reduce costs. +Our Product Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often +26 +involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. W e also sold large quantities of our OraQuick ® HCV test to foreign governments and agencies for use in broad-based or country-wide HCV elimination programs. There can be no assurance that purchases or funding from these agencies will occur or continue. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +Our Inability To Expand International Sales Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. We are also working to expand international sales of our professional HIV and HCV products and our molecular collection kits. We believe there is a significant opportunity for international sales of our SARS-CoV-2 diagnostic products once these products are available for sale. +While we believe international sales of these and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will materialize, continue or increase. Among other factors, competition from other cheaper products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not occur or increase or if we are otherwise unable to expand international sales of our products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If we are unable to obtain or continue this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $40.9 million or 24% of consolidated net revenues in 2020, $47.3 million or 31% of consolidated net revenues in 2019 and $44.9 million or 25% of consolidated net revenues in 2018. In addition, our subsidiary DNAG, which accounted for $97.3 million or 57% of consolidated net revenues in 2020, is operated in Canada. In 2019 we also recently acquired Novosanis, a company based in Belgium, and we may acquire other foreign companies as part of our business development efforts. +A number of factors could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Cultural and language differences that make international operations and business management more difficult; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements, including compliance with applicable customs regulations and the need to obtain or maintain regulatory approvals, registrations or reimbursement approvals for our products; +• +Trade protection measures, additional trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +27 +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Multiple jurisdictions and differing tax laws, as well as changes in those laws; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Exposure to infectious disease and epidemics, including the effects of the coronavirus outbreak on our business operations in geographic locations impacted by the outbreak and on the business operations of our customers and suppliers; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our OraQuick ® tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. In addition, the ongoing coronavirus pandemic has resulted in increased government-imposed travel restrictions and extended shutdowns of certain businesses in the affected locations. These or any further political or governmental responses to pandemic diseases could result in social, economic and labor instability of foreign countries, which could have a material adverse effect on our business, results of operations and financial condition. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our Risk and Liability. +From time to time, we receive funding from the U.S. government and we sell some of our products to the federal government. As a result of our U.S. government funding and product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing +28 +false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of impropriety related to such contracts are made against us. +Our U.S. Government Contracts May Affect our Intellectual Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including our contracts with the Biomedical Advanced Research and Development Authority (“BARDA”). When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States. +Our U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on our business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +Risks Relating to Our Industry, Business and Strategy +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. We may not be able to compete successfully in such a consolidated industry. We believe industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful Offerings. +In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new or enhanced products and services. The research and development process generally takes a significant amount of time from inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product or service in which we have invested substantial time and money. +Successful products and services can require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. Similarly, regulatory clearances or registrations, such as a CLIA certification, and compliance with industry guidelines, may be required in order to provide competitive laboratory services. As noted above, regulatory authorities may not issue such +29 +approvals, clearances or certifications or may substantially delay or condition such action . Even if a product or service is developed and all applicable regulatory approvals , clearance or certifications are obtained, there may be little or no market for the product or service and entry into or development of new markets for our products and services may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product or service . Other factors that could affect the success of our efforts include our ability to manufacture products or provide laboratory services in a cost-effective manner and whether we can obtain necessary intellectual property rights and protection in the markets where the product or service is sold. +Starting in 2020, we have been investing significant time and resources in developing two diagnostic products for SARS-CoV-2 and pursuing EUA for these products from the FDA. If these efforts are successful we believe these products could contribute significant revenues once commercialized. We are also investing significantly to expand our manufacturing capacity to ensure we can satisfy the expected demand for these products. +If we fail to develop and gain commercial acceptance for our products and services, or if competitors develop more effective products and services or a greater number of successful new products and services, customers may decide not to purchase our products and services or may purchase and use products and services developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flow and business. Additionally, if we are not successful in commercializing our planned SARS-CoV-2 assays, the investment in expanded manufacturing capacity may not be fully utilized. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +Since the beginning of 2019, we have acquired several companies through which we have gained access to new technologies, products and services which are complementary to our existing business and aligned with our long-term business strategy. We will likely continue to pursue strategic acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products, services and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +We may have difficulties in coordinating geographically separate organizations; +• +We may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• +An acquisition may result in a diversion of resources from our existing products, business and technologies; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +To the extent we agree to pay contingent consideration for an acquisition, if and how much of such consideration we are required to pay may be subject to dispute, resulting in the distraction of our management team and the incurrence of legal costs; +• +An acquisition may result in employee anxiety, morale and/or engagement issues; +• +An acquisition may result in disparate information technology, internal control, financial reporting and record-keeping systems; +• +An acquisition may result in new partners or customers who may operate on terms and programs different than ours; +30 +• +An acquisition may result in employees not familiar with our operations; +• +An acquisition may result in new products and services, including the risk that any underlying intellectual property associated with such products and services may not have been adequately protected or that such products and services may infringe on the proprietary rights of others; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +There Are Risks Relating To Our Acquisitions of Diversigen, Novosanis and UrSure. +The success of the acquisitions will depend, in part, on our ability to successfully combine and integrate our legacy business with those businesses. The integration of the businesses with our existing business can be complex, costly and time-consuming processes. It is possible that a number of factors, including, without limitation, the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruptions of ongoing businesses or inconsistencies in standards, controls, procedures and policies, could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisitions. If we experience difficulties with the integration process, the anticipated benefits of the acquisitions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the Company for an undetermined period following the acquisitions. +As a general matter, the market for microbiome laboratory testing and analytical services provided by CoreBiome and Diversigen is at an early stage and is still developing. In addition, the Colli-Pee ® urine collection devices manufactured and sold by Novosanis are relatively new products that are not yet widely accepted by customers. Although we are optimistic about the prospects for these new businesses, there is no assurance that we will be successful in creating or expanding demand for these services and products. To the extent that the markets for these services and products fail to develop or increase, our revenues and results of operations could be adversely affected and we may not meet our growth objectives. +The Future results of Acquired Companies May Be Adversely Impacted if We Do Not Effectively Manage Our Expanded Operations . +Following the completion of recent acquisitions, the size of our business has increased and these acquisitions are expected to enhance our growth in future periods. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of the two companies, but also the increased scale and scope of the combined businesses with its associated increased costs and complexity. There can be no assurances that we will be successful and the acquisitions may have an adverse effect on the Company. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of certain of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or +31 +adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. In addition, the reimbursement approval process may delay the market introduction of our products. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to lower overall federal healthcare spending. The U.S. government recently enacted legislation that eliminated what is known as the “individual mandate” under the Affordable Care Act and may enact other changes in the future. The ultimate content and timing of any of these types of changes in other healthcare reform legislation and the resulting impact on us are impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention, or CDC, issue diagnostic testing guidelines or recommendations, which can affect the usage of our HIV and HCV tests or other diagnostic products. For example, domestic professional OraQuick ® HIV sales have decreased in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which our OraQuick ® rapid HIV and HCV testing products or other products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use our products. In international markets, we often sell products such as our OraQuick ® HIV Self-Test to or through foreign governmental agencies or parties funded by such agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries to pay for the products and services they purchase. These research customers also purchase our genomic and microbiome laboratory tests and analytical services. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government or other funding as a result of legislative or regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products and services. +32 +Risks Relating to Collaborators +The Use of Third Party Supply Sources For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick ® HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third-party suppliers. We have contracted with a third party in Thailand for the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, our subsidiary, DNAG, uses three third-party manufacturers to supply virtually all of its products, including its Oragene ® and ORAcollect ® lines of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +The COVID-19 pandemic and the measures taken to contain the spread of the virus, could disrupt the normal operations of our third-party suppliers. Our third-party suppliers may not have the personnel, raw materials, capacity or capability to manufacture our products according to our schedule and specifications. To the extent any such production and distribution interruption or closures occur and continue for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations. If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +33 +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Further, our ability to enter into agreements with additional strategic partners depends in part on convincing them that our products can help achieve and accelerate their goals and efforts. Our strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +We have limited access to our collaborator’s confidential corporate information and sudden unexpected changes in ownership or strategy or other material events affecting a collaborator of which we are not made aware of in a timely manner, or at all, could adversely impact our relationship; +• +Our collaborators may be acquired by another company, sell the part of their business related to our collaboration, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Our collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues or operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual +34 +property rights. For example, our competitors may develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. E mployees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. +For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through other unforeseen means. Although we have licensed certain technology for use in our microbiome laboratory services offerings and we have developed proprietary know-how that we use in this business, we do not currently hold any patents covering the laboratory processes and analytical methods offered to our customers. The absence of patent protection in this or other parts of our business may make it more difficult to protect our intellectual property. In addition, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. An adverse determination may limit or restrict the type of work that certain employees involved with such products may perform. +We may collaborate with universities and governmental research organizations or receive funding for our products from government agencies. As a result, one or more of these entities may acquire part of the rights to any inventions or technical information derived from our collaboration or funding relationship with them. +To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. +We May Become Involved in Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products, Provide Services or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product and service areas, and additional patents may be issued to third parties relating to our product and service areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products or services. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or services or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products or services. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or services or stop selling them if it is ultimately determined that our products or services infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, our involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +As is common with major litigation, it could consume a substantial portion of managerial and financial resources; +35 +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products or services; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or services or other products or services we may develop or acquire; +• +We may be required to alter our product or services, given the proprietary rights of others; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products or services; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products or services. +We may indemnify some customers and strategic partners under our agreements with such parties if our products, services or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products or services may contain technology provided to us by other parties, such as universities, contractors, suppliers, customers or collaborators, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under Federal law, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +Regulatory Risks +The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products and services are subject to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products and the processes and procedure for our laboratory services. Our practice is to train our employees on the legal requirements applicable to our business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances, premarket authorizations can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances, other premarket authorizations or certifications can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product or a laboratory certification will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, premarket authorization or certification that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive such approvals, clearances, premarket authorization or certification could have a material adverse effect on our business, financial condition and results of operations. +We are developing and are or will be seeking EUA for a rapid pan-SARS coronavirus antigen self-test and a lab-based SARS-CoV-2 oral fluid antibody test. There is no assurance that we will obtain an EUA for either or both of these products. Failure to do so could result in the loss of potential future revenues and adversely affect our business and results of operations. +36 +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential requirements of the IVDD. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. We may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable our customers to access interested funding sources for our products. We may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit our ability to market and sell our products in the relevant country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for clinical diagnostic use and they are labeled “For Research Use Only”, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. +Our Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The +37 +implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Our Inability to Manufacture Products in Accordance With Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which we advertise our products. As a device manufacturer, we are required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value we have made to physicians and teaching hospitals and any physician ownership or investment interest in the Company. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +In the past, the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) has generally affected us indirectly, as the Company is generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities. We recently completed a merger of our wholly owned subsidiary, UrSure, Inc. Given that UrSure, Inc. collects certain protected health information, or PHI, it is a Business Associate subject to HIPAA. As a result of the merger, the PHI collected cannot be walled off from the Company and the Company is now subject to HIPAA. We have in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. Moreover, the potential for enforcement action against us is now greater, as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of our business. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +38 +Failure to Comply With Data Protection Requirements or Privacy Laws Could Increase Our Costs . +The European Union (“EU”) has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are implementing a plan to ensure compliance with these new requirements. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as the uncertainties that accompany new, comprehensive legislation. +We are also subject to the California Consumer Privacy Act of 2018 (“CCPA”), which took effect on January 1, 2020. The CCPA imposes extensive new requirements and protections on the processing of personal data, aimed at giving California consumers more visibility and control over their personal information. Failure to comply with the CCPA or other data processing or security laws, or any changes in these laws, could adversely impact our business and our business plans. +Given the recent integration of UrSure, we now collect, process or maintain sensitive information, such as patient data and other personal information, on a limited basis. If we do use or not adequately safeguard that information in compliance with applicable requirements under state, federal and international laws, or if it were disclosed to persons or entities that should not have access to it, our business could be materially impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event of a data security breach, we may be subject to notification obligations, litigation and governmental investigation or sanctions, and may suffer reputational damage, which could have an adverse impact on our business. We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (a) HIPPA and the regulations thereunder, which establish (i) a complex regulatory framework including requirements for safeguarding protected health information and (ii) comprehensive federal standards regarding the uses and disclosures of protected health information. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by the FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies will be adopted with respect to regulating LDTs. +Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDT’s and reduce demand for DNAG’s products and adversely impact our revenues. +In 2019, the Department of Justice (“DOJ”) indicted a number of telemedicine companies and cancer genetic testing (“CGx”) laboratories for allegedly submitting fraudulent insurance claims to Medicare. A number of these companies were customers of DNAG. As a result of these activities, the FDA has issued letters to genetic testing laboratories indicating that it plans to increase oversight of this market which has caused some of these companies to stop providing testing options or to change how they are reporting the information provided by the testing. The activities have negatively affected this market and there is a risk that these enforcement actions will continue to negatively affect this market by forcing laboratories to either stop offering such services or restricting the use of such services. Such a reduction in testing could result in decreased sales of our DNA collection devices. +39 +Our International Sales Create Potential Exposure Under Anti-Corruption Laws . +We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the “FCPA”) and similar foreign laws. In 2020, approximately $40.9 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject us to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. We have operations, enter into agreements with third parties and make sales in countries known to experience corruption. Further international expansion, including the acquisition of foreign entities, may create increased exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of operations and financial condition. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption, Including Those Related To The COVID-19 Pandemic, Could Adversely Affect Our Business, Financial Performance, Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers . +Global and U.S. markets and economies have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. Many economists and major investment banks have expressed concern that the continued spread of the virus globally has led or will lead to a world-wide economic downturn. Volatile economic conditions may occur again or continue in the future. +Although the severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, impacts that we may experience include, but are not limited to: +• +a slowdown or stoppage in the supply chain of the raw materials and components used to manufacture our products; +• +interruptions or delays in international shipment of our products to our distributors and customers; +• +interruptions in normal operations of certain end-use customers that could result in reductions in demand for our products; +• +disruptions to our operations, including a shutdown of our facilities or product lines; restrictions on our operations and sales, marketing and distribution efforts; and interruptions to our research and development, manufacturing, clinical/regulatory and other important business activities; +• +shutdown or interruption of our manufacturing facilities due to contamination and costs incurred to clean and disinfect a facility following contamination; +• +inefficiencies and increased costs in our production and shipping processes due to premium pay for manufacturing and certain other employees as well as social distancing and personal protective equipment requirements; +• +limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions; +• +a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties; +• +an increase in exposure to credit losses for customers adversely affected by the COVID-19 pandemic; and +• +an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, including acquisitions. +These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute our products or supply us with necessary equipment, raw materials or components. Any or all of these effects would have an adverse effect on our operations, business, financial condition and results of operations. +40 +The duration of the COVID-19 pandemic is unknown, and it is difficult to predict the full extent of potential impacts the pandemic will have in the future on our business, operations, and financial results, or on our customers, suppliers or logistics providers, or on the global economy as a whole. It is uncertain how materially the COVID-19 pandemic will affect our global operations, particularly if the effects continue or get worse over an extended period of time. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery. +An Impairment of Goodwill and Intangible Assets Could Reduce our Earnings . +At December 31, 2020, our consolidated balance sheet reflected approximately $40.4 million of goodwill and approximately $17.9 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles (“U.S. GAAP”) require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, such as intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment review often cannot be done at the level of the individual asset and it must instead be applied to a group of assets. For the purpose of our annual goodwill impairment testing based on the current circumstances of how we manage or business, this group of assets is the Company as a whole. If we determine that any of our goodwill or intangible assets were impaired, we will be required to take an immediate charge to earnings and our results of operations could be adversely affected. +We Have Experienced Losses in the Past and May Not Be Able To Maintain Profitable Operations . +We experienced annual net losses during the five years prior to 2015 and again in 2020. In addition, as of December 31, 2020, the Company had an accumulated deficit of $96.9 million. Even though we achieved profitability in 2015 through 2019, there can be no assurance that we will be able to sustain his profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• +Our ability to continue growing sales of our molecular collection products and related genomic and microbiome laboratory services; +• +Our ability to successfully commercialize a rapid pan-SARS coronavirus antigen self-test and a lab-based SARS-CoV-2 oral fluid antibody test; +• +Our ability to mitigate declining sales of our OraQuick ADVANCE ® HIV 1/2 test in the United States and expand sales of our OraQuick ® HIV Self-Test internationally; +• +Changes in customer buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to expand our business through the acquisition of other companies or technologies or through internal development of new or improved products; +• +Our ability to improve manufacturing efficiencies; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +41 +• +Failure to achieve our revenue growth targets; +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or against us. +Changes in Foreign Currency Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and the revenues and expenses of our subsidiary Novosanis are recorded in Euros. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the businesses of our foreign subsidiaries will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect the revenues and expenses of our foreign subsidiaries and the translation of those financial results into U.S. dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HIV, HCV and Molecular Solutions products and our OraQuick ® In-Home HIV test and HIV Self-Test; +• +Our efforts to expand sales of our genomic and microbiome laboratory service offerings; +• +Our efforts to commercialize a rapid pan-SARS coronavirus antigen test and a lab-based SARS-CoV-2 oral fluid antibody test; +• +Future announcements concerning us and our products or services, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions; +• +Clinical results with respect to our products or services or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or services, or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products and services; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products or services; +• +Legislative developments and industry or competitive trends; +• +Biological or medical discoveries; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +42 +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters, including pandemics. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +43 +General Risk Factors +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Moreover, there is no assurance that our products will not be included in unethical, illegal or inappropriate research or applications, which may in turn put us at risk of litigation. Regardless of merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling the OraQuick ® In-Home HIV test in the United States OTC market, and we offer HIV Self-Tests to consumers internationally. We believe the sale of products for use by consumers increases our potential exposure to product liability and other claims. +Performance of Our Products May Affect Our Revenues, Stock Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic or specimen collection products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products and Services. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and become more widely known, and as new products and services reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products and services enter the market, our products and services may become obsolete or a competitor’s products and services may be more effective or attractive or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products and services that would render our technologies, products and services obsolete or otherwise commercially unattractive, or introduce or commercialize such products and services before we can do so. If we fail to convince our customers of the advantages and economic value of our products and services or otherwise maintain and enhance our competitive position, our customers may decide to use products and services developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition and results of operations. +We also face competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +44 +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products and services or continue growing our business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, service, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and services and develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and scientific staff. Our business may be harmed by the loss of a significant number of our executive officers or senior managers. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products, laboratory services and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We generally do not enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively market and sell our products and services, to meet the demands of our strategic partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. +If Our Essential Employees Who Are Unable To Telework Become Ill or Otherwise Incapacitated, Our Operations May Be Adversely Impacted. +As a medical device manufacturer, we fall within a “critical essential infrastructure” sector, specifically the “Healthcare/Public Health” sector, and are considered exempt under various stay at home/shelter in place orders. Accordingly, our employees may continue to work because of the importance of our operations to the health and well-being of citizens in the states in which we operate. Consistent with these Stay at Home Orders, we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures, including social distancing, face covering and increased sanitation standards. We are following guidance from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure, based on the direct threat that such exposure may present to our workforce. We continue to address other unique situations that arise among our workforce due to the COVID-19 pandemic on a case-by-case basis. While we believe that we have taken appropriate measures to ensure the health and wellbeing of our “essential” employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or that they may otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted. +Increases in Demand for Our Products and Services Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We Are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products and services, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new products, machinery or new manufacturing or laboratory facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing or laboratory equipment and facilities may require FDA approval or government or industry certification before they can be used to manufacture our products or provide laboratory services. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products and services could be adversely affected. +45 +If we are unable to develop necessary manufacturing or laboratory capabilities in a timely manner, our sales could be adversely affected. If we fail to increase these capabilities in a cost effective manner or if we experience lower than anticipated yields or production or performance problems as a result of changes that we make in our manufacturing or laboratory processes to meet increased demand, we could experience delays or interruptions and increased costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products and services could also harm our customer relationships and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, including for management of inventory, processing and analyzing laboratory specimens, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, process and analyze specimens in our laboratories, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales or the provision of laboratory services and reduced efficiency of our operations. Significant expenditures could be required to remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +Cyber-attacks could result in unauthorized access to our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. Spear phishing has occurred and is a growing threat that the Company is facing. If successful, these activities could lead to the disclosure of intellectual property or personally identifiable information, which could lead to financial harm and cause reputational damage. We have taken additional steps designed to improve the security of our networks and computer systems. +In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shut downs due to attack by hackers or breaches, voyeur or malfeasance. +46 +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt our operations, require significant management attention and resources to remedy any damages that result, and damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business. +As our activities continue to evolve and expand, we may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact our business either directly or indirectly. Our failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact our business and future business plans. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products or services; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products and services; +47 +• +The costs and timing of the expansion of our manufacturing and laboratory capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments. +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks, Natural Disasters, Public Health Crises or Other Catastrophic Events Outside of Our Control May Adversely Affect Our Business. +Terrorist attacks, natural disasters, public health crises or other catastrophic events outside of our control, including pandemics, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for our products. For example, the COVID-19 outbreak has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, including the United States. This outbreak has resulted in, and until fully resolved is likely to continue to result in, among other things: (i) restrictions on travel, government mandated social distancing measures, and the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories; (ii) significant disruption to the business of many companies, including our customers and suppliers, as well as layoffs of employees; (iii) reduction or termination by public health and other customers of infectious disease testing programs, including for HIV and HCV, and a reallocation of personnel and monetary resources from these programs to programs intended to address COVID-19; (iv) reduction or termination of clinical and research studies by academic and other entities that use our molecular collection products and laboratory services; and (v) rapidly evolving proposals and actions by state and federal governments to address the problems being experienced by markets, businesses and the economy in general, which may have unintended consequences or may not adequately address such problems. These events have disrupted, and threaten to continue to disrupt, our normal operation, the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. Despite our efforts to manage and mitigate the impact of these events on us, it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty under applicable laws or regulations that impact us. It is clear that these types of events are impacting and will, for at least some time, continue to impact our product development and operation and in many instances the impact may be adverse and may be material. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our business and results of operation. +Various types of disasters, including earthquakes, fires, floods, riots, acts of terrorism and pandemics, may also affect our manufacturing facilities and computer systems, and increase our cybersecurity risks. Although we have business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, including pandemics, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. Moreover, we may incur incremental costs following an unforeseen event which could adversely affect our results of operation. +Future Sales of Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, +48 +that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. +Unresolved Staff Comments. +Not Applicable. +ITEM 2. +Properties. +We own a 48,000 square foot facility which is OraSure’s primary corporate office and manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for manufacturing activities. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis, including a 70,000 square foot warehouse in Bethlehem Township, Northampton County, Pennsylvania. In addition, our subsidiary, DNAG, leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, manufacturing, distribution, research and development, and regulatory and quality operations. Our other subsidiaries, Diversigen and Novosanis, also lease facilities for their operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. +Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +On February 6, 2017, DNAG entered into a settlement and license agreement (the “Settlement Agreement”) in order to settle certain patent infringement and breach of contract litigation against Ancestry.comDNA, LLC (“Ancestry”) and its contract manufacturer. This litigation was related to a saliva DNA collection device sold by Ancestry that was similar to products sold by DNAG. Under the terms of the Settlement Agreement, DNAG and Ancestry agreed to certain procedures for considering whether future versions of Ancestry’s saliva DNA collection product are covered by the DNAG patents licensed to Ancestry (the “Licensed Patents”) and thus subject to ongoing royalties under the Settlement Agreement. A dispute arose among the parties regarding whether certain new Ancestry products are covered by the Licensed Patents. Pursuant to the terms of the Settlement Agreement, a binding arbitration proceeding was commenced to resolve the dispute. In February 2020, an arbitration panel issued a decision finding that the future Ancestry products do not infringe the DNAG patents asserted in the arbitration and would no longer be subject to the royalties under the Settlement Agreement. +Following the completion of the arbitration, a new patent was issued to DNAG that is a continuation of a patent licensed to Ancestry and is thus a Licensed Patent under the Settlement Agreement. DNAG notified Ancestry of this new patent and following discussions between the parties, Ancestry initiated a new arbitration proceeding during the third quarter of 2020 pursuant to the Settlement Agreement with respect to the applicability of the new patent to the future Ancestry products and the validity of that patent. Following the initiation of the arbitration by Ancestry, DNAG filed a statement of defense and an objection to the arbitration on the basis that a dispute between the parties has not yet occurred and therefore the alleged dispute is not sufficiently ripe to arbitrate. An arbitration panel has been appointed. The parties have since engaged in settlement discussions and the commencement of the arbitration has been delayed. +ITEM 4. +Mine Safety Disclosures. +Not Applicable. +49 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol “OSUR”. On February 22, 2021, there were 305 holders of record and approximately 37,295 holders in street name of our Common Stock, and the closing price of our Common Stock was $10.83 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number of shares purchased +Average price paid per Share +Total number of shares purchased as part of publicly announced plans or programs +Maximum number (or approximate dollar value) of shares that may yet be repurchased under the plans or programs (1, 2) +October 1, 2020- October 31, 2020 +— +— +— +$ +11,984,720 +November 1, 2020 - November 30, 2020 +— +— +— +$ +11,984,720 +December 1, 2020 - December 31, 2020 +1,083 +11.60 +— +$ +11,984,720 +1,083 +— +(1) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no commitment to purchase any shares under this plan. +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the period from December 31, 2015 through December 31, 2020. The graph assumes that $100 was invested on December 31, 2015 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +50 +The NASDAQ Composite Index was chosen because it is a broad index of companies whose equity securities are traded on NASDAQ. The NASDAQ Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +* +$100 invested on 12/31/15 in stock or index, including reinvestment of dividends. +Fiscal year ending December 31, +2015 +2016 +2017 +2018 +2019 +2020 +OraSure Technologies, Inc. +100.00 +136.34 +292.86 +181.37 +124.69 +164.36 +NASDAQ Composite +100.00 +108.87 +141.13 +137.12 +187.44 +271.64 +NASDAQ Biotechnology +100.00 +78.65 +95.67 +87.19 +109.08 +137.90 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +51 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussion of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. +Overview and Business Segments +The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment, which was previously named “OSUR” and our “Molecular Collection Systems” segment, which was previously named “DNAG.” Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our Molecular Solutions business consists of the manufacture and sale of kits that are used to collect, stabilize, transport and store biological samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, infectious disease diagnostics, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our collection kits are also used for the collection of first-void urine for liquid biopsy in the prostate and bladder cancer markets and in the sexually transmitted infection screening market. In addition, our Molecular Solutions business provides microbiome laboratory and bioinformatics services. +The Diagnostics business includes tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our HIV product is also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business includes the operations of UrSure, Inc. (“UrSure”), which was acquired and merged into OraSure in 2020. This part of the business develops and commercializes products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medication in a patient’s urine or blood, as well as point of care products currently in development. We also previously manufactured and sold medical devices used for the removal of benign skin lesions by cryosurgery or freezing. We sold the assets associated with our cryosurgical systems business to a third party in August 2019. +Our Molecular Solutions business is operated by our subsidiaries, DNA Genotek Inc. (“DNAG”), Diversigen, Inc. (“Diversigen”) and Novosanis NV (“Novosanis”). In this business, we manufacture and sell kits that are used to collect, stabilize, transport and store biological sample of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. Included in the disease risk management area are pharmacogenomics testing, hereditary disease screening, prenatal or cancer screening, population health initiatives and other molecular testing using DNA or RNA for diagnosis of acute disease. We also sell research use only collection products into the microbiome market. We offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, Inc. (“CoreBiome”), a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals. +52 +Recent Developments +Impact of COVID-19 +In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. It is not possible for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations at this time. During 2020, traditional HIV and HCV testing programs and drug testing in the workplace market were reduced or terminated as a result of the various “stay-at-home” orders and social distancing guidelines issued by federal, state and local governments to contain the spread of the COVID-19 pandemic in the United States. On the international front, we experienced some reductions and stoppages of professional HIV and HCV testing in Europe and Asia due to the pandemic and delays with international shipments due to a reduction of customs and transportation personnel, a reduced number of air flights and shipping congestion. In our molecular segment, clinical and research work during the year, particularly in the academic market, has reduced demand for our products. These trends had a material impact on our results of operations during 2020 and we believe they will continue to have a material and adverse impact on the revenues of certain parts of our business for an indeterminate time period, depending on the duration and severity of the COVID-19 pandemic. +We also believe there are potentially significant opportunities for increase d revenues as a result of the pandemic. During 2020, we began selling our saliva collection devices for use in molecular COVID-19 testing. In addition, we are developing and will be seeking EUA of a rapid COVID-19 antigen test and a laboratory-based oral fluid SARS-CoV-2 antibody test. A description of these products can be found in the “Business ” section of Part I one of this A nnual R eport. +In 2020, we generated additional revenues of approximately $49.8 million from sales of our molecular collection devices related to COVID-19 testing during the year. In the U.S., public health customers are purchasing increased quantities of our OraQuick ® In-Home HIV Test in order to permit continued HIV testing while allowing clients and patients to adhere to “stay-at-home” and social distancing requirements. In addition, we are seeing increased demand for our molecular collection products from customers who conduct both saliva and blood-based testing. As it becomes increasingly difficult to collect blood in clinics or healthcare settings, these customers are increasingly relying on the saliva collection alternative. However, the degree to which these and other opportunities will offset the negative trends caused by the COVID-19 pandemic in future periods cannot be predicted with certainty. +Public Offering +In June 2020, the Company completed the issuance and sale of 9,200,000 shares of its Common Stock. The price to the public in the offering was $11.00 per share, with net proceeds from the offering equaling approximately $95.0 million after deducting underwriting discounts and offering expenses paid by the Company. +UrSure Acquisition +On July 22, 2020, the Company acquired all of the outstanding stock of UrSure, pursuant to the terms of a merger agreement. Subsequently in December 2020, UrSure was merged into OraSure. The activities of this line of business are described in the “Business” section of Part I of this Annual Report. The acquisition of UrSure supports our strategy of expanding our product offerings to include additional diagnostic products particularly point-of-care tests, that complement our current infectious disease portfolio and pipeline. We used cash of $3.0 million to pay for this acquisition and have incurred a total of $393,000 of acquisition related costs, including accounting, legal, and other professional fees, all of which were expensed and reported as a component of general and administrative expense in the consolidated statement of income for the year ended December 31, 2020. +Current Consolidated Financial Results +During the year ended December 31, 2020, our consolidated net revenues increased 11% to $171.7 million, compared to $154.6 million for the year ended December 31, 2019. Net product and services revenues during the year ended December 31, 2020 increased 12% when compared to the same period of 2019, due to the inclusion of product revenues associated with COVID-19 testing, higher international sales of our OraQuick ® HIV Self-Test, and higher laboratory services revenues . Partially offsetting these increases were lower sales of our genomics, HCV, risk assessment, domestic HIV and microbiome products and the absence of cryosurgical sales as a result of the divestiture of our cryosurgical systems business in August 2019 . Other revenues for the year ended December 31, 2020 were $5.3 million compared to $6.5 million in the same period of 2019. This decline was largely due to lower royalty income partially offset by increased revenues from funded research and development associated with the development of our adherence tests and COVID-19 products. +53 +Our consolidated net loss for the year ended December 31, 2020 was $ 14. 9 million, or $ ( 0.2 2 ) per share on a fully diluted basis, compared to consolidated net income of $16.7 million , or $0.27 per share on a fully diluted basis , for the year ended December 31, 2019 . Results for the year ended December 31, 2020 included a $1.1 million non-cash pre-tax gain associated with the change in the fair value of acquisition-related contingent consideration and $393,000 of acquisition related transaction costs associated with the UrSure acquisition, which together accounted for approximately $0.01 per share . Results for the year ended December 31 , 2019 included a pre-tax gain on the sale of our cryosurgical systems business of $10.2 million, $ 664,000 of non-cash pre-tax income associated with the change in the fair value of acquisition-related contingent consideration and $1. 8 million of acquisition-related transaction costs. The combined net impact of these items increased earnings per share by approximately $0.1 4 in 2019 . Results for the full-year 2020 also reflect the significant increase in spend ing associated with the development of our COVID-19 products. +Cash provided by operating activities during the years ended December 31, 2020 and 2019 was $5.8 million and $9.8 million, respectively. As of December 31, 2020, we had $257.1 million in cash, cash equivalents, and available-for-sale securities, compared to $189.8 million at December 31, 2019. +Results of Operations +YEAR ENDED DECEMBER 31, 2020 COMPARED TO DECEMBER 31, 2019 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +2020 +2019 +% Change +2020 +2019 +Diagnostics +$63,601 +$77,259 +(18) +% +37 +% +50 +% +Molecular Solutions +102,780 +70,814 +45 +60 +46 +Net product and service revenues +166,381 +148,073 +12 +97 +96 +Other +5,340 +6,532 +(18) +3 +4 +Net revenues +$171,721 +$154,605 +11 +% +100 +% +100 +% +Consolidated net product and services revenues increased 12% to $166.4 million for the year ended December 31, 2020 from $148.1 million for 2019 due to the inclusion of product revenues associated with COVID-19 testing from our Molecular Solutions segment coupled with increased international sales of our OraQuick ® HIV Self-Test and higher laboratory services revenues . These increases were partially offset by lower sales of our genomics, HCV, risk assessment, domestic HIV, and microbiome products and the absence of cryosurgical sales as a result of the divestiture of our cryosurgical systems business in August 2019. Other revenues for the year ended December 31, 2020 were $5.3 million compared to $6.5 million in 2019. This decline was largely due to lower royalty income partially offset by increased revenues from funded research and development associated with the development of our adherence tests and COVID-19 products. +Consolidated net revenues derived from products sold to customers outside of the United States were $40.9 million and $47.3 million, or 24% and 31% of total net revenues, during the years ended December 31, 2020 and 2019, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +54 +Net Revenues by Segment +Diagnostics Segment +The table below shows the amount of total net revenues (dollars in thousands) generated by our Diagnostics segment. +Years Ended December 31, +Dollars +Percentage of Total Net Revenues +Market +2020 +2019 +% Change +2020 +2019 +Infectious disease testing +$ +54,227 +$ +58,016 +(7 +) +% +83 +% +74 +% +Risk assessment testing +9,374 +12,189 +(23 +) +14 +16 +Cryosurgical systems +— +7,054 +(100 +) +0 +9 +Net product revenues +63,601 +77,259 +(18 +) +97 +99 +Other +1,638 +966 +70 +3 +1 +Net revenues +$ +65,239 +$ +78,225 +(17 +) +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market decreased 7% to $54.2 million in 2020 from $58.0 million in 2019. This decrease resulted from lower world-wide sales of our OraQuick ® HCV products and lower domestic sales of our OraQuick ® HIV products partially offset by higher international sales of our OraQuick ® HIV products . +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2020 and 2019. +Years Ended December 31, +Market +2020 +2019 +% Change +Domestic HIV +$ +15,184 +$ +17,984 +(16 +) +% +International HIV +29,040 +25,108 +16 +Net HIV revenues +44,224 +43,092 +3 +Domestic HCV +4,793 +8,108 +(41 +) +International HCV +3,655 +4,864 +(25 +) +Net HCV revenues +8,448 +12,972 +(35 +) +Net OraQuick® revenues +$ +52,672 +$ +56,064 +(6 +) +% +Domestic OraQuick ® HIV sales decreased 16% to $15.2 million for the year ended December 31, 2020 from $18.0 million for the year ended December 31, 2019. This decrease was primarily the result of the decline in domestic HIV testing in public health clinics, hospitals and doctors’ offices resulting from the COVID-19 pandemic partially offset by increased sales for our at-home test as a result of the COVID-19 pandemic. +International sales of our OraQuick ® HIV products during 2020 increased 16% to $29.0 million from $25.1 million in 2019. This increase was largely due to higher sales of our OraQuick ® HIV Self-Test in Africa. +Domestic OraQuick ® HCV sales decreased 41% to $4.8 million in 2020 from $8.1 million in 2019. International OraQuick ® HCV sales decreased 25% to $3.7 million in 2020 from $4.9 million in 2019. The declines in HCV sales in both the domestic and international markets were due to the closure of testing programs due to the COVID-19 pandemic. +Risk Assessment Market +Sales to the risk assessment market decreased 23% to $9.4 million for the year ended December 31, 2020 from $12.2 million for the year ended December 31, 2019 due to unemployment and reductions in workplace and insurance testing programs resulting from the COVID-19 pandemic. +Cryosurgical Systems Market +In August 2019, we sold our cryosurgical systems line of business and as such have stopped recording revenues associated with that business since the third quarter of 2019. +55 +Other revenues +Other revenues for the year ended December 31, 2020 increased 70% to $1.6 million from $966,000 for the year ended December 31, 2019. Revenue associated with funding of our research and development efforts increased to $1.6 million for the year ended December 31, 2020 from $705,000 for the year ended December 31, 2019 as new grants for COVID-19 funded projects and adherence test research and development funding were partially offset by the wind-down of efforts to develop our rapid Ebola test. Other revenues for the year ended December 31, 2020 also included $68,000 in reimbursement of certain costs under our charitable support agreement with the Gates Foundation compared to $261,000 for the year ended December 31, 2019. +Molecular Solutions Segment +The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Molecular Solutions segment for the year ended December 31, 2020 and 2019. +Years Ended December 31, +Market +2020 +2019 +% Change +Genomics +$ +37,141 +$ +56,200 +(34 +) +% +Microbiome +6,156 +7,172 +(14 +) +COVID-19 +49,802 +— +N/A +Laboratory services +9,564 +6,767 +41 +Other product revenues +117 +675 +(83 +) +Net molecular product and services revenues +102,780 +70,814 +45 +Other +3,701 +5,566 +(34 +) +Net revenues +$ +106,481 +$ +76,380 +39 +% +Sales of our genomics products decreased 34% to $37.1 million in 2020 compared to $56.2 million in 2019, largely due to the timing of orders placed by one of our largest genomics customer and the reduction in genomics testing due to the COVID-19 pandemic. +Microbiome revenues decreased 14% to $6.2 million in 2020 compared to $7.2 million in 2019 largely due to reduced product demand caused by the COVID-19 pandemic. +During 2020, we sold $49.8 million of sample collection devices for use in the collection and transport of samples for COVID-19 molecular testing. There were no similar sales in 2019. +Laboratory services revenues increased 41% to $9.6 million in 2020 compared to $6.8 million in 2019, due to the inclusion of revenues generated by Diversigen which was acquired in the fourth quarter of 2019, partially offset by a decline in laboratory testing due to the inability of our customers to collect samples as a result of the COVID-19 pandemic. +Other revenues in 2020 decreased 34% to $3.7 million from $5.6 million in 2019 largely as a result of lower royalty income under a litigation settlement agreement. +56 +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit percentage was 59% for the year ended December 31, 2020 compared to 61% for 2019. The decrease in gross profit percentage was primarily due to lower labor utilization as we increased our manufacturing headcount with full-time and temporary employees to prepare for expected product production increases, increased scrap and spoilage expense and the decline in other revenues which contribute 100% to our gross profit percentage. These declines in gross profit percentage were partially offset by a more favorable product mix. +Consolidated operating loss in 2020 was $5.2 million, a $23.8 million decline from the $18.6 million of operating income reported in 2019. Results in 2020 were negatively impacted by increased operating expenses related to COVID-19 product development, higher staffing costs and the inclusion of expenses attributable to Diversigen and UrSure. The operating loss in 2020 included $1.1 million of non-cash income related to the fair value change of acquisition-related contingent consideration compared to $664,000 of non-cash income in the comparable period of the prior year. Results in 2019 also included the pre-tax gain of $10.2 million from the sale of our cryosurgical systems business. +OPERATING INCOME BY SEGMENT +Diagnostic Segment +The gross profit percentage of the Diagnostics business was 42% in 2020 compared to 55% in 2019. This decrease is largely due to a less favorable product mix, lower labor utilization as we increased our manufacturing headcount with full-time and temporary employees to prepare for expected product production increases and increased scrap and spoilage expense. +Research and development expenses increased 75% to $21.3 million in 2020 from $12.2 million in 2019, largely due to spending associated with COVID-19 product development, higher staffing costs, and the inclusion of UrSure expenses not present in 2019. +Sales and marketing expenses increased 24% to $22.4 million in 2020 from $18.1 million in 2019, due to higher staffing costs as a result of increased headcount, increased commissions and the additional costs associated with the retirement of a senior executive who previously led our Diagnostics Business Unit and the on-boarding costs of his successor. Also contributing to the higher sales and marketing expense was an increase in our reserve for uncollectible accounts associated primarily with one of our distributors located in Africa, higher marketing costs and the inclusion of UrSure expenses not present in 2019. These increases were partially offset by lower travel and trade show costs due to the COVID-19 pandemic. +General and administrative expenses increased 25% to $28.1 million in 2020 from $22.5 million in 2019 largely due to higher staffing costs associated with increased employee bonuses as a result of our strong financial performance in 2020 and an increase in headcount, and the inclusion of $393,000 in transaction costs associated with the UrSure acquisition . These increases were partially offset by a decline in professional fees related to business development activities and lower travel expenses due to the COVID-19 pandemic. +Operating income in 2019 also included a $10.2 million pre-tax gain on the sale of our cryosurgical systems business. In August 2019, we sold all assets necessary to operate this line of business to a third party for $12.0 million. The $10.2 million gain includes the $12.0 million proceeds received net of the fair value of the assets sold, which consisted of inventory and fully-depreciated fixed assets, the legal fees associated with the transaction, and a value attributed to the transition services. +All of the above contributed to an operating loss of $43.2 million for 2020, which included non-cash charges of $3.3 million for depreciation and amortization and $6.0 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax gain of $989,000 associated with the change in the fair value of acquisition-related contingent consideration. +Molecular Solutions Segment +The gross profit percentage of the Molecular Solutions segment was 70% in 2020 compared to 68% in 2019. This increase was attributable to a more favorable product mix as a result of higher sales of higher gross profit products and services partially offset by the decline in other revenues which contribute 100% to the gross profit percentage. +Research and development expenses increased 31% to $9.8 million in 2020 from $7.5 million in 2019 due higher staffing costs and the inclusion of research and development expenses incurred by Diversigen for the full year in 2020 compared to two months in 2019. +Sales and marketing expenses decreased 12% to $12.0 million in 2020 compared to $13.7 million in 2019 largely due to a prior period increase in our reserve for uncollectible accounts associated primarily with a receivable from a large Chinese genomics customer and +57 +a decline in travel expenses due to the COVID-19 pandemic. These decreases were partially offset by increased staffing costs and a full year of expenses incurred by Diversigen compared to two months in 2019. +General and administrative expenses increased 14% to $14.6 million in 2020 compared to $12.8 million in 2019, due to the inclusion of expenses incurred by Diversigen for in the full year 2020 compared to two months in 2019 . +All of the above contributed to operating income of $38.0 million for 2020, which included non-cash charges of $6.0 million for depreciation and amortization and $1.1 million for stock-based compensation. The Molecular Solutions segment operating income also included a non-cash pre-tax gain of $110,000 associated with the change in the fair value of acquisition-related contingent consideration. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2020, we recorded a federal tax benefit of $637,000 and a state income tax benefit of $156,000 compared to a federal tax benefit of $832,000 and state income tax expense of $892,000 for the year ended December 31, 2019. Foreign income tax expense of $12.2 million and $4.6 million was recorded in 2020 and 2019, respectively. The increase in income tax expense was largely a result of the increase in income before taxes generated by our Canadian subsidiary. +Liquidity and Capital Resources +December 31, +2020 +2019 +(In thousands) +Cash and cash equivalents +$ +160,802 +$ +75,715 +Available for sale securities +96,317 +114,043 +Working capital +242,404 +191,837 +Our cash and cash equivalents and available-for-sale securities increased to $257.1 million at December 31, 2020 from $189.8 million at December 31, 2019. Our working capital increased to $242.4 million at December 31, 2020 from $191.8 million at December 31, 2019. +During 2020, net cash provided by operating activities was $5.8 million. Our net loss of $14.9 million included non-cash charges for depreciation and amortization expense of $9.4 million, stock-based compensation expense of $7.1 million, a provision for doubtful accounts of $941,000, and other net non-cash charges of $165,000. Operating activities also included a $1.1 million non-cash gain associated with the change in the estimated fair value of contingent consideration and a $496,000 contingent consideration payment representing the excess of the total contingent consideration payment made during the first quarter of 2020 over the fair value of the liability estimated at the time of acquisition. Sources of cash generated from our working capital accounts included a $7.4 million increase in accounts payable due to the timing of invoice payments, a $7.3 million increase in accrued expenses associated with the accruals for current year management incentive bonuses and higher sales tax payable, and a $1.1 million increase in deferred revenue associated with customer prepayments. Offsetting these sources of cash were an increase in inventory of $8.6 million to meet anticipated demand to support COVID-19 testing programs and to fulfill international HIV sales. An additional use of cash was a $2.3 million increase in accounts receivable largely resulting from an increase in product orders placed during the fourth quarter of 2020. +Net cash used in investing activities was $14.0 million for the year ended December 31, 2020, which reflects $90.1 million used to purchase investments, $26.7 million used to acquire property and equipment largely associated with increasing capacity in anticipation of increased product demand in 2021, $3.0 million to acquire UrSure, and $2.3 million used to purchase certain patent and product rights from a third party, partially offset by $107.7 million in proceeds from the maturities and redemptions of investments. +Net cash provided by financing activities was $92.5 million for the year ended December 31, 2020, which largely resulted from the $95.0 million in net proceeds from the issuance of common stock in connection with a public offering and proceeds of stock option exercises of $3.2 million, partially offset by $3.0 million used for payment of an acquisition-related contingent consideration obligation and $2.1 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to our employees. +We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current and foreseeable operating and capital needs. Our cash requirements, however, may vary materially from those now planned due to many +58 +factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, including continued investment to expand our capacity to manufacture products for COVID-19 testing, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $99.4 million or 39% of our $257.1 million in cash, cash equivalents and available-for-sale securities at December 31, 2020 as held by to our Canadian subsidiary , DNAG . Repatriation of such cash into the United States exceeding certain levels could have adverse tax consequences. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make judgements and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +We generally do not grant product return rights to our customers, except for (i) warranty returns, (ii) return rights on sales of our OraQuick ® In-Home HIV test to the retail trade, and (iii) under the terms of a long-term contract with a genomics customer, which was amended in 2020 to remove the return rights provision. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +Service Revenues. Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligation for services rendered. +Arrangements with multiple-performance obligations. In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues. Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +59 +Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2020 and 2019 included customer prepayments of $3.2 million and $1.9 million, respectively. Deferred revenue as of December 31, 2020 and 2019 also included $1.6 million and $1.8 million, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined based on the expected revenues and revenue is recognized at that rate when the product is delivered to the customer. +Financing and Payment. Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense over the life of the related sales contract . +Inventories . +Our inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. +During 2020, 2019, and 2018, we wrote-off inventory which had a cost of $2.6 million, $1.3 million and $1.3 million, respectively. These write-offs were a result of quality, scrap and product expiration issues. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Deferred Tax Assets and Liabilities. +At December 31, 2020, we had federal Net Operating Loss (“NOL”) carryforwards of $136.3 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $35.4 million at December 31, 2020. Net operating losses will begin to expire in 2021. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. +We currently have a full valuation allowance recorded against our total U.S. deferred tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax assets. Each year, we continue to reevaluate our valuation allowance position and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized. As such, we maintain a full valuation allowance as of December 31, 2020 and 2019 against our deferred tax assets associated with the operations subject to income tax in the U.S. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes in the ownership of our stock. The Company does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income and the Company continues to review ownership changes on an annual basis. +60 +Business Combinations and Contingent Consideration . +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting guidance. As part of our consideration for our recent acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing certain intangible assets and contingent consideration include: +• +future expected cash flows from sales and acquired developed technologies; +• +the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio; +• +the probability of meeting the future events; and +• +discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities. +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk. +The information with respect to forward-looking statements within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report is incorporated herein by reference. +We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of December 31, 2020, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 5.0% of our total revenues for the year ended December 31, 2020. We do have foreign currency exchange risk related to our operating subsidiaries in Canada and in Belgium. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. Our foreign subsidiaries had net assets, subject to translation, of $161.5 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of December 31, 2020. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have decreased our comprehensive income by approximately $12.9 million in the year ended December 31, 2020. +ITEM 8. +Financial Statements and Supplementary Data. +Information with respect to this Item is contained in our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. +61 +ITEM 9. +Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. +Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2020. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2020 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2020. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The Company acquired UrSure, Inc. during 2020, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, the acquired company representing approximately 1.7% of total assets and 0.5% of total revenues of the Company as of and for the year ended December 31, 2020. Management plans to fully integrate the operations of these businesses into the assessment of the effectiveness of the Company’s internal control over financial reporting in 2021. +The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended +62 +December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements. +The Company acquired UrSure, Inc. during 2020, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, UrSure, Inc.’s internal control over financial reporting associated with approximately 1.7% of total assets and 0.5% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2020. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of UrSure, Inc. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 1, 2021 +ITEM 9B. +Other Information. +Not applicable. +63 +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2021Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. +Directors, Executive Officers and Corporate Governance. +Certain information required by this Item is incorporated by reference to the information under the captions “Proposal No. 1. Election of Directors,” “Corporate Governance - Governance Guidelines and Code of Conduct,” “Corporate Governance – Committees of the Board,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. +Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. +Executive Compensation. +The information required by this Item is incorporated by reference to the information under the captions “Compensation Committee Matters” (including the “Compensation Committee Report”), “Compensation Discussion and Analysis,” “Compensation Tables,” “Employment Agreements and Potential Payments Upon Termination or Change in Control,” and “Director Compensation” in the Proxy Statement. +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item with respect to the securities ownership of certain beneficial owners and management, and equity compensation plan information, is incorporated by reference to the information under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item is incorporated by reference to the information under the captions “Transactions with Related Persons” and “Corporate Governance - Director Independence” in the Proxy Statement. +ITEM 14. +Principal Accountant Fees and Services. +The information required by this Item is incorporated by reference to the information under the caption “Audit Committee Matters” in the Proxy Statement. +64 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., as amended and restated as of February 19, 2018, are incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. +4.1 +Description of Securities is incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 . +10.1 +Employment Agreement dated as of January 3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Employment Agreement, dated as of May 4, 2018, between the Company and Roberto Cuca is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2018. * +10.3 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.4 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.5 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.6 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Jack E. Jerrett is incorporated by reference to Exhibit 99.3 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.7 +Retirement Agreement, dated as of May 1, 2020, between OraSure technologies, Inc. and Anthony Zezzo II is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on For 8-K filed May 5, 2020 * +10.8 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.* +10.9 +Employment Agreement, dated as of May 11, 2020, between OraSure Technologies, Inc. and Lisa Nibauer is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on form 10-Q for the quarter ended June 30, 2020.* +10.10 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on form 8-K filed August 14, 2019.* +10.11 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.12 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +65 +Exhibit +Number +Exhibit +10. 13 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective April 4, 2020, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 9, 2020, for the 2020 Annual Meeting of Stockholders.* +10.14 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.15 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.16 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.17 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.18 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.19 +Description of the OraSure Technologies, Inc. 2020 Incentive Plan is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed February 21, 2020.* +10.20 +Description of Long-Term Incentive Policy and 2019 Award Performance Measures is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed February 21, 2020.* +10.21 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.22 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.23 +Amended and Restated Code of Business Conduct and Ethics of OraSure Technologies, Inc. is incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed August 14, 2019. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 +Certification of Roberto Cuca required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Roberto Cuca required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS +Inline XBRL Instance Document +101.SCH +Inline XBRL Taxonomy Extension Schema Document +101.CAL +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE +Inline XBRL Taxonomy Extension Presentation Linkbase document +66 +104 +The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL. +* +Management contract or compensatory plan or arrangement. +ITEM 16. +Form 10-K Summary. +None +67 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2021. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Stephen S. Tang +Stephen S. Tang, Ph.D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 1, 2021, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Stephen S. Tang +President, Chief Executive Officer and Director +(Principal Executive Officer) +Stephen S. Tang, Ph.D. +/s/ Roberto Cuca +Chief Financial Officer +(Principal Financial Officer) +Roberto Cuca +/s/ Michele Miller +Vice President, Finance and Controller +(Principal Accounting Officer) +Michele Miller +*MARA ASPINALL +Mara Aspinall +Director +*MICHAEL CELANO +Michael Celano +Director +*JAMES A. DATIN +James A. Datin +Director +*EAMONN P. HOBBS +Eamonn P. Hobbs +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*LELIO MARMORA +Lelio Marmora +Director +*DAVID J. SHULKIN, M.D. +David J. Shulkin, M.D. +Director +*By: +/s/ Jack E. Jerrett +Jack E. Jerrett +(Attorney-in-Fact) +68 +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-4 +Consolidated Statements of Operations +F-5 +Consolidated Statements of Comprehensive Income (Loss) +F-6 +Consolidated Statements of Stockholders’ Equity +F-7 +Consolidated Statements of Cash Flows +F-8 +Notes to the Consolidated Financial Statements +F-9 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Change in Accounting Principle +As discussed in Note 9 to the consolidated financial statements, the Company has elected to change its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases . +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Evaluation of net realizable value adjustments to inventories for excess or obsolescence +As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has inventories with a carrying value of $31,863 thousand as of December 31, 2020. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The majority of the inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the reserve. +F-2 +We identified the evaluation of net realizable value adjustments to inventories for excess or obsolescence as a critical audit matter. Evaluating the Company’s specific identification procedures, which included estimates of forecasted sales and the resulting inventory consumption and ability to extend inventory expiration dates, required a high degree of auditor judgment. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for determining net realizable value adjustments for inventory excess or obsolescence, which included controls related to the review of the specific identification procedures. For a selection of inventory items, we compared the Company’s historic estimates of net realizable value adjustments for excess and obsolescence to the actual physical inventory disposals to evaluate the Company’s ability to accurately estimate the net realizable value adjustments. We evaluated the Company’s ability to forecast sales by comparing prior period sales forecasts to actual results. In addition, we selected inventory items from the underlying data used in the Company’s analysis and evaluated the Company’s determination of net realizable value adjustments for those items by comparing forecasted inventory consumption to historic inventory consumption. We also selected inventory items from the underlying data used in the Company’s analysis and evaluated the ability to extend the expiration dates by inspecting relevant supporting documentation. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +March 1, 2021 +F-3 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2020 +December 31, 2019 +ASSETS +Current Assets: +Cash and cash equivalents +$ +160,802 +$ +75,715 +Short-term investments +48,599 +80,623 +Accounts receivable, net of allowance for doubtful accounts of $ 3,654 and $ 2,666 +38,835 +36,948 +Inventories +31,863 +23,155 +Prepaid expenses +3,860 +2,433 +Other current assets +4,934 +5,676 +Total current assets +288,893 +224,550 +Noncurrent Assets: +Property, plant and equipment, net +51,860 +30,339 +Operating right-of-use assets, net +4,461 +4,996 +Finance right-of-use assets, net +1,312 +1,951 +Intangible assets, net +17,904 +14,674 +Goodwill +40,351 +36,201 +Long-term investments +47,718 +33,420 +Other noncurrent assets +1,973 +3,164 +Total noncurrent assets +165,579 +124,745 +TOTAL ASSETS +$ +454,472 +$ +349,295 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current Liabilities: +Accounts payable +$ +17,407 +$ +9,567 +Deferred revenue +4,811 +3,713 +Accrued expenses +22,227 +14,288 +Finance lease liability +517 +613 +Operating lease liability +1,125 +1,032 +Acquisition-related contingent consideration obligation +402 +3,500 +Total current liabilities +46,489 +32,713 +Noncurrent Liabilities: +Finance lease liability +895 +1,372 +Operating lease liability +3,591 +4,206 +Acquisition-related contingent consideration obligation +2,049 +112 +Other noncurrent liabilities +1,682 +2,848 +Deferred income taxes +1,195 +899 +Total noncurrent liabilities +9,412 +9,437 +TOTAL LIABILITIES +55,901 +42,150 +COMMITMENTS AND CONTINGENCIES (Note 14) +STOCKHOLDERS' EQUITY +Preferred stock, par value $ .000001 , 25,000 shares authorized, none issued +— +— +Common stock, par value $ .000001 , 120,000 shares authorized, 71,738 and +61,731 shares issued and outstanding +— +— +Additional paid-in capital +505,123 +401,814 +Accumulated other comprehensive loss +( 9,097 +) +( 12,136 +) +Accumulated deficit +( 97,455 +) +( 82,533 +) +Total stockholders' equity +398,571 +307,145 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY +$ +454,472 +$ +349,295 +See accompanying notes to the consolidated financial statements. +F-4 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2020 +2019 +2018 +NET REVENUES: +Products and services +$ +166,381 +$ +148,073 +$ +165,428 +Other +5,340 +6,532 +16,315 +171,721 +154,605 +181,743 +COST OF PRODUCTS SOLD +69,853 +60,022 +68,130 +Gross profit +101,868 +94,583 +113,613 +OPERATING EXPENSES: +Research and development +31,032 +19,629 +16,250 +Sales and marketing +34,459 +31,869 +30,609 +General and administrative +42,653 +35,287 +38,325 +Change in the estimated fair value of acquisition-related contingent consideration +( 1,099 +) +( 664 +) +— +Gain on sale of business +( 10,149 +) +— +107,045 +75,972 +85,184 +Operating income (loss) +( 5,177 +) +18,611 +28,429 +OTHER INCOME +1,653 +2,720 +3,287 +Income (loss) before income taxes +( 3,524 +) +21,331 +31,716 +INCOME TAX EXPENSE +11,398 +4,675 +11,320 +NET INCOME (LOSS) +$ +( 14,922 +) +$ +16,656 +$ +20,396 +EARNINGS (LOSS) PER SHARE: +BASIC +$ +( 0.22 +) +$ +0.27 +$ +0.33 +DILUTED +$ +( 0.22 +) +$ +0.27 +$ +0.33 +SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE: +BASIC +67,505 +61,675 +61,112 +DILUTED +67,505 +62,170 +62,532 +See accompanying notes to the consolidated financial statements. +F-5 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the years ended December 31, +2020 +2019 +2018 +NET INCOME (LOSS) +$ +( 14,922 +) +$ +16,656 +$ +20,396 +OTHER COMPREHENSIVE INCOME (LOSS) +Currency translation adjustments +3,273 +5,767 +( 8,003 +) +Unrealized gain (loss) on marketable securities +( 234 +) +803 +( 363 +) +COMPREHENSIVE INCOME (LOSS) +$ +( 11,883 +) +$ +23,226 +$ +12,030 +See accompanying notes to the consolidated financial statements. +F-6 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the years ended December 31, 2020, 2019 and 2018 +(in thousands) +Common Stock +Additional +Paid-in +Accumulated +Other +Comprehensive +Accumulated +Shares +Amount +Capital +Loss +Deficit +Total +Balance at January 1, 2018 +60,662 +— +387,931 +( 10,340 +) +( 119,510 +) +258,081 +Adoption of ASU 2014-9 +( 75 +) +( 75 +) +Common stock issued upon exercise +of options +227 +— +1,697 +— +— +1,697 +Vesting of restricted stock +578 +— +— +— +— +— +Purchase and retirement of common shares +( 191 +) +— +( 3,592 +) +— +— +( 3,592 +) +Stock-based compensation +— +— +15,237 +— +— +15,237 +Net income +— +— +— +— +20,396 +20,396 +Currency translation adjustments +— +— +— +( 8,003 +) +— +( 8,003 +) +Unrealized loss on marketable securities +— +— +— +( 363 +) +— +( 363 +) +Balance at December 31, 2018 +61,276 +— +401,273 +( 18,706 +) +( 99,189 +) +283,378 +Common stock issued upon exercise +of options +27 +— +196 +— +— +196 +Vesting of restricted stock and performance stock units +717 +— +— +— +— +— +Purchase and retirement of common shares +( 289 +) +— +( 3,712 +) +— +— +( 3,712 +) +Stock-based compensation +— +— +4,057 +— +— +4,057 +Net income +— +— +— +— +16,656 +16,656 +Currency translation adjustments +5,767 +5,767 +Unrealized gain on marketable securities +— +— +— +803 +— +803 +Balance at December 31, 2019 +61,731 +— +401,814 +( 12,136 +) +( 82,533 +) +307,145 +Common stock issued upon exercise +of options +402 +— +3,222 +— +— +3,222 +Vesting of restricted stock and performance stock units +653 +— +— +— +— +— +Purchase and retirement of common shares +( 248 +) +— +( 2,088 +) +— +— +( 2,088 +) +Issuance of common stock in connection with public offering, net of commissions and expenses of $ 6,200 +9,200 +95,036 +95,036 +Stock-based compensation +— +— +7,139 +— +— +7,139 +Net loss +— +— +— +— +( 14,922 +) +( 14,922 +) +Currency translation adjustments +3,273 +3,273 +Unrealized loss on marketable securities +— +— +— +( 234 +) +— +( 234 +) +Balance at December 31, 2020 +71,738 +$ +— +$ +505,123 +$ +( 9,097 +) +$ +( 97,455 +) +$ +398,571 +See accompanying notes to the consolidated financial statements. +F-7 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2020 +2019 +2018 +OPERATING ACTIVITIES: +Net income (loss) +$ +( 14,922 +) +$ +16,656 +$ +20,396 +Adjustments to reconcile net income (loss) to net cash provided by +operating activities: +Stock-based compensation +7,139 +4,057 +15,237 +Depreciation and amortization +9,387 +7,339 +6,451 +Other non-cash amortization +327 +391 +771 +Provision for doubtful accounts +941 +2,248 +( 53 +) +Unrealized foreign currency (gain) loss +269 +385 +( 400 +) +Interest expense on finance leases +72 +36 +— +Deferred income taxes +( 392 +) +( 1,457 +) +( 919 +) +Loss on sale of fixed assets +114 +147 +— +Gain on sale of product line +( 225 +) +— +— +Gain on sale of business +— +( 10,149 +) +— +Change in the estimated fair value of contingent earn-out consideration +( 1,099 +) +( 664 +) +— +Payment of acquisition related contingent consideration +( 496 +) +— +— +Changes in assets and liabilities +Accounts receivable +( 2,324 +) +( 2,210 +) +6,688 +Inventories +( 8,607 +) +( 1,324 +) +( 3,857 +) +Prepaid expenses and other assets +( 104 +) +200 +( 366 +) +Accounts payable +7,379 +( 1,537 +) +208 +Deferred revenue +1,051 +( 297 +) +2,240 +Accrued expenses and other liabilities +7,297 +( 4,017 +) +( 7,306 +) +Net cash provided by operating activities +5,807 +9,804 +39,090 +INVESTING ACTIVITIES: +Purchases of investments +( 90,137 +) +( 92,173 +) +( 163,763 +) +Proceeds from maturities and redemptions of investments +107,718 +93,491 +152,680 +Purchases of property and equipment +( 26,674 +) +( 9,314 +) +( 6,344 +) +Purchase of patent and product rights +( 2,250 +) +— +— +Acquisition of businesses, net of cash acquired +( 3,037 +) +( 23,801 +) +— +Proceeds from sale of business +— +12,000 +— +Other investing activities +351 +— +— +Net cash used in investing activities +( 14,029 +) +( 19,797 +) +( 17,427 +) +FINANCING ACTIVITIES: +Repayments of loans +— +( 724 +) +— +Cash payments for lease liability +( 687 +) +( 442 +) +— +Proceeds from issuance of common stock, net +95,036 +— +— +Proceeds from exercise of stock options +3,222 +196 +1,701 +Payment of acquisition related contingent consideration +( 3,004 +) +— +— +Repurchase of common stock +( 2,088 +) +( 3,712 +) +( 3,592 +) +Net cash provided by (used in) financing activities +92,479 +( 4,682 +) +( 1,891 +) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +830 +1,952 +( 4,203 +) +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS +85,087 +( 12,723 +) +15,569 +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD +75,715 +88,438 +72,869 +CASH AND CASH EQUIVALENTS, END OF PERIOD +$ +160,802 +$ +75,715 +$ +88,438 +See accompanying notes to the consolidated financial statements. +F-8 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. +THE COMPANY: +The overall goal of OraSure Technologies, Inc. (“OraSure” or “the Company”) is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment, which was previously named “OSUR” and our “Molecular Solutions” segment, which was previously name “DNAG”. Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our Molecular Solutions business consists of the manufacture and sale of kits that are used to collect, stabilize, transport and store biological samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, infectious disease diagnostics, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our collection kits are also used for the collection of first-void urine for liquid biopsy in the prostate and bladder cancer markets and in the sexually transmitted infection screening market. In addition, our Molecular Solutions business provides microbiome laboratory and bioinformatics services . +The Diagnostics business includes tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our HIV product is also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business includes the operations of UrSure, Inc. (“UrSure”), which was acquired and merged into OraSure in 2020. This part of the business develops and commercializes products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV. These products include laboratory-based tests that can measure levels of the medication in a patient’s urine or blood, as well as point of care products currently in development. We also previously manufactured and sold medical devices used for the removal of benign skin lesions by cryosurgery or freezing. We sold the assets associated with our cryosurgical systems business to a third party in August 2019. In 2020, we began the development of a rapid antigen self-test for COVID-19 and a COVID-19 antibody ELISA test for use in laboratory settings. We expect to begin selling these products in 2022. +Our Molecular Solutions business is operated by our subsidiaries, DNA Genotek Inc. (“DNAG”), Diversigen, Inc. (“Diversigen”), and Novosanis NV (“Novosanis”). In DNAG’s business, we manufacture and sell kits that are used to collect, stabilize, transport and store biological sample of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. In 2020, two of our collection devices were used in connection with COVID-19 molecular testing. We also sell research use only collection products into the microbiome market. We offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, Inc. (“CoreBiome”), a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals. +F-9 +2. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNAG, Diversigen, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the fair value of assets acquired and liabilities assumed for business combinations, the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, contingent consideration and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +In 2020, 2019 and 2018, we paid income taxes of $ 9,263 , $ 10,611 and $ 17,126 , respectively. +In 2020, 2019 and 2018, we recorded through the consolidated statements of operations an increase (decrease) in our allowance for doubtful accounts of $ 941 , $ 2,248 and $( 53 ), respectively. We had write-offs of $ 501 , $ 11 0 and $ 11 in 2020, 2019, and 2018, respectively. +As of December 31, 2020, 2019 and 2018, we had accruals for purchases of property and equipment of $ 802 , $ 660 , and $ 964 , respectively. +Investments +We consider all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +We record an allowance for credit loss for our available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, we review factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. As of December 31, 2020, we determined that the decline in the market value of our available-for-sale investment was not due to credit-related factors and as such no allowance for credit-loss was necessary. +The following is a summary of our available-for-sale securities as of December 31, 2020 and 2019: +F-10 +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +December 31, 2020 +Guaranteed investment certificates +$ +25,132 +$ +— +$ +— +$ +25,132 +Corporate bonds +71,533 +135 +( 483 +) +71,185 +Total available-for-sale securities +$ +96,665 +$ +135 +$ +( 483 +) +$ +96,317 +December 31, 2019 +Guaranteed investment certificates +$ +24,632 +$ +— +$ +— +$ +24,632 +Corporate bonds +89,525 +271 +( 385 +) +89,411 +Total available-for-sale securities +$ +114,157 +$ +271 +$ +( 385 +) +$ +114,043 +At December 31, 2020, maturities of our available- +for-sale securities were as follows: +Less than one year +$ +48,835 +$ +114 +$ +( 350 +) +$ +48,599 +Greater than one year +$ +47,830 +$ +21 +$ +( 133 +) +$ +47,718 +Fair Value of Financial Instruments +As of December 31, 2020 and 2019, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +All of our available-for-sale debt securities are measured as Level 2 instruments as of December 31, 2020 and 2019. Our guaranteed investment certificates are measured as Level 1 instruments as of December 31, 2020 and 2019. +Included in cash and cash equivalents at December 31, 2020 and 2019, was $ 71,489 and $ 1,624 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. +F-11 +We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds. The fair value of the plan assets as of December 31, 2020 and 2019 was $ 2,565 and $ 3,519 , respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other noncurrent assets with the same amounts included in accrued expenses and other noncurrent liabilities in the accompanying consolidated balance sheets. +As further discussed in Note 3, Business Combinations, we have identified our contingent consideration obligations as Level 3 liabilities due to significant inputs that are required to measure the fair value of these obligations. +The following table represents the change in contingent consideration: +Balance as of January 1, 2019 +$ +— +Addition related to acquisition (initial measurement) +4,350 +Change in fair value during the period +( 664 +) +Currency translation adjustment +( 74 +) +Balance as of December 31, 2019 +3,612 +Addition related to acquisition (initial measurement) +3,440 +Payments made during the period +( 3,500 +) +Change in fair value during the period +( 1,099 +) +Currency translation adjustment +( 2 +) +Balance as of December 31, 2020 +$ +2,451 +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. +Property, Plant and Equipment +Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years , while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years . Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. +Intangible Assets +Intangible assets consist of customer relationships, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years . +F-12 +Impairment of Long-Lived Assets +Long-lived assets, which include property and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We assess the recoverability of our long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect our assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +We performed our annual impairment assessment as of July 31, 2020 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our reporting units is greater than their carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting units. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. +Revenue +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +We generally do not grant product return rights to our customers, except for warranty returns, return rights on sales of our OraQuick ® In-Home HIV test to the retail trade, and under the terms of a long-term contract with a genomics customer, which was amended in 2020 to remove the return rights provision. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +Service revenues. Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues and satisfy our performance obligation for services rendered. +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues . Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +F-13 +Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2020 and 2019 included customer prepayments of $ 3,216 and $ 1,904 , respectively. Deferred revenue as of December 31, 2020 and 2019 also included $ 1,595 and $ 1,809 , respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined based on expected revenues and revenue is recognized at that rate when the product is delivered to the customer. +Financing and Payment . Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract. +Revenues by product . The following table represents total net revenues by product line: +Year Ended December 31, +2020 +2019 +2018 +Infectious disease testing +$ +54,227 +$ +58,016 +$ +56,159 +Risk assessment testing +9,374 +12,189 +12,058 +Cryosurgical systems +— +7,054 +10,767 +Genomics +37,141 +56,200 +79,754 +Microbiome +6,156 +7,172 +6,690 +COVID-19 +49,802 +— +— +Laboratory services +9,564 +6,767 +— +Other product revenue +117 +675 +— +Net product and service revenues +166,381 +148,073 +165,428 +Royalty income +3,432 +5,116 +9,653 +Other non-product revenues +1,908 +1,416 +6,662 +Other revenues +5,340 +6,532 +16,315 +Net revenues +$ +171,721 +$ +154,605 +$ +181,743 +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +Years Ended December 31, +2020 +2019 +2018 +United States +$ +130,835 +$ +107,279 +$ +136,847 +Europe +12,068 +11,752 +11,062 +Other regions +28,818 +35,574 +33,834 +$ +171,721 +$ +154,605 +$ +181,743 +Customer and Vendor Concentrations. One of our customers accounted for 11 % of our accounts receivable as of December 31, 2020 and another customer accounted for 19 % of our accounts receivable as of December 31, 2019. The same customer accounted for approximately 15 % and 24 % of our net consolidated revenues for the year ended December 31, 2019 and 2018, respectively. We had no customers that accounted for more than 10% of our consolidated net revenues for the year ended December 31, 2020. +We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the +F-14 +delivery of our products to our customers. Third-party suppliers also manufacture certain products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. +Business Combinations and Contingent Consideration +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting standard. As part of our consideration for the recent acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing certain intangible assets and contingent consideration include: +• +future expected cash flows from sales and acquired developed technologies; +• +the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio; +• +the probability of meeting the future events; and +• +discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities . +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2020, 2019, and 2018, we incurred $ 1,126 , $ 468 , and $ 745 , respectively, in advertising expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on +F-15 +assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than purchase shares in the open market. +Income Taxes +We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income (expense) in our consolidated statements of operations were $( 337 ), $( 1,339 ), and $ 831 for the years ended December 31, 2020, 2019, and 2018, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive . +The computations of basic and diluted earnings (loss) per share are as follows: +Year ended December 31, +2020 +2019 +2018 +Net income (loss) +$ +( 14,922 +) +$ +16,656 +$ +20,396 +Weighted average shares of common stock outstanding: +Basic +67,505 +61,675 +61,112 +Dilutive effect of stock options, restricted stock, and +performance stock units +— +495 +1,420 +Diluted +67,505 +62,170 +62,532 +Earnings (loss) per share: +Basic +$ +( 0.22 +) +$ +0.27 +$ +0.33 +Diluted +$ +( 0.22 +) +$ +0.27 +$ +0.33 +For the year ended December 31, 2020, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 984 shares were excluded from the computation of diluted loss per share. +F-16 +For the years ended December 31, 2019, and 2018, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 768 and 291 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets. +We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and we have defined the Euro as the functional currency of our Belgian subsidiary, Novosanis. The results of operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2020 consists of $ 8,749 of currency translation adjustments and $ 348 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio. Accumulated other comprehensive loss at December 31, 2019 consists of $ 12,022 of currency translation adjustments and $ 114 of net unrealized losses on marketable securities. +Recent Accounting Pronouncements +In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss requires a credit loss to be recognized when it is probable. We adopted this guidance in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the coronavirus (COVID-19) pandemic on expected credit losses. In addition, the new guidance requires us to record an allowance for credit loss when a decline in investment market value is due to credit-related factors. As of January 1, 2020, there was no material decline in the market value of available-for-sale investments due to credit-related factors. +In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the enactment of the U.S. Tax Cuts and Jobs Act (i.e., our first quarter of fiscal year 2018). We adopted this guidance in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements . +In August 2018, the FASB issued guidance related to fair value measurement disclosures. This guidance removes the requirement to disclose the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, the policy for determining that a transfer has occurred, and valuation processes for Level 3 fair value measurements. Additionally, this guidance modifies the disclosures related to the measurement uncertainty for recurring Level 3 fair value measurements (by removing the requirement to disclose sensitivity to future changes) and the timing of liquidation of invested assets (by removing the timing requirement in certain instances). The guidance also requires new disclosures for Level 3 financial assets and liabilities, including the amount and location of unrealized gains and losses recognized in other comprehensive income(loss) and additional information related to significant unobservable inputs used in determining Level 3 fair value measurements. We adopted this guidance in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements . +3. BUSINESS COMBINATIONS +UrSure +On July 22, 2020, the Company acquired all of the outstanding stock of UrSure, Inc. (“UrSure”), pursuant to the terms of a merger agreement. The initial aggregate purchase price of this transaction was $ 3,000 , adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement . +Pursuant to our acquisition agreements, we may pay up to an additional $ 28,000 of contingent consideration over the next four years based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue +F-17 +dollars, and the achievement of certain clinical milestones associated with the development of certain new technology. The Company, with the assistance of an independent valuation specialist, determined the estimated acquisition-date fair value of the acquisition-related contingent consideration of $ 3,440 . The fair value was determined using a probability-weighted model based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including the likelihood of the achievement of clinical milestones and revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. T he fair value of the contingent consideration obligation changed from $3,440 as of the acquisition date to $ 2,451 as of December 31, 2020 largely due to changes in the timing of achieving certain clinical milestones . +During the year ended December 31, 2020, we incurred a total of $ 393 of acquisition related costs, including accounting, legal, and other professional fees, all of which were expensed and reported as a component of general and administrative expense in the consolidated statement of operations for the year ended December 31, 2020. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +285 +Other current assets +24 +Other assets +6 +Intangibles +3,600 +Goodwill +3,586 +Total assets acquired +7,501 +Liabilities Assumed +Current liabilities +335 +Deferred tax liability +689 +Total liabilities assumed +1,024 +Net Assets Acquired +6,477 +Estimated fair value of contingent consideration +( 3,440 +) +Net Cash Paid (net of cash acquired of $ 111 ) +$ +3,037 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, which is subject to amortization on a straight-line basis and is being amortized over a ten year estimated useful life. +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of UrSure. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisition was a result of gaining a complementary product offering that will enable us to leverage those products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Diagnostics segment. +We continue to evaluate the fair value of certain assets acquired and liabilities assumed, related to the acquisition. Additional information that existed as of the acquisition date, but was at that time unknown to us, may become known during the remainder of the measurement period. Changes to amounts recorded as a result of the final determination may result in a corresponding adjustment to these assets and liabilities, including goodwill. The determination of the estimated fair values of all assets acquired is expected to be completed within one year from the date of acquisition. +F-18 +Revenues from UrSure primarily consist of grant money received to fund the development of certain new technology and approximated $ 842 since acquisition . Effective as of July 22, 2020, the financial results of UrSure are included in our Diagnostics segment. +Diversigen +On November 8, 2019, the Company acquired all of the outstanding stock of Diversigen pursuant to the terms of a merger agreement. The aggregate purchase price for this transaction was $ 12,000 , adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement noted above . +During the year ended December 31, 2019, we incurred a total of $ 1,198 of acquisition related costs, including investment banking fees and accounting, legal and other professional fees, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2019 . +Pursuant to the merger agreement, we were to pay up to an additional $ 1,500 of contingent consideration in 2020 based on the achievement of certain 2019 revenue metrics as defined under the agreements which did not occur. +The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +1,234 +Other current assets +45 +Property, plant, and equipment, net +1,916 +Acquired intangible assets +3,560 +Goodwill +6,317 +Total assets acquired +13,072 +Liabilities Assumed +Current liabilities +1,123 +Deferred tax liability +598 +Other long-term liabilities +893 +Total liabilities assumed +2,614 +Net Assets Acquired +10,458 +Estimated fair value of contingent consideration +- +Net Cash Paid (net of cash acquired of $ 479 ) +$ +10,458 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets included customer relationships and tradenames, all of which are subject to amortization on a straight-line basis and are being amortized over estimated useful lives as summarized below: +Estimated Useful +Description +Life (in yrs) +Amount +Customer relationships +10 +2,900 +Tradenames +9 +660 +Total acquired intangibles +$ +3,560 +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of Diversigen. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +F-19 +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisitions was a result of providing us a complementary service and product offering that will enable us to leverage those services and products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Molecular Solutions segment. +Revenues from Diversigen primarily consist of microbiome laboratory services that provide metagenomics sequencing, bioinformatics and statistical analysis for the study of the microbiome. Effective as of November 8, 2019, the financial results of Diversigen are included in our Molecular Solutions segment. For the year ended December 31, 2019, consolidated net revenues include revenues associated with the Diversigen business of $ 1,046 and consolidated results from operations include a net loss of $ 47 generated since the acquisition date. +CoreBiome and Novosanis +On January 4, 2019, the Company acquired all of the outstanding stock of CoreBiome, pursuant to the terms of a merger agreement, dated January 3, 2019. CoreBiome has subsequently been merged into Diversigen in December 2020. Also on January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of Novosanis, pursuant to a share purchase agreement, dated January 3, 2019. We began operating these entities as of the January 4, 2019 closing date. The aggregate purchase price for both of these transactions was $ 13,320 adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into escrow accounts for a limited period after closing, in order to secure the potential payment of certain indemnification obligations of the selling stockholders under each agreement noted above. +During the year ended December 31, 2019, we incurred a total of $ 639 of acquisition-related costs in connection with these acquisitions, including success-based investment banking fees and accounting, legal and other professional fees, related to both acquisitions, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of operation. +Pursuant to our acquisition agreements, we were to pay up to an additional $ 32,400 of contingent consideration over three years based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue dollars, the achievement of a large customer contract, and the development of certain new technology. The Company, with the assistance of an independent valuation specialist, utilized a Monte Carlo simulation to determine the estimated acquisition-date fair value of the acquisition-related contingent consideration of $ 4,350 . The simulation calculated the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration obligation changed from $ 4,350 as of the acquisition date to $ 3,612 as of December 31, 2019. This change was a result of changes in our estimated revenue forecasts and an amendment to one of the agreements, entered into in October 2019, in which management agreed to settle the contingent consideration associated with one of the acquisition’s 2019 results for $ 3,500 . The fair value of the contingent consideration obligation changed from $ 3,612 as of December 31, 2019 to $ 0 as of December 31, 2020. This change is a result of a $ 3,500 payment made in the first quarter of 2020, changes in our estimated revenue forecasts and an amendment to one of the agreements. As of December 31, 2020, and based on current and forecasted revenue results, it is not expected than any further contingent consideration will be paid through the final potential payment date of July 2021. +F-20 +The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +791 +Inventories +310 +Other current assets +82 +Property, plant, and equipment, net +414 +Other assets +5 +Acquired intangible assets +8,400 +Goodwill +10,368 +Total assets acquired +20,370 +Liabilities Assumed +Current liabilities +1,180 +Notes payable, short-term +730 +Deferred tax liability +819 +Other long-term liabilities +74 +Total liabilities assumed +2,803 +Net Assets Acquired +17,567 +Estimated fair value of contingent consideration +( 4,350 +) +Net Cash Paid (net of cash acquired of $ 103 ) +$ +13,217 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, customer relationships, and tradenames, all of which are subject to amortization on a straight-line basis and are being amortized over estimated useful lives as summarized below: +Estimated Useful +Description +Life (in yrs) +Amount +Developed Technology +10 +$ +5,000 +Customer relationships +10 +2,200 +Tradenames +8.34 +1,200 +Total acquired intangibles +$ +8,400 +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of CoreBiome and Novosanis. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisitions was a result of providing us a complementary service and product offering that will enable us to leverage those services and products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Molecular Solutions segment. +Revenues from CoreBiome primarily consist of microbiome laboratory services that utilize optimal analytical algorithms to deliver speed and scalability in the lab with precise analytics. Revenues from Novosanis primarily consist of the sale of its Colli-Pee collection device which was designed for the standard collection of first-void urine used in the liquid biopsy and sexually transmitted infection screening market. Effective as of January 4, 2019, the financial results of CoreBiome and Novosanis are included in our +F-21 +Molecular Solutions segment. For the year ended December 31, 2019, consolidated net revenues include combined revenues associated with the CoreBiome and Novosanis business of $ 5,152 . Consolidated results from operations for the year ended December 31, 2019 included a net loss of $ 2,450 generated from the combined companies since the acquisition date. +Unaudited Pro Forma Financial Information +The unaudited pro forma results presented below include the results of the CoreBiome, Diversigen, Novosanis acquisitions as if they had been consummated as of January 1, 2018 and the results of UrSure as if it had been consummated as of January 31, 2019. The unaudited pro forma results include the amortization associated with acquired intangible assets and the estimated tax effect of adjustments to income before income taxes but do not include changes in the fair value of our contingent consideration obligations. Material nonrecurring charges, directly attributable to the transactions, including direct acquisition costs, are also excluded. In addition, the unaudited pro forma results do not include any expected benefits of the acquisitions. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of the January 1, 2018 and 2019 dates. +Year Ended December 31, +2020 +2019 +2018 +Revenue +$ +172,563 +$ +159,632 +$ +190,487 +Net income +( 14,937 +) +16,261 +19,448 +Net income per share, basic +( 0.22 +) +0.26 +0.32 +Net income per share, diluted +( 0.22 +) +0.26 +0.31 +4. SALE OF CRYOSURGICAL BUSINESS +On August 16, 2019, we sold all rights and title to the assets necessary to operate our cryosurgical systems line of business to +a third party for $ 12,000 . This business consisted of medical devices used for the removal of benign skin lesions by cryosurgery or freezing. The products were sold in both the professional and OTC markets in North America, Europe, Central and South America and Australia. We also entered into a transition services agreement with CryoConcepts in which both parties agreed to provide certain transition services beginning after the closing. The Company recorded a gain on sale of business of $ 10,149 reflected in our statement of income for the year ended December 31, 2019. The gain includes the $ 12,000 of proceeds net of the fair value of the assets sold, which consisted entirely of inventory and fully-depreciated fixed assets, the legal fees associated with the transaction, and a value attributed to the transition services. +5 . +INVENTORIES: +December 31, +2020 +2019 +Raw materials +$ +15,425 +$ +14,168 +Work in process +2,572 +643 +Finished goods +13,866 +8,344 +$ +31,863 +$ +23,155 +F-22 +6 . +PROPERTY, PLANT AND EQUIPMENT: +December 31, +2020 +2019 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +26,480 +23,231 +Machinery and equipment +36,878 +33,568 +Computer equipment and software +13,024 +11,590 +Furniture and fixtures +3,545 +2,791 +Construction in progress +24,419 +4,923 +105,464 +77,221 +Less accumulated depreciation +( 53,604 +) +( 46,882 +) +$ +51,860 +$ +30,339 +Depreciation expense was $ 5,514 , $ 4,421 , and $ 3,828 for 2020, 2019, and 2018, respectively. +7 . +GOODWILL AND OTHER INTANGIBLE ASSETS: +The changes in goodwill are as follows: +December 31, +2020 +2019 +Balance as of January 1 +36,201 +18,521 +Goodwill acquired during the year +3,586 +16,811 +Purchase price adjustment +( 126 +) +— +Change related to foreign currency translation +690 +869 +Balance as of December 31 +$ +40,351 +$ +36,201 +Intangible assets consist of the following: +December 31, 2020 +Amortization Period (Years) +Gross +Accumulated Amortization +Net +Customer relationships +10 +$ +14,997 +$ +( 9,685 +) +$ +5,312 +Patents and product rights +5 +7,766 +( 5,792 +) +1,974 +Developed technology +7-10 +16,603 +( 8,880 +) +7,723 +Tradename +5-15 +5,645 +( 2,750 +) +2,895 +$ +45,011 +$ +( 27,107 +) +$ +17,904 +December 31, 2019 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer relationships +10 +$ +14,731 +$ +( 8,054 +) +$ +6,677 +Patents and product rights +10 +5,400 +( 5,158 +) +242 +Developed technology +7-10 +12,410 +( 7,982 +) +4,428 +Tradename +5-15 +5,553 +( 2,226 +) +3,327 +$ +38,094 +$ +( 23,420 +) +$ +14,674 +Amortization expense for 2020, 2019, and 2018 was $ 3,246 , $ 2,522 , and $ 2,623 , respectively. +F-23 +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2021 +3,291 +2022 +2,345 +2023 +2,345 +2024 +2,302 +2025 +2,050 +Beyond +5,571 +$ +17,904 +8 . +ACCRUED EXPENSES: +December 31, +2020 +2019 +Payroll and related benefits +$ +14,769 +$ +6,088 +Professional fees +978 +2,769 +Other +6,480 +5,431 +$ +22,227 +$ +14,288 +9. LEASES: +In February 2016, the FASB issued ASU No. 2016-02, Leases . The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We adopted this standard on January 1, 2019 on a modified retrospective basis and did not restate comparative amounts. +We determine whether an arrangement is a lease at inception. We have operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of December 31, 2020, we are the lessee in all agreements. Our leases have remaining lease terms of 1 to 7 years , some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year. +As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. +We have lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, we account for lease components separate from non-lease components. +The components of lease expense are as follows: +Year ended +Year ended +December 31, 2020 +December 31, 2019 +Operating Lease Cost +$ +1,291 +$ +964 +Finance Lease Cost +Amortization of right-of use assets +627 +410 +Interest on lease liabilities +72 +36 +Total Finance Lease Cost +$ +699 +$ +446 +Lease cost for the year ended December 31, 2018 was $ 1,461 . +Supplemental cash flow information related to leases is as follows: +F-24 +Year ended +Year ended +December 31, 2020 +December 31, 2019 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases +$ +1,280 +$ +937 +Operating cash flows from financing leases +72 +33 +Financing cash flows from financing leases +687 +442 +Non-cash activity +Right-of-use assets obtained in exchange for operating lease obligations +498 +1,829 +Right-of-use assets obtained in exchange for finance lease obligations +46 +2,069 +Right of use assets obtained include those assets acquired and entered into during 2020 and 2019. +Supplemental balance sheet information related to leases is as follows: +December 31, 2020 +December 31, 2019 +Operating Leases +Right-of-use assets +$ +4,461 +$ +4,996 +Current lease liabilities +1,125 +1,032 +Non-current lease liabilities +3,591 +4,206 +Total operating lease liabilities +$ +4,716 +$ +5,238 +Finance Leases +Right-of-use assets +$ +1,312 +$ +1,951 +Current lease liabilities +517 +613 +Non-current lease liabilities +895 +1,372 +Total finance lease liabilities +$ +1,412 +$ +1,985 +Weighted Average Remaining Lease Term +Weighted-average remaining lease term—operating leases +4.45 +Weighted-average remaining lease term—finance leases +2.67 +Weighted Average Discount Rate +Weighted-average discount rate—operating leases +4.28 +% +Weighted-average discount rate—finance leases +4.35 +% +As of December 31, 2020, minimum lease payments by period are expected to be as follows: +Finance +Operating +2021 +566 +1,332 +2022 +566 +1,315 +2023 +337 +874 +2024 +25 +894 +2025 +4 +520 +Thereafter +- +325 +Total Minimum Lease Payments +1,498 +5,260 +Less: imputed interest +( 86 +) +( 544 +) +Present Value of Lease Liabilities +$ +1,412 +$ +4,716 +F-25 +1 0 . +INCOME TAXES: +Income (loss) before income tax expense consists of the following: +Years Ended December 31, +2020 +2019 +2018 +United States +$ +( 47,995 +) +$ +3,106 +$ +( 11,728 +) +Foreign +44,471 +18,225 +43,444 +$ +( 3,524 +) +$ +21,331 +$ +31,716 +The components of income tax expense are as follows: +Years Ended December 31, +2020 +2019 +2018 +Current +Federal +$ +— +$ +— +$ +— +State +( 106 +) +1,033 +155 +Foreign +11,896 +5,099 +12,084 +11,790 +6,132 +12,239 +Deferred +Federal +( 20,946 +) +3,568 +9,200 +State +( 1,053 +) +125 +1,011 +Foreign +( 410 +) +( 697 +) +( 919 +) +( 22,409 +) +2,996 +9,292 +Decrease in valuation allowance +22,017 +( 4,453 +) +( 10,211 +) +( 392 +) +( 1,457 +) +( 919 +) +Total income tax expense +$ +11,398 +$ +4,675 +$ +11,320 +For the years ended December 31, 2020, 2019, and 2018 we recorded foreign income tax expense of $ 12,185 , $ 4,607 , and $ 11,165 , respectively. +The Tax Cuts and Jobs Act imposed a U.S. tax on GILTI that is earned by certain foreign affiliates owned by a U.S. shareholder effective in 2018. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying tangible property. The GILTI computation for 2018 was completed and is reflected in the 2018 income tax provision. The Company has made a policy election related to its treatment of GILTI and will treat it as a current period expense in the reporting period in which the tax is incurred. +Final GILTI regulations were released in 2020. Among the changes was a GILTI “High-Tax Exception,” which allows foreign income deemed taxed at a sufficient effective rate to be excluded from a US owner’s GILTI income. All foreign income in 2020 fell under this exception. It is expected that foreign income will continue to qualify for the exception in future years. +F-26 +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each of the years ended December 31, 2020, 2019, and 2018 is as follows: +2020 +2019 +2018 +Statutory U.S. federal income tax rate +21.0 +% +21.0 +% +21.0 +% +Deemed repatriation tax +— +— +10.9 +GILTI tax +— +16.9 +22.2 +Nondeductible executive compensation +( 0.9 +) +0.4 +4.8 +Impact of share-based payment awards +( 12.4 +) +( 5.3 +) +0.6 +Tax effect of foreign items +( 70.7 +) +4.5 +6.8 +State income taxes, net of federal benefit +26.0 +4.0 +2.8 +U.S. and foreign tax credits +34.9 +( 1.1 +) +( 1.0 +) +Nondeductible transaction costs +( 2.8 +) +1.6 +— +Nondeductible expenses and other +( 2.6 +) +0.4 +( 0.2 +) +NOL adjustment due to change in GILTI regulations +308.9 +— +— +Change in valuation allowance, federal and state +( 624.8 +) +( 20.5 +) +( 32.2 +) +Effective tax rate +( 323.4 +) +% +21.9 +% +35.7 +% +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2020 and 2019 are as follows: +2020 +2019 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +31,701 +$ +9,897 +Inventories +1,593 +2,002 +Capitalized research and development costs +746 +1,183 +Accruals and reserves currently not deductible +3,200 +2,272 +Acquired intangible assets +( 3,870 +) +( 3,525 +) +Depreciation and amortization +( 2,695 +) +( 1,999 +) +Stock-based compensation +1,354 +1,777 +Tax credit carryforwards +3,354 +2,055 +Net deferred tax asset +35,383 +13,662 +Valuation allowance +( 36,578 +) +( 14,561 +) +Net deferred tax liability +$ +( 1,195 +) +$ +( 899 +) +In assessing the realizability of our deferred tax asset, we consider all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of December 31, 2020 and 2019 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2020, 2019, or 2018. +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2021 - 2031 +$ +26,317 +2032 - 2037 +$ +45,072 +Non-Expiring +64,865 +$ +136,254 +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. We do not believe that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income. We +F-27 +continue to review ownership changes on an annual basis and we do not believe we have had a subsequent ownership change that would impact the NOLs. +Effective January 1, 2018, there is a transition to a participation exemption system whereby distributions from foreign subsidiaries to U.S. shareholders are generally exempt from taxation. Our intention is to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiary to the extent that we will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the foreign subsidiary. +As of December 31, 2020, our gross unrecognized tax benefits totaled $ 1,172 , and based upon the valuation allowance for our U.S. operations, the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2020, 2019 and 2018. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2020. +A reconciliation of our unrecognized tax benefits is as follows: +2020 +2019 +2018 +Balance as of January 1 +$ +1,308 +$ +1,676 +$ +1,663 +Additions for tax positions of prior periods +1 +4 +44 +Reductions for tax positions of prior periods +( 137 +) +( 372 +) +( 31 +) +Balance as of December 31 +$ +1,172 +$ +1,308 +$ +1,676 +1 1 . +STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2020, 5,595 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including our officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years , with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2020 +2019 +2018 +Risk-free interest rate (1) +1.33 +% +2.52 +% +2.60 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +42 +% +41 +% +43 +% +Expected life of stock options (in years) (2) +5 +5 +6 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2020, 2019 and 2018 was $ 2.79 , $ 5.19 and $ 9.15 , respectively. +F-28 +Compensation expense recognized in the financial statements related to stock options was as follows: +Years Ended December 31, +2020 +2019 +2018 +Total compensation cost during the year +$ +892 +$ +1,161 +$ +2,163 +Amounts capitalized into inventory during the year +( 466 +) +( 343 +) +( 420 +) +Amounts recognized in cost of products sold for amounts previously capitalized +360 +405 +396 +Amounts charged against income +$ +786 +$ +1,223 +$ +2,139 +The aggregate intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $ 3,117 , $ 92 , and $ 2,314 , respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted-Average +Exercise Price Per +Share +Weighted-Average +Remaining +Contractual Term +(in years) +Aggregate +Intrinsic +Value +Outstanding on January 1, 2020 +1,193 +10.68 +Granted +510 +7.16 +Exercised +( 402 +) +8.03 +Expired +( 5 +) +8.73 +Forfeited +( 64 +) +10.12 +Outstanding on December 31, 2020 +1,232 +$ +10.12 +6.79 +$ +2,688 +Vested or expected to vest as of December 31, 2020 +1,232 +$ +10.12 +6.79 +$ +2,688 +Exercisable on December 31, 2020 +636 +$ +11.62 +4.87 +$ +1,034 +As of December 31, 2020, there was $ 1,689 of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 2.6 years. +Net cash proceeds from the exercise of stock options were $ 3,222 , $ 196 and $ 1701 for the years ended December 31, 2020, 2019, and 2018, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2020: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$5.37 - $8.24 +665 +7.7 +$ +6.94 +182 +$ +6.30 +$8.87 - $13.31 +368 +5.8 +10.99 +276 +10.39 +$14.95 - $22.43 +199 +5.5 +19.19 +178 +18.97 +1,232 +6.8 +$ +10.12 +636 +$ +11.62 +The Stock Plan also permits us to grant restricted shares and restricted units of our common stock to eligible employees, including officers, and our outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by our Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the restrictions lapse. Compensation cost of $ 4,094 $ 2,979 and $ 6,357 related to restricted shares was recognized during the years ended December 31, 2020, 2019, and 2018, respectively. +F-29 +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units +Weighted-Average +Grant Date Fair +Value +Issued and unvested, January 1, 2020 +464 +12.86 +Granted +561 +8.35 +Vested +( 342 +) +11.14 +Forfeited +( 24 +) +11.90 +Issued and unvested, December 31, 2020 +659 +$ +9.95 +Issued and expected to vest, December 31, 2020 +659 +$ +9.95 +As of December 31, 2020, there was $ 3,697 of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 1.7 years. +In connection with the vesting of restricted shares during the years ended December 31, 2020, 2019 and 2018, we purchased and immediately retired 127 , 76 and 171 shares with aggregate values of $ 1,219 , $ 949 and $ 3,291 , respectively, in satisfaction of minimum tax withholding and exercise obligations. +We grant performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in our service for three years from the grant date. Performance during the one-year period will be based on a one-year earnings per share or income before taxes target. If the one-year target is achieved, the PSUs will then vest three years from grant date. Performance during the three-year period will be based on achievement of a three-year compound annual growth rate for consolidated product revenues. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $ 2,153 , $( 83 ) and $ 6,717 related to the PSUs was recognized during the years ended December 31, 2020, 2019 and 2018, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2020 +525 +12.52 +Granted (1) +368 +7.57 +Performance adjustment (2) +104 +N/A +Vested +( 311 +) +8.87 +Forfeited +( 35 +) +13.87 +Issued and unvested, December 31, 2020 +651 +$ +11.30 +Issued and expected to vest, December 31, 2020 +651 +$ +11.30 +1. +Grant activity for all PSUs disclosed at target. +2. +Reflects the performance adjustment based on actual performance measured at the end of the performance period. +In connection with the vesting of performance stock units during the year ended December 31, 2020, 2019 and 2018, we purchased and immediately retired 121 , 213 , and 20 shares with aggregate values of $ 869 , $ 2,763 and $ 301 , respectively. +Public Offering +On June 1, 2020, we entered into an underwriting agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Evercore Group LLC, as representatives of several underwriters, relating to the issuance and sale of 8,000 shares of our common stock. The price to the public in the offering was $ 11.00 per share. Under the terms of the underwriting agreement, we also granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,200 shares of common stock. On June 3, 2020, we announced the full exercise by the underwriters of their option to purchase these additional shares. +F-30 +The offering was made pursuant to an effective registration statement on Form S-3 (File No. 333-228877) we had previously filed with the SEC, and a prospectus supplement thereunder. The net proceeds from the offering were approximately $ 95,000 after deducting underwriting discounts and offering expenses paid by the Company. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $ 25,000 of our outstanding common shares. No shares were purchased and retired in 2020, 2019 or 2018. +1 2 . +TRANSITION COSTS +In January 2018, we announced the retirement of our President and CEO and our CFO and Chief Operating Officer. Stephen S. Tang, Ph.D., who served as Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018. Dr. Tang replaced Douglas A. Michels, who retired as President and CEO, and as a member of the Board, on March 31, 2018. In addition, Roberto Cuca was appointed as the Company’s new CFO, effective June 8, 2018. Mr. Cuca replaced Ronald H. Spair, our former CFO and Chief Operating Officer, who retired on that same date. Charges associated with these transitions were $ 9,602 during 2018 and are included in general and administrative expenses in the consolidated statement of income. These charges primarily reflect non-cash charges associated with modifications to existing stock grants held by the retiring executives and expenses associated with the onboarding of the Company’s new President and CEO. +1 3 . +BUSINESS SEGMENT INFORMATION: +Our business consists of two segments: our “Diagnostics” business, which was previously named “OSUR”, primarily consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our Diagnostics segment includes the financial results of UrSure. Our “Molecular Solutions” business, which was previously named “DNAG,” consists of the development, manufacture, marketing and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing. Our collection kits are also used for the collection of first-void urine for liquid biopsy in the prostate and bladder cancer markets; and in the sexually transmitted infection screening market. In addition, our Molecular Solutions business provides microbiome laboratory services that accelerate research and discovery for customers in the pharmaceutical, agricultural, and academic research markets. Financial results of Diversigen, CoreBiome and Novosanis are included in our Molecular Solutions segment. Our cryosurgical systems business was included in our Diagnostics segment and the impact of the sale of that business in August 2019 is reflected in the results presented below. +We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income. We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +Operating income (loss) for the year ended December 31, 2018 has been modified to conform to the classification of the intercompany service fee presentation for 2019. Beginning with the first quarter of 2019, we have included the fees for intercompany services in our segment operating income (loss) in order to more accurately reflect the results of each segment. +F-31 +The following table summarizes operating segment information for the years ended December 31, 2020, 2019, and 2018, and asset information as of December 31, 2020 and 2019: +Years Ended December 31, +2020 +2019 +2018 +Net revenues: +Diagnostics +$ +65,240 +$ +78,225 +$ +85,635 +Molecular Solutions +106,481 +76,380 +96,108 +Total +$ +171,721 +$ +154,605 +$ +181,743 +Operating income (loss): +Diagnostics +$ +( 43,156 +) +$ +154 +$ +( 15,188 +) +Molecular Solutions +37,979 +18,457 +43,617 +Total +$ +( 5,177 +) +$ +18,611 +$ +28,429 +Depreciation and amortization: +Diagnostics +$ +3,345 +$ +3,039 +$ +3,755 +Molecular Solutions +6,042 +4,300 +3,467 +Total +$ +9,387 +$ +7,339 +$ +7,222 +Capital expenditures: +Diagnostics +$ +17,860 +$ +6,073 +$ +4,893 +Molecular Solutions +8,814 +3,241 +1,451 +Total +$ +26,674 +$ +9,314 +$ +6,344 +December 31, +2020 +2019 +Total assets: +Diagnostics +$ +242,613 +$ +163,943 +Molecular Solutions +211,859 +185,352 +Total +$ +454,472 +$ +349,295 +The following table represents total long-lived assets by geographic area: +December 31, +2020 +2019 +United States +$ +36,897 +$ +23,846 +Canada +10,616 +5,697 +Other regions +4,347 +796 +$ +51,860 +$ +30,339 +1 4 . +COMMITMENTS AND CONTINGENCIES: +Purchase Commitments +As of December 31, 2020, we had outstanding non-cancelable purchase commitments related to inventory, supplies, capital expenditures, and other goods or services as follows: +2021 +16,542 +2022 +20 +2023 +18 +$ +16,580 +Employment Agreements +Under terms of employment agreements with certain employees, which extend through 2024, we are required to pay each individual a base salary for continuing employment with us as follows: +F-32 +2021 +2,947 +2022 +1,213 +2023 +409 +2024 +— +$ +4,569 +Litigation +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +On February 6, 2017, DNAG entered into a settlement and license agreement (the “Settlement Agreement”) in order to settle certain patent infringement and breach of contract litigation against Ancestry.comDNA, LLC (“Ancestry”) and its contract manufacturer. This litigation was related to a saliva DNA collection device sold by Ancestry that was similar to products sold by DNAG. Under the terms of the Settlement Agreement, DNAG and Ancestry agreed to certain procedures for considering whether future versions of Ancestry’s saliva DNA collection product are covered by the DNAG patents licensed to Ancestry (the “Licensed Patents”) and thus subject to ongoing royalties under the Settlement Agreement. A dispute arose among the parties regarding whether certain new Ancestry products are covered by the Licensed Patents. Pursuant to the terms of the Settlement Agreement, a binding arbitration proceeding was commenced to resolve the dispute. In February 2020, an arbitration panel issued a decision finding that the future Ancestry products do not infringe the DNAG patents asserted in the arbitration and would no longer be subject to the royalties under the Settlement Agreement. +Following the completion of the arbitration, a new patent was issued to DNAG that is a continuation of a patent licensed to Ancestry and is thus a Licensed Patent under the Settlement Agreement. DNAG notified Ancestry of this new patent and following discussions between the parties Ancestry initiated a new arbitration proceeding during the third quarter of 2020 pursuant to the Settlement Agreement with respect to the applicability of the new patent to the future Ancestry products and the validity of that patent. Following the initiation of the arbitration by Ancestry, DNAG filed a statement of defense and an objection to the arbitration on the basis that a dispute between the parties has not yet occurred and therefore the alleged dispute is not sufficiently ripe to arbitrate. An arbitration panel has been appointed. The parties have since engaged in settlement discussions and the commencement of the arbitration has been delayed. +1 5 . +RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for us to match employee contributions up to $ 4 per year. We contributed $ 994 , $ 754 and $ 721 to the 401(k) Plan, net of forfeitures, in 2020, 2019, and 2018, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2020 and 2019, the value of the assets associated with this plan was $ 2,565 and $ 3,519 , respectively, and is included in current assets and other assets in our consolidated balance sheets. Our obligation related to the deferred compensation plan is included in accrued expenses and other liabilities in our consolidated balance sheets. As of December 31, 2020 and 2019, our total obligation under this plan was $ 2,565 and $ 3,519 , respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee contributions up to $ 4 per year. We contributed $ 366 , $ 184 and $ 163 to the RRSP in 2020, 2019, and 2018, respectively. +F-33 \ No newline at end of file diff --git a/raw/filings/0001116463/2020/0001564590-21-009887/filing_metadata.csv b/raw/filings/0001116463/2020/0001564590-21-009887/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e9089d76e9d56f5ea88deafac67e2cbd54523925 --- /dev/null +++ b/raw/filings/0001116463/2020/0001564590-21-009887/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2021-03-01,2020-12-31,2021-03-01T21:31:27.000Z,0001564590-21-009887,osur-10k_20201231.htm,10-K,17220701,1,1,https://www.sec.gov/Archives/edgar/data/1116463/000156459021009887/osur-10k_20201231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000156459021009887/,2020,2020,1 diff --git a/raw/filings/0001116463/2020/0001564590-21-009887/rpt_disclosure.txt b/raw/filings/0001116463/2020/0001564590-21-009887/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..baea4c53fb3de4a5e601bcdc105b70a474cc5f3f --- /dev/null +++ b/raw/filings/0001116463/2020/0001564590-21-009887/rpt_disclosure.txt @@ -0,0 +1,9 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2021 there have been no transactions with related persons that would require disclosure in this Proxy Statement. +The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could +be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit +Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the +Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. +25 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/filing.txt b/raw/filings/0001116463/2021/0000950170-22-002556/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..51e0837b974b86c37eeed997bb9f443b0930a87c --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/filing.txt @@ -0,0 +1,4333 @@ +10-K +false two years two years two years --12-31 0001116463 five years P1Y twenty years FY 0001116463 osur:StockRepurchaseProgramMember 2021-01-01 2021-12-31 0001116463 2008-08-05 0001116463 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2019-12-31 0001116463 osur:RangeThreeMember 2021-01-01 2021-12-31 iso4217:USD xbrli:shares xbrli:pure xbrli:shares osur:Segment iso4217:USD +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ Annual report pursuant to Section 13 or 15( d ) of the Securities Exchange ACT OF 1934 +For the fiscal year ended December 31, 2021 +or +☐ Transition report pursuant to Section 13 or 15( d ) of the Securities Exchange Act of 1934 +F or the transition period from to +Commission File No. 001-16537 +ORASURE TECHNOLOGIES, INC . +(Exact name of registrant as specified in its charter) +Delaware +36-4370966 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem , Pennsylvania +18015 +(Address of principal executive offices) +(Zip Code) +(Registrant’s telephone number, including area code): ( 610 ) 882-1820 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Trading Symbol +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +OSUR +The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☒ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +State the aggregate market value of the voting and non-voting common equity held by nonaffiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2021) : $ 727,984,802 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 25, 2022: 72,304,792 shares. +Documents Incorporated by Reference: +Part III of this Annual Report on Form 10-K will be incorporated by reference from certain portions of the Registrant's definitive Proxy Statement for its 2022 Annual Meeting of Shareholders, or will be included in an amendment hereto, to be filed not later than 120 days after the close of the fiscal year ended December 31, 2021. Except with respect to information specifically incorporated by reference in the Annual Report on From 10-K, the Proxy Statement is not deemed to be filed as part hereof. +Table of Contents +PART I +Page +ITEM 1. +Business +1 +ITEM 1A. +Risk Factors +19 +ITEM 1B. +Unresolved Staff Comments +48 +ITEM 2. +Properties +48 +ITEM 3. +Legal Proceedings +48 +ITEM 4. +Mine Safety Disclosures +48 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +49 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +51 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +60 +ITEM 8. +Financial Statements and Supplementary Data +60 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +60 +ITEM 9A. +Controls and Procedures +61 +ITEM 9B. +Other Information +62 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +63 +ITEM 11. +Executive Compensation +63 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +63 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +63 +ITEM 14. +Principal Accountant Fees and Services +63 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +64 +ITEM 16. +Form 10-K Summary +66 +Signatures +67 +Use of Names +References in this Annual Report to "OraSure" mean OraSure Technologies, Inc. References in this Annual Report to "we," "us," "our," or the "Company" mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Disclosure Regarding Forward Looking Statements +This Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "Annual Report") contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings/losses per share, net income (loss), expenses, cash flow or other financial performance, or developments, clinical trial or development activities, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: +• +risk that our exploration of strategic alternatives may not result in any definitive transaction or enhance stockholder value and may create a distraction or uncertainty that may adversely affect operating results, business or investor perceptions. +• +the diversion of management’s attention from our ongoing business and regular business responsibilities and due to our exploration of strategic alternatives; +• +our ability to resolve our InteliSwab ® COVID-19 Rapid Tests manufacturing challenges and satisfy customer demand; +• +our ability to market and sell products, whether through our internal, direct sales force or third parties; +• +Our ability to fulfill our commitments under our contracts with the U.S. government for InteliSwab ® COVID-19 Rapid Tests; +• +impact of significant customer concentration in the genomics business; +• +our ability to successfully scale-up our manufacturing for InteliSwab ® COVID-19 Rapid Tests; +• +failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; +• +our ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; +• +our ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; +• +our ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (or “FDA”), or other regulators; +• +the impact of the COVID-19 pandemic on our business; +• +the impact of COVID-19 on our supply chain; +• +our ability to successfully develop new products, validate the expanded use of existing collector products, receive necessary regulatory approvals and authorizations, transport work-in-process goods and finished products and commercialize such products for COVID-19 testing; +• +changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; +• +our ability to meet increased demand for our products; +• +the impact of replacing distributors on our business; +• +inventory levels at distributors and other customers; +• +our ability to achieve our financial and strategic objectives and continue to increase our revenues, including the ability to expand international sales; +• +the impact of competitors, competing products and technology changes on our business; +• +reduction or deferral of public funding available to customers; +• +competition from new or better technology or lower cost products; +• +our ability to develop, commercialize and market new products; +• +market acceptance of oral fluid or urine testing, collection or other products; +• +market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services; +• +changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention, or “CDC” or other agencies; ability to fund research and development and other products and operations; +• +our ability to obtain and maintain new or existing product distribution channels; +• +reliance on sole supply sources for critical products and components; +• +availability of related products produced by third parties or products required for use of our products; +• +the impact of contracting with the U.S. government on our business; +• +the impact of negative economic conditions on our business; +• +our ability to maintain sustained profitability; +• +our ability to increase our gross margins; +• +the ability to utilize net operating loss carry forwards or other deferred tax assets; +• +volatility of our stock price; +• +uncertainty relating to patent protection and potential patent infringement claims; +• +uncertainty and costs of litigation relating to patents and other intellectual property; +• +availability of licenses to patents or other technology; +• +ability to enter into international manufacturing agreements; +• +obstacles to international marketing and manufacturing of products; +• +our ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; +• +adverse movements in foreign currency exchange rates; +• +loss or impairment of sources of capital; +• +our ability to attract and retain qualified personnel; +• +our exposure to product liability and other types of litigation; +• +changes in international, federal or state laws and regulations; +• +customer consolidations and inventory practices; +• +equipment failures and ability to obtain needed raw materials and components; +• +the impact of terrorist attacks and civil unrest; and +• +general political, business and economic conditions. +These and other factors that could affect our results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements and Risk Factors are made as of the date of this Annual Report and we undertake no duty to update these statements, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +Trademarks, Trade Names and Service Marks +This Annual Report contains certain trademarks, which are protected under applicable intellectual property laws and are the Company's property. Solely for convenience, the Company's trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure Quick Flu ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +PART I +ITEM 1. Bu siness. +The overall goal of OraSure Technologies, Inc. (“OraSure” or “the Company”) is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Our business consists of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +Diagnostics +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. +Molecular Solutions +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek, Inc. ("DNAG"), Diversigen, Inc. ('Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. +We have expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. We have also developed new collection devices for the emerging microbiome market, which focuses on studying microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene® • GUT, is focused on the human gut microbiome (microbes living in human stool). In 2021, the OMNIgene® • GUT collection device (OMD-200) was granted “FDA De Novo classification for the preservation and stabilization of the relative abundance of microbial nucleic acids in clinical samples.” We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. +Our Molecular Solutions segment includes the Colli-Pee® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Our Molecular Solutions business also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, we received three Emergency Use Authorizations ("EUA") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab ® COVID-19 Rapid Tests (“InteliSwab®”) for non-prescription OTC, professional point-of-care use and prescription home use. We began recording revenues on the sales of our InteliSwab® tests during the third quarter of 2021. In September 2021, the Defense Logistics Agency awarded the Company a procurement contract for the InteliSwab® for OTC use, which the Defense Logistics Agency estimated to have a value of $205 million and which will provide InteliSwab® tests to up to 20,000 sites throughout the United States from October 2021 through September 2022. Also in September 2021, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), which is part of the office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services (“HHS”), pursuant to which BARDA would provide the Company with up to $13.6 +1 +million in funding to obtain 510(k) clearance and Clinical Laboratory Improvement Amendments (“CLIA”) waiver of the InteliSwab® tests. +In the latter part of 2021, we have focused our efforts on scaling up our operations to meet the increasing demand for the InteliSwab® tests. In September 2021, we receive $109 million in funding from the U.S. Department of Defense (the “DOD”), in coordination with the HHS, to build additional manufacturing capacity in the United States for our InteliSwab® test as part of the nation’s pandemic preparedness plan. This funding will be used to expand the Company’s production capacity by 100 million tests annually and will be paid based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick ® HIV Self-Test and OraQuick ® HCV Test. +Exploration of Strategic Alternatives +The COVID-19 pandemic has provided us an opportunity to fundamentally transform into a higher growth, more innovative and efficient organization with broader customer reach, both within and outside the United States. We believe we are well positioned to address current public health challenges and capitalize on diagnostic trends in the market and enhance its operational and competitive profile. Against this backdrop, our Board of Directors is exploring and evaluating a broad range of strategic alternatives with the goal of maximizing value for stockholders There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. +Diagnostics Segment Products +The following is a summary of our principal products for the infectious disease and risk management markets, which comprise the Diagnostics segment of our business: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is our rapid immunoassay platform designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received emergency use authorization (“EUA”) from the U.S. Food and Drug Administration (“FDA”) for non-prescription, over-the-counter home use in individuals aged 2 years or older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the over-the-counter version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the U.S. FDA for use by laboratories located in the United States certified under CLIA. We have also received a CLIA waiver for use of the test enabling the test to be used by numerous additional sites in the United States not certified under CLIA to perform high and moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged two years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the U.S. FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a +2 +screening test and requires a confirmation test where an initial positive result is obtained. This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received pre-market approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”) for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988 (“CLIA”), to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered for sale in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received World Health Organization (“WHO”) pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. The OraQuick® HIV Self-Test received CE Mark in 2021 and is being sold in certain European Countries. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +We have received FDA pre-market approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +We have received 510(k) clearance from the FDA for our rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +3 +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with a blood-based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate "OMT" for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. Our MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and we are selling a NIDA-5 panel of microplate assays supplied by Thermo Fisher to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Molecular Solutions Segment +Genomic Products +4 +We sell many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. Our lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. +Our genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• +The reliable collection of high-quality and stable genetic samples. +• +The use of simple, non-invasive collection methods. +• +The ability to store and transport collected samples for extended periods at ambient temperatures. +• +Compatibility with fully automated laboratory testing systems. +We also sell the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. +COVID Collection Products +Since 2020, we have actively engaged with several laboratories and researchers to demonstrate the effectiveness of our existing collection products for use with COVID-19 molecular testing. The stabilization solution in our molecular collection products can accommodate a vast spectrum of microbiome activity, spanning bacteria to viruses. We have collected data on the usability of our kits for this purpose. We believe that oral samples collected using devices from our product lines for liquid saliva or oral swab samples are a suitable alternative to more commonly used samples collected with a nasopharyngeal or oropharyngeal swab. Our products are optimized for self-collection, unlike nasopharyngeal and oropharyngeal swabs, which cannot be self-administered easily. That means healthcare providers, retailers, and online vendors can ship our kits directly to an individual’s home, eliminating unnecessary trips to hospitals, doctors’ offices, and testing facilities. Self-collection also supports the social distancing guidelines in many communities, reduces the burden on testing sites and healthcare facilities, and provides wider access to testing. Moreover, the chemistry in our products stabilizes nucleic acids, including RNA, which is the nucleic acid used by most labs for COVID-19 testing. The chemistry is bacteriostatic and inactivates viral activity in the sample. These products' usability and form factors are conducive to use at home or in clinic settings. As a result, since 2020, we have sold our ORAcollect ® • RNA and OMNIgene ® • ORAL collection devices for use in connection with COVID-19 molecular testing. These products have become an increasingly important part of our business and accounted for 47% of 2020 revenue generated by our Molecular Solutions segment and 40% in 2021. +Microbiome Products +We also market several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environmental fluctuations. A reliable method captures and preserves ("snapshots") the microbiome after collection until an analysis is required to optimize and standardize sample results. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We believe our product ensures that the microbial DNA in the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Recently, we have applied these principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. In 2021, the Microbiome portfolio grew to support collecting and stabilizing metabolites found in fecal samples. +5 +Laboratory and Data Analytical Services +Our Molecular Solutions business also offers our customers microbiome laboratory testing and analytical services. These services reflect the collective benefits of our Diversigen subsidiaries, which were combined under the Diversigen name during 2020. Our services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. Our goal is to help customers unleash the translational potential of the microbiome and providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. We also offer comprehensive microbiome and metagenomics services to improve human, animal, and environmental health. Diversigen has extensive experience with highly diverse microbiome sample types and provides complete project life cycle consulting services, including pre-project consulting, study design, extraction, and sequencing to complete bioinformatics analysis. Diversigen is at the forefront of setting quality standards for this industry and has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. We are also in the process of integrating the services offered through GenoFIND TM , under the Diversigen brand. +Products Under Development +Diagnostic Products +Our research and development efforts include programs targeted at expanding and enhancing our diagnostics business. These programs typically focus on products related to drug adherence and rapid tests for various diseases. In 2021, significant time and resources were dedicated to the development of our COVID-19 Rapid Antigen Self-Test (InteliSwab®). We introduced our antigen test to the market in 2021 for three different uses: +▪ +Professional Test (CLIA Waived) for use at drive-through sites, physician offices, public health testing sites, and employer/university health centers. In this instance, a physician would prescribe the test and the patient would conduct a self-swab in the presence of a healthcare provider who would then interpret the result. +▪ +Prescription Self-Test for use by individual consumers (with prescription) at home or in any location, by employers/universities on- or off-site, or by physicians or public health via remote testing. In this instance, a physician would prescribe the test and the patient would conduct a self-swab at home, or in any location, where they would then interpret their own result. +▪ +OTC Self-Test for use by consumers who would purchase online or at retail without prescription, and conduct the test and receive the result themselves anytime, anywhere. +We completed the InteliSwab ® product development and clinical studies in 2021 and received three EUA authorizations for this test in June 2021. +In the first and second quarter of 2021, the clinical studies were completed and the EUAs were submitted to the FDA. Throughout 2021, limit of detection studies were completed with live coronavirus in certified third party analytical laboratories, confirming that InteliSwab ® is able to detect all the variants of concern thus far including Omicron. The company has transferred the technology for the making of the devices to manufacturing which is ramping up and optimizing operations. +In 2021, we also received a $13.6 million grant from BARDA, which provides the funding necessary to obtain a 510(k) for InteliSwab ® for both professional use (CLIA waived) and OTC use. +Molecular Solutions +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. Our development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to our customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +Sales and Marketing +6 +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were $188.4 million, $130.8 million, and $107.3 million in 2021, 2020, and 2019, respectively. Consolidated net revenues attributable to international customers amounted to $45.3 million, $40.9 million, and $47.3 million or 19%, 24%, and 31% of our total revenues in 2021, 2020, and 2019 respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Notes 2 and 14 to o ur consolidated financial statements included elsewhere in this Annual Report. +Diagnostics - Professional +Our InteliSwab® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. It is also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. We sell our OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, we distribute our OraQuick ® HIV test in certain foreign countries through distributors. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +Diagnostics - OTC and Self-Test +We sell our InteliSwab® COVID-19 Rapid Test product in the U.S. retail and consumer markets. The OTC InteliSwab® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the US military. +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. The product is also available for purchase on-line through certain retailers and from our website, www.oraquick.com. The primary target population for our HIV-OTC test comprises young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. We also sell our OraQuick ® HIV Self-Test in certain international markets. Under a Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) we are able to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates Foundation. The funding consists of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement was entered into in 2017 and has a four-year term and enables non-governmental organizations in the eligible countries that receive funding from government or public sector agencies and donors to access our HIV Self-Test at reduced pricing. The agreement with the Gates Foundation provides for an aggregate funding amount not to exceed $20.0 million over the four-year term or $6.0 million each year of the agreement. The term of this agreement expired in June 2021. +Our OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we +7 +have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we also sell our next generation Intercept i2 ® he collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Molecular Solutions +Our Molecular Solutions business sells its products directly to its customers, primarily through its own internal sales force in U.S. domestic markets. However, in many international markets, distributors are used. +Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. Sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority these revenues. A significant portion of total sales are derived from repeat customers in both markets. Molecular Solutions also has customers in the livestock and companion animal markets. +We have expanded the market focus of our Molecular Solutions business by selling certain existing collection products for use in COVID-19 tests and by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). We are leveraging our existing sales force and global research connections to engage microbiome customers around the world and establish ourselves as among the leaders in ease-of-collection, stabilization and transport of this challenging sample type. +Our Molecular Solutions segment includes the Colli-Pee ® device, a product developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. +This segment is offering laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of its customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. During 2019, we substantially expanded our ability to offer microbiome laboratory and bioinformatics services with the acquisition of CoreBiome and Diversigen. The laboratory operations of CoreBiome and Diversigen were combined during 2020 under the Diversigen brand. +Significant Products and Customers +Several different product lines have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands). +For the years ended December 31, +2021 +2020 +2019 +Genomics +$ +63,350 +$ +36,878 +$ +56,200 +OraQuick ® HIV +42,373 +44,224 +43,092 +COVID-19 collection kits +54,167 +50,927 +— +Inteliswab ® +22,405 +— +— +One of our customers accounted for approximately 15% of our net consolidated revenues in 2019. We had no customers that accounted for more than 10% of our net consolidated revenues for the years ended December 31, 2021 and 2020. +8 +Supply and Manufacturing +We manufacture all of our OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTOLYTE and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV In-Home Test in order to supply certain international markets. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. We have long-term agreements in place for the contract manufacturing in Thailand and one of our suppliers has been manufacturing for us for the past 20 years. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +We manufacture all of the proprietary chemistry and assay cards for our InteliSwab ® COVID-19 Rapid Tests in our Bethlehem, Pennsylvania facilities. We made significant capital investments during 2021 in order to scale this manufacturing. On September 30, 2021, we entered into an agreement for $109 million in capital funding from the US Department of Defense, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Under the Agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding will be paid to us based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. An existing Company location in Bethlehem, PA is being retrofitted to accommodate increased manufacturing and an additional new facility will be added in another U.S. location to be determined. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +Our wholly-owned subsidiary, DNA Genotek, Inc. ("DNAG") has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. We are actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products in our Molecular Solutions segment are produced in Canada. We have increased the capacity for our molecular collection kits to meet demand for COVID molecular testing to 60 million kits per year (including non-COVID kits) with another 20 million kits per year to be qualified by end of 2022. +Our Colli-Pee ® device is currently manufactured at our Belgian assembly facility with components supplied by third party vendors. +Our GenoFIND TM genomics laboratory services are provided to our customers by a third party laboratory. We believe there are other laboratories that can also provide these services. Our microbiome laboratory testing and analytical services are provided by our subsidiary, Diversigen. +Human Capital Resources +In order to achieve the goals and expectations of our Company, it is crucial that we continue to attract and retain top talent. To facilitate talent attraction and retention, we strive to make OraSure a safe and rewarding workplace with opportunities for our employees to grow and develop in their careers. +9 +As of December 31, 2021, we had 785 full-time employees, which compares to 570 employees as of December 31, 2020. The increase in employees during 2021 was primarily the result of the need to add manufacturing capacity for our InteliSwab® COVID-19 Rapid Test and molecular collection devices used in COVID-19 molecular testing. Our employees are not currently represented by a U.S. collective bargaining agreement. +We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention to attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +During 2021, in response to the changing impact of the COVID-19 pandemic, we continued to implement safety protocols and new procedures to protect our employees, our subcontractors and our customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. In addition, we continued to modify the way we conduct many aspects of our business to reduce the number of in-person interactions. +As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefits programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering a diverse, equitable, and inclusive workplace that reflects and contributes to the global communities in which we do business and the customers and partners we serve. This includes all communities impacted by our corporate presence. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a Code of Conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. We strive to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. We have an active Diversity, Equity and Inclusion Council that strives to drive diversity, equity and inclusion within the workplace. At OraSure, we believe a variety of perspectives are critical to achieving success, and that diversity, equity and inclusion are key drivers to growth-based innovation and profitability. We aim to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgement. We believe that when all voices are heard, we honor and exemplify our core values and best serve our communities. +Competition +Diagnostics Segment +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. We have many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, we differentiate based on our tests’ ease of use, which has enabled us to expand our self-testing offering. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +10 +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables us to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. Our OraQuick ADVANCE HIV rapid test is the only oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our OraQuick® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the US OTC market. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below our HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the US with WHO Prequalification status and the CE mark. The majority of our sales outside the US are in Africa due to the greater incidence of HIV in that region. In 2021, we obtained the CE mark for our OraQuick ® HIV Self-Test which will enable us to enter the European over-the-counter market for HIV. In addition, in 2021, we received registration of our OraQuick ® HIV Self-Test, and the Thai Free Sales Certificate which enables us to obtain registrations in Asia and Latin America. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as over-the-counter tests purchased and used by consumers. Currently, there are 45 professional point-of-care EUA authorizations by the US FDA. There are also 13 OTC Antigen rapid tests and 3 OTC rapid molecular tests authorized under EUA by the FDA. Our InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +11 +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, we believe that these tests are qualitative tests that we believe are lower in quality and provide fewer benefits than our Q.E.D. ® test. +Molecular Solutions Segment +Our Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although we believe the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. With the receipt of authorizations for use in connection with COVID-19 molecular tests, our Oragene ® and ORAcollect ® products now compete against COVID-19 testing systems and the collection methods used in those systems. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, we are one of the few vendors to offer a solution that fully meets these requirements. +Our genomic and microbiome laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have two United States patents and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from June 2022 to December 2026. We have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have one United States patent for our OraQuick ® platform expiring in 2028, as well as corresponding related international patents. We also have patent applications pending internationally. We have five pending patent applications in the United States for our InteliSwab® COVID-19 Rapid Test, and we have filed and expect to file additional patent applications for this product in certain international markets. +We hold, through our subsidiary, DNAG, twenty-four granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from February 2022 through April 2035. +We hold through our subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. +Our subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological samples containing polynucleotide molecules. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also +12 +provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure QuickFlu ® , Q.E.D. ® , Inteliswab®, Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, de novo classification, premarket approval, or emergency use authorization. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety +13 +and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a request for de novo classification or a premarket approval application (“PMA”) before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a de novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an Emergency Use Authorization (“EUA”). FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made following a determination by the Secretary of Health and Human Services that there is a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to our marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement +14 +must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of our products are used for research only or other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other post-market requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by our subsidiary, Diversigen, are subject to CLIA and consist of microbiome and metagenomics sequencing, bioinformatics and analysis. Diversigen has recently received a CLIA certificate of registration in Minnesota, and is pursuing accreditation from the College of American Pathologists (CAP). A CLIA certificate of compliance is issued once a state regulator or the Center for Medicare and Medicaid Services determines that the laboratory is compliant with the applicable CLIA requirements. Under CLIA, certain organizations—including CAP—can accredit laboratories performing testing on specimens from human beings or animals, using methodologies and clinical applications within the expertise of the laboratory accreditation program. +Certain of our products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell products. +15 +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO 13485 certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Medical Devices Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +In addition, the EU has adopted the EU Medical Devices Regulation (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (the “EU IVDR”), which will repeal and replace the MDD and IVDD. The EU MDR and EU IVDR impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU MDR requirements are in effect as of May 2021 and manufacturers of currently approved medical devices have until May 2022 to meet the EU IVDR requirements. Compliance with these regulations may be expensive and +16 +time-consuming. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. We also note that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to our international strategy. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). We received this certification for our Diagnostics segment (previously named "OSUR") in January 2019 as well as for our Molecular Business Unit in February 2020. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require us to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to health care providers. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +17 +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which we are subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. We also are subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which we are subject as a result of our international sales also include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require us to alter our manufacturing processes, thereby increasing our manufacturing costs, or may impose other additional obligations on us or our products. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +18 +ITEM 1A. Ris k Factors +Summary of Risk Factors +Investing in our Common Stock involves risk. Below is a summary of the principal factors that could adversely affect our business, operations and financial results . You should carefully consider the following risks and uncertainties, together with all other information in this Annual Report, including our consolidated financial statements and related notes and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, before investing in our Company. This summary does not address all of the risks that we face. Additional discussion of the summarized risks can be found below following this summary. +Risks Relating to Products, Marketing and Sales +• +Changes in the genomics market may adversely affect our business. +• +Our future success depends upon market acceptance of our existing and future products and service offerings. +• +We may not realize anticipated revenue from our COVID-19 diagnostic assays. +• +The COVID-19 pandemic continues to cast uncertainty over our consolidated results of operations, financial position and cash flows, while the consequences of COVID-19 and the governmental response to the pandemic and pandemic-related macroeconomic impacts could negatively affect our operations and share price; +• +Marketing of our COVID-19 tests and collection kits under EUAs from FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of the EUAs is subject to government discretion. +• +If acceptance and adoption of oral fluid testing and collection products does not continue, our future results may suffer. +• +We expect to face increasing competition from other providers of diagnostic tests, sample collection products and molecular laboratory services. +• +Our product sales cycles can be lengthy and may depend on public funding, which can cause variability and unpredictability in our operating results. +• +Our inability to expand international sales could adversely affect our business and results of operations. +• +Our international presence may increase our risks and expose our business to regulatory, cultural or other restraints. +• +Our U.S. government contracts require compliance with numerous laws and increases our risk and liability. +• +Our inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect our business. +• +Our business will suffer if we do not effectively manage challenges to our manufacturing processes and we may be unable to successfully scale-up manufacturing of our products in sufficient quality and quantity to meet demand, which would negatively impact revenue expectations. +• +Our business results depend on our ability to manage disruptions in our domestic and global supply Chains and distribution channels. +• +Our U.S. government contracts may affect our intellectual property rights. +• +Certain of or products depend on components form a sole-source supplier, the loss of which would cause us to be unable to deliver such products. +• +Our U.S. government contracts and related administrative processes are subject to audits and cost adjustments by the federal government. +• +We may not be able to fulfill our obligations under government contracts, which could result in reduced sales and profits, contract penalties or terminations and damages to customer relationships. +Risks Relating to Our Industry, Business and Strategy +• +Consolidation in the healthcare industry could adversely affect our future revenues and operating results. +• +Our research, development and commercialization efforts may not succeed and our competitors may develop and commercialize more effective or successful offerings. +19 +• +Acquisitions or investments may not generate the expected benefits and could disrupt our ongoing business, distract our management, increase our expenses and adversely affect our business. +• +There are risks relating to our acquisitions of Diversigen, Novosanis and UrSure. +• +The future results of acquired companies may be adversely impacted if we do not effectively manage our expanded operations. +• +Our revenues could be affected by third-party reimbursement policies and potential cost constraints. +• +Changes in healthcare regulation could affect our revenues, costs and financial condition. +• +New or changed testing guidelines could affect sales of our diagnostic products. +• +Reductions in government funding and research budgets could adversely affect our business and financial results. +Risks Relating to Our Dependence on Third Parties +• +The use of third party supply sources for critical components of our products could adversely affect our business. +• +Our failure to maintain existing distribution channels, or develop new distribution channels, may result in lower revenues. +• +We may need strategic partners to assist in developing and commercializing some of our products. +Risks Relating to Intellectual Property +• +Our success depends on our ability to protect our proprietary technology. +• +We may become involved in intellectual property disputes, which could increase our costs and limit or eliminate our ability to sell products, provide services or use certain technologies. +Regulatory Risks +• +The need to obtain regulatory approvals could increase our costs and adversely affect our financial performance. +• +Failure to comply with FDA, EMA or other regulatory requirements may require us to suspend production or sale of our products or institute a recall which could result in higher costs and loss of revenues. +• +Our inability to respond to changes in regulatory requirements could adversely affect our business. +• +Our inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect our business. +• +We are subject to numerous government regulations in addition to FDA requirements, which could increase our costs and affect our operations. +• +Failure to comply with privacy, security and breach notification regulations may increase our costs. +• +Failure to comply with data protection requirements or privacy laws could increase our costs. +• +FDA regulation of laboratory-develop tests and genetic testing could affect demand for our products. +• +Our international sales create potential exposure under anti-corruption laws. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +• +Economic volatility and disruption, including those related to the COVID-19 pandemic could adversely affect our business, financial performance, results of operations, cash flow and financial condition or those of our customers and suppliers. +• +An impairment of goodwill and intangible assets could reduce our earnings. +• +We have experienced losses in the past and may not be able to maintain profitable operations. +• +Changes in foreign currency exchange rates could negatively affect our operating results. +Risks Relating to Our Common Stock +• +Our stock price could continue to be volatile. +20 +• +Future sales of our Common Stock by existing stockholders, executive officers or directors could depress the market price of our Common Stock and make it more difficult for us to sell stock in the future. +• +Because we do not intend to pay cash dividends on our Common Stock, an investor in our Common Stock will benefit only if our Common Stock appreciates in value. +• +Certain provisions in our Certificate of Incorporation and Bylaws and under Delaware law could make a third-party acquisition of us difficult. +General Risk Factors +• +We may face product liability claims for injuries resulting from the use of our products. +• +Performance of our products may affect our revenues, stock price and reputation. +• +Our ability to sell products could be adversely affected by competition from new and existing products and services. +• +Failure to achieve our financial and strategic objectives could have a material adverse impact on our business prospects. +• +If we lose our key personnel or are unable to attract and retain qualified personnel as necessary, our business could be harmed. +• +If our essential employees who are unable to telework become ill or otherwise incapacitated our operations may be adversely impacted. +• +Increases in demand for our products and services could require use to expend considerable resources or harm our customer relationships if we are unable to meet that demand. +• +We rely on information technology in our operations and any material failure, inadequacy, interruption or security breach of that technology could harm our ability to efficiently operate our business. +• +Security breaches and other disruptions could compromise our information, expose us to liability and harm our reputation and business. +• +Federal and state laws pertaining to healthcare fraud and abuse could adversely affect our business, financial condition and results of operations. +• +We may experience fluctuations in our financial results or fail to meet our financial projections. +• +We may require future additional capital. +• +Terrorist attacks, natural disasters, public health crises or other catastrophic events outside of our control may adversely affect our business. +• +Future sales of shares of our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new equity offerings. +Risk Factors +You should carefully consider the risks and uncertainties described below. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Changes in the Genomics Market May Adversely Affect our Business . +The genomics market has been the largest component of our overall molecular business segment for some time and the major driver of this market has been consumer genomics, which offers products and services to consumers to provide them with personalized health and genealogical information. The ancestry portion of this market may be maturing and our sales to customers with offerings in this market have been volatile. Our genomics revenues have been volatile due to changes in promotional strategies and purchasing patterns by one of our largest customers which serves the consumer ancestry and genetic testing market. This trend in the ancestry testing market may continue and revenues in this segment may continue to be volatile. +21 +In an effort to increase our molecular revenues, we have devoted increasing time and attention to expanding sales of our genomics products both domestically and internationally, including in the Asia-Pacific and other markets. While we believe these new markets represent large growth opportunities, there is no assurance that we will be successful in capitalizing on these opportunities or that we will be able to increase our international product sales consistent with our expectations. Factors that include, but are not limited to, the market acceptance of our products, available funding, cost containment strategies implemented by customers, increasing competition and regulatory constraints could limit sales of our genomics products into these international markets. To the extent that we are unsuccessful or limited in expanding our business in the Asia-Pacific or other new markets, our revenues and results of operations could be negatively affected. +Despite the challenges that we face in the ancestry segment of the consumer genomics market, we believe there is significant growth opportunity for our genomics products in the area of disease risk management (“DRM”), which includes genetic risk testing, prenatal testing, carrier screening, pharmacogenomics testing and population heath studies. +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products and Service Offerings. +Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as InteliSwab ® , OraQuick ® HIV Self-Test, OraQuick ® Ebola test and OMNIgene ® • GUT product offerings, and other new products or technologies that may be developed or acquired. In addition, our future revenues will depend on market acceptance of new uses for our saliva collection products, including for COVID-19 testing, and our new service offerings, such as the microbiome laboratory testing and analytical services we provide through Diversigen. To commercially market new uses of our products and to achieve market acceptance, we will likely be required to undertake clinical studies to validate the new uses for our products and spend significant funds to complete product development and clinical studies and then undertake substantial marketing efforts to inform potential customers and the public of the existence and perceived benefits of these products and services. In addition, governmental funding may be needed to help complete development, obtain required regulatory approvals, clearances or EUAs and create market acceptance and expand the use of these products and services. +There may be limited evidence on which to evaluate the market reaction to products and services that may be developed and our marketing efforts for new products and services or products with new uses may not be successful. The market for microbiome products and services is in its early stages and its future development and acceptance by our customers is uncertain. Also, we have started the process of developing and seeking 510(k) regulatory clearance for the InteliSwab® tests, and it is uncertain whether we will be successful in our development and validation efforts or whether these products will prove effective, receive applicable regulatory approvals and gain widespread acceptance in the marketplace. As such, there can be no assurance that any products or services will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. It is possible that our expenses to develop and market any such products, including, without limitation our InteliSwab ® tests, will exceed any benefit in revenues, which may be short-lived. In addition, other products that compete with ours may achieve 510(k) clearance earlier than we do, providing market advantages. +We May Not Realize Anticipated Revenue From Our InteliSwab® COVID-19 Rapid Test . +While we expect to continue to see significant demand for our InteliSwab® COVID-19 Rapid Test, other companies are working to produce or have produced rapid tests for COVID-19 which may lead to the diversion of customers, including governmental and quasi-governmental entities, away from us and toward other companies. Moreover, the dangers posed by COVID-19 may subside over time. A number of preventative vaccines have recently been approved for use in human populations by regulatory agencies in the U.S. and around the world. The uptake of these vaccines will likely limit the spread of COVID-19 and potentially reduce the market size for COVID-19 testing. +We expect that, if and when the current COVID-19 pandemic subsides, there could be significantly reduced demand for testing, and thus, for our InteliSwab® COVID-19 Rapid Tests. There is no guarantee that current or anticipated demand will continue, or if demand does continue, that we will be able to produce our InteliSwab® COVID-19 Rapid Test in quantities to meet the demand. A significant decline in demand for our InteliSwab® COVID-19 Rapid Test without a corresponding increase in our other businesses could have a material, adverse effect on our results of operations, cash flow and financial position. +The COVID-19 Pandemic Continues to Cast Uncertainty Over Our Consolidated Results of Operations, Financial Position and Cash Flows, While the Consequences of COVID-19 and the Governmental Response to Contain the Pandemic and Pandemic Related Macroeconomic Impacts Could Negatively Affect Our Operations and Share Price . +Although we have experienced heavy demand for our InteliSwab ® tests and certain specimen collection devices for use in COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on our performance, the duration and level of the demand for COVID-19 testing is highly uncertain. in addition, the COVID-19 pandemic has negatively impacted our ability to +22 +provide our HIV self-tests in Southern and Eastern African countries due to logistics challenges and, in our Molecular Solutions segment, COVID-related disruptions in clinical and research work, particularly in the academic market, had reduced demand for our products. We believe the COVID-19 pandemic's continued impact on our consolidated results of operations, financial position and cash flows will be primarily driven by; (i) the severity and duration of the COVID-19 pandemic; (ii) the CCOVID-19 pandemic's impact on the U.S. healthcare system and the U.S. economy; (iii) the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic, including the development and deployment of vaccine, and (iv) the COVID-19 pandemic's impact on global clinics, research markets and global logistics. Each of these factors are difficult to predict and the nature, length and severity of any adverse consequences as a result of any given factor are uncertain. +Management has closely monitored the impact of the COVID-19 pandemic, with a focus on the health and safety of the Company’s employees and business continuity. +In response to, or as a result of, the current COVID-19 pandemic and emergence of variants, we may experience, among other things, voluntary or mandated temporary closures of one or more of our facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on our supply ‎chain and distribution channels; the potential of increased network vulnerability and risk of data loss resulting from ‎increased use of remote access and removal of data from our facilities; and required reallocation or adjustment of resources, which may ‎impact our business plans and product offerings. In addition, the direct or indirect impacts of ‎COVID-19 may extend to disrupt our suppliers, partners, manufacturers, customers and other ‎stakeholders, which in turn could materially adversely affect our business, results of operations or financial condition. Any change or disruption in operations could impact and have a material adverse effect on our operations and/or results from operations. In addition, the re-introduction of voluntary or mandated efforts ‎to slow the spread of COVID-19 could impact the Company’s operations and sales. If portions or all of our, our partners’, or our customer’s operations are disrupted or suspended as a result of preventative or reactionary ‎measures in response to the ongoing spread of COVID-19, it could have a material adverse impact on our ‎profitability, results of operations, financial condition and share price. Further, there continue to be significant economic and social impacts of the COVID-19 pandemic, including rising inflation rates, continued levels of higher unemployment, and market volatility, among other impacts; any of which may have an impact on consumer behavior, including use of our products.‎ +Given the uncertainties associated with the ongoing COVID-19 pandemic, including ‎the uncertainty surrounding the remaining duration and outcome, COVID-19 variants and vaccine efficacy, we are unable to estimate the full impact of the COVID-19 pandemic on its business, financial condition, results of operations, and/or cash flows; however, the impact could be material. +Marketing of Our COVID-19 Tests and Collection Kits Under EUAs From FDA Is Subject To Certain Limitations and We Are Required To Maintain Compliance With The Terms of The EUA, Among Other Things, And The Continuance of The EUAs Is Subject To Government Discretion. +On February 4, 2020, the U.S. Department of Health and Human Services (“HHS”) issued a declaration that the threat to public health posed by COVID-19 justifies the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of SARS-CoV-2. Under Section 564 of the Food, Drug, and Cosmetic Act (“FDCA”), because HHS has issued this declaration, the FDA Commissioner is authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA reflects an FDA conclusion that based on the totality of scientific evidence available to the FDA, it is reasonable to believe that the product may be effective in diagnosing COVID-19, the known potential benefits of the product outweigh the known and potential risks, and there is no adequate, approved, and available alternative to the emergency use of the product. +During 2020, our ORAcollect ® ·RNA and OMNIgene ® ·ORAL collection devices were included in EUAs granted by the FDA to certain third parties for use in the detection of SARS-CoV-2 and we have separately obtained EUAs for these products. Several other laboratories are pursuing the inclusion of our specimen collection devices for use with their SARS-CoV-2 assays. In addition, we obtained three EUAs for our new COVID-19 Rapid Tests. Although there are certain regulatory requirements the FDA has waived for the duration of the EUAs, we remain subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events. As part of the conditions of authorization, OraSure was required to conduct a clinical study in a pediatric population ages 2-14 and an asymptomatic population in addition to launching an app for consumers to report their test results to public health jurisdictions. OraSure has initiated the clinical studies as required by the condition of authorization. OraSure has successfully completed the clinical study in the pediatric population and the development of the InteliSwab ® Connect app. +As with other FDA-regulated products, issues could emerge during the course of the marketing and use of our products under an EUA that could impact our ability to continue the sale and distribution of these products (for example, compliance or product performance +23 +issues). The applicable EUAs remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety. If that were to occur then in order market our diagnostic products or collection kits for the purpose of detecting COVID-19, we would be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations for device manufacturers, including the Quality System Regulation under 21 CFR Part 820. It is possible that we may not be able to obtain those clearances or approvals in a timely manner, or at all, and that one or more of our competitors may obtain the necessary clearances or approvals for their products before we do. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications including testing for SARS-CoV-2. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. In addition, demand for our new rapid tests for SARS-CoV-2 or PrEP adherence may not develop consistent with our expectations. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on our future sales growth. +We Expect to Face Increasing Competition From Other Providers of Diagnostic Tests, Sample Collection Products and Molecular Laboratory Services. +Our rapid point-of-care tests compete with other point-of-care products made by our competitors. This competition is particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test and our HIV Self-Test outside of the US. The Oragene ® product line sold by our subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs and will likely face additional competition from collection devices similar in design and operation to our Oragene ® and ORACollect ® products. There are a number of products currently in or expected to enter the market for the detection of antigen to SARS-CoV-2 that will compete with our InteliSwab® COVID -19 diagnostic test. +Our genetic and microbiome laboratory services business is expected to face increasing competition, primarily from large commercial reference laboratories, hospital-based laboratories and specialty laboratories. We believe there is significant opportunity in the markets for these services, particularly the microbiome market which is still in the early stages. As these markets evolve and expand, we expect competition for genomic and microbiome laboratory services to intensify. +There is significant competition, including from other companies and governmental organizations, who make and distribute rapid tests for COVID-19. Many of these entities have substantially greater resources (including capital and personnel) than we do. Even if we are successful in marketing our InteliSwab® tests, there is no guarantee that competitors will not take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority. +A number of our competitors are making investments in competing technologies, products and services, and several may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and service offerings, aggressively discount prices for their products and services and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created, or may decide to create, their own products to compete with ours. If our competitors take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers use internally developed or acquired sample collection devices or services in order to reduce costs. +Our Product Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in Our Operating Results. +24 +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +Our Inability To Expand International Sales Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. We are also working to expand international sales of our professional HIV and HCV products and our molecular collection kits. We also believe there is a significant opportunity for international sales of our InteliSwab® COVID-19 Rapid Test once the necessary studies and registrations are complete. +While we believe international sales of these and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will materialize, continue or increase. Among other factors, competition from competitive lower priced products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not occur or increase or if we are otherwise unable to expand international sales of our products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If we are unable to obtain or continue this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $45.3 million, or 24%, of consolidated net r evenues in 2021, $40.9 million, or 24%, of consolidated net revenues in 2020 and $47.3 million, or 31%, of consolidated net revenues in 2019. In addition, our subsidiary DNAG, which accounted for $130.3 million or 56% of consolidated net revenues in 2021, is operated in Canada. In 2019 we also acquired Novosanis, a company based in Belgium, and we may acquire other foreign companies as part of our business development efforts. +A number of factors could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Cultural and language differences that make international operations and business management more difficult; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements, including compliance with applicable customs regulations and the need to obtain or maintain regulatory approvals, registrations or reimbursement approvals for our products; +• +Trade protection measures, additional trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +25 +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Differing tax laws across jurisdictions, as well as changes in those laws; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Exposure to infectious disease and epidemics, including the effects of the coronavirus outbreak on our business operations in geographic locations impacted by the outbreak and on the business operations of our customers and suppliers; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our OraQuick ® HIV tests and a portion of the assembly of our InteliSwab® COVID-19 Rapid Tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. In addition, the ongoing coronavirus pandemic has resulted in increased government-imposed travel restrictions and extended shutdowns of certain businesses in the affected locations as well as logistics delays due to the global logistical crisis from the pandemic. These or any further political or governmental responses to pandemic diseases could result in social, economic and labor instability of foreign countries, which could have a material adverse effect on our business, results of operations and financial condition. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our Risk and Liability. +From time to time, we receive funding from the U.S. government and we sell some of our products to the federal government. Historically, we have sold a number of our products to the government under contracts with the General Services Administration and the Veterans Administration. +During the third quarter of 2021, we entered into a contract with the Defense Logistics Agency ("DLA") for the procurement of our InteliSwab ® COVID-19 Rapid Test for over-the-counter use, with an estimated value of $205 million. During the same quarter, we entered into a contract with the BARDA to provide us with up to $13.6 million in funding to obtain FDA 510(k) clearance and CLIA waiver for our InteliSwab® test. In September 2021, we entered into a contract with the U.S. Department of Defense, in coordination with the HHS for $109 million in funding to build additional manufacturing capacity in the United States for our InteliSwab ® test. +As a result of our U.S. government funding and product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. For example, the government has the right to terminate one or more of these contracts at its convenience even if we have not defaulted in any of our obligations. +26 +As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of impropriety related to such contracts are made against us. +Our Inability to Manufacture Products in Accordance with Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +In June 2021, we received three FDA EUAs for our InteliSwab ® COVID-19 Rapid Tests. Although there has been significant demand for this product in 2021, we have experienced some challenges in the technology transfer of our test in accordance with applicable specifications. As a result, we have not been able to meet the demand for our product. While we have now implemented key process automation steps which have resolved prior issues, we are currently manufacturing InteliSwab ® at rates well below our installed capacity as we are scaling up production. Therefore, significant variability in our output can be expected As a result, our future revenues with this test may not meet expectations and could be adversely affected. +Our Business Will Suffer if We Do Not Effectively Manage Challenges to Our Manufacturing Processes and We May be Unable to Successfully Scale-Up Manufacturing of Our Products in Sufficient Quality and Quantity to Meet Demand, Which Would Negatively Impact Revenue Expectations. +Challenges in the manufacture of our products in the face of significant demand for our InteliSwab® COVID-19 Rapid Tests have adversely affected, and could in the future adversely affect, our operating efficiency and results of operations. We have contracted with the U.S. Department of Defense to add additional manufacturing capacity of our InteliSwab® COVID-19 Rapid Tests, however, we face risks in scaling up and building new manufacturing facilities, including with respect to expanding our overall production capacity as well as moving production to new facilities, that could increase costs, divert management attention and reduce our operating results, with no guarantee of success. The expansion of our manufacturing and scale-up of additional commercial production and capacity involves significant risks and challenges, including, but not limited to, design and construction delays, implementation of new systems and expertise and cost overruns. There can be no assurance that our scale-up and manufacturing expansion will be operational, on time, or contribute the production capacity that we anticipate, and we cannot guarantee that any such scale-up will operate at costs acceptable to us or that demand for our products will remain at levels high enough to meet the return on investment necessary to justify our investment in these projects. +As we increase our manufacturing capacity to meet market demand or begin to manufacture new products at scale, we may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. In addition, we could experience delays in production as we increase our manufacturing capacity or begin to manufacture new products that may result in our inability to meet product demand as the products ordered by our customers being on back-order as initial production issues are addressed. If we experience production delays or inefficiencies, a deterioration in the quality of our products or other complications in managing changes to our manufacturing processes, including those +27 +that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, we may not achieve the benefits that we anticipate from these actions when expected, or at all, and our operations could experience disruptions, our manufacturing efficiency could suffer and our business, financial condition and results of operations could be materially and adversely affected. Any such delays could allow our competitors to seize market advantage. In addition, global supply chain and workforce challenges related to the COVID-19 pandemic increase the risks in scaling-up manufacturing as global supply challenges may increase the difficulty in obtaining necessary materials and a dynamic and unpredictable labor market may make the necessary labor and staffing challenges more difficult. If we are unable to successfully meet our manufacturing challenges, we may be unable to meet the demand for our InteliSwab® COVID-19 Rapid Tests, which could have a material, adverse effect on our reputation, revenues, results of operations, cash flow and financial position. +Our Business Results Depend on our Ability to Manage Disruptions in our Domestic and Global Supply Chains and Distribution Channels. +Our ability to meet our customers needs and achieve our financial objectives depends on our ability to maintain key manufacturing, supply and distribution arrangements. The loss or disruption of such manufacturing and supply arrangements could, in the future, interrupt our ability to obtain necessary raw materials and manufacture our products. Such disruptions could result from labor disputes, financial liquidity, natural disasters, extreme weather conditions, public health emergencies and pandemics, supply constraints and general economic and political conditions that could limit the ability of our suppliers to timely provide us with raw materials and components and distribute our products in a timely manner in accordance with applicable quality requirements. Disruptions in the global supply chain could also delay or preclude the ability of our distributors to sell and deliver our products to customers. Recently, the global supply chain has experienced significant disruptions caused by the COVID-19 pandemic, resulting in shortages of labor and equipment. These conditions, if not mitigated or remedied in a timely manner, could delay or preclude delivery of raw materials needed to manufacture our products or delivery of our products to customers, particularly in international markets. This in turn could have an adverse impact on our business, financial condition, results of operations or cash flows. +Certain of Our Products Depend on Components From a Sole-Source Supplier, the Loss of Which Would Cause Us to be Unable to Deliver Such Products. +Our Intercept i2 ® he collection device is manufactured and supplied under a long-term agreement with Thermo Fisher, the sole-source supplier for these products. If Thermo Fisher were unable or unwilling to supply the necessary components for the manufacture of the Intercept i2 ® he collection devices, we would be unable to produce this product or offer it to our customers. Any interruption in, or change in the cost or quality of, the supply of the necessary raw materials, manufacturing services, product and process development, or other materials necessary to manufacture the product could adversely impact the efficacy of the product and negatively affect our reputation with our customers. If our sole source supplier were to be acquired by a competitor, it may elect not to provide us with the product. If the sole source supplier were to otherwise cease supplying us, go out of business, or were unable to meet its obligations in a timely fashion or at an acceptable price, or at all, we may be forced to incur higher costs to obtain the necessary raw materials elsewhere, if we could even source such materials at all. +Our U.S. Government Contracts May Affect our Intellectual Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including our contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States. +Our U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, +28 +unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on our business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +We May Not be Able to Fulfill Our Obligations Under Government Contracts, Which Could Result in Reduced Sales and Profits, Contract Penalties or Terminations, and Damages to Customer Relationships. +If we are unable to successfully scale-up our manufacturing of our InteliSwab® COVID-19 Rapid Tests, we may be unable to meet our obligations under our government contracts. Our inability to fulfill our obligations government contracts could result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships, leading the government to turn to other companies to fulfill the contract. +Risks Relating to Our Industry, Business and Strategy +Our operations are subject to the general risks associated with acquisitions, divestitures, and other strategic transactions, including our ongoing, Board-led strategic review. +We have made several acquisitions and divestitures in recent years. We regularly review strategic opportunities to grow through acquisitions and to divest non-strategic assets. In January 2022, we announced that our Board of Directors intends to explore and evaluate a broad range of strategic alternatives with the goal of maximizing value for stockholders. This exploration of strategic alternatives may not result in any definitive transaction or enhance stockholder value. This process may also create a distraction and diversion of management’s attention from other business concerns, or result in the loss of key employees, which could lead to uncertainty that may adversely affect our operating results, business or investor perceptions. Any or all of these risks could impact our financial results and business reputation. +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. We may not be able to compete successfully in such a consolidated industry. We believe industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful Offerings. +In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new or enhanced products and services. The research and development process generally takes a significant amount of time from inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product or service in which we have invested substantial time and money. +Successful products and services can require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. Similarly, regulatory clearances or registrations, such as a CLIA certification, and compliance with industry guidelines, may be required in order to provide competitive laboratory services. As noted above, regulatory authorities may not issue such approvals, clearances or certifications or may substantially delay or condition such action. Even if a product or service is developed and all applicable regulatory approvals, clearance or certifications are obtained, there may be little or no market for the product or service and entry into or development of new markets for our products and services may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product or service. Other factors that could affect the success of our efforts include +29 +our ability to manufacture products or provide laboratory services in a cost-effective manner and whether we can obtain necessary intellectual property rights and protection in the markets where the product or service is sold. +If we fail to develop and gain commercial acceptance for our products and services, or if competitors develop more effective products and services or a greater number of successful new products and services, customers may decide not to purchase our products and services or may purchase and use products and services developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flow and business. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +Since the beginning of 2019, we have acquired several companies through which we have gained access to new technologies, products and services which are complementary to our existing business and aligned with our long-term business strategy. We will likely continue to pursue strategic acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products, services and/or technology into our business; +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +We may have difficulties in coordinating geographically separate organizations; +• +We may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• +An acquisition may result in a diversion of resources from our existing products, business and technologies; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +To the extent we agree to pay contingent consideration for an acquisition, if and how much of such consideration we are required to pay may be subject to dispute, resulting in the distraction of our management team and the incurrence of legal costs; +• +An acquisition may result in employee anxiety, morale and/or engagement issues; +• +An acquisition may result in disparate information technology, internal control, financial reporting and record-keeping systems; +• +An acquisition may result in new partners or customers who may operate on terms and programs different than ours; +• +An acquisition may result in employees not familiar with our operations; +• +An acquisition may result in new products and services, including the risk that any underlying intellectual property associated with such products and services may not have been adequately protected or that such products and services may infringe on the proprietary rights of others; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +30 +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +There Are Risks Relating To Our Acquisitions of Diversigen, Novosanis and UrSure. +The success of the acquisitions will depend, in part, on our ability to successfully combine and integrate our legacy business with those businesses acquired. The integration of the businesses with our existing business can be complex, costly and time-consuming processes. It is possible that a number of factors, including, without limitation, the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruptions of ongoing businesses or inconsistencies in standards, controls, procedures and policies, could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisitions. If we experience difficulties with the integration process, the anticipated benefits of the acquisitions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the Company for an undetermined period following the acquisitions. +As a general matter, the market for microbiome laboratory testing and analytical services provided by Diversigen is at an early stage and is still developing. In addition, the Colli-Pee ® urine collection devices manufactured and sold by Novosanis are relatively new products that are not yet widely accepted by customers. There is no assurance that we will be successful in creating or expanding demand for these services and products. To the extent that the markets for these services and products fail to develop or increase, our revenues and results of operations could be adversely affected and we may not meet our growth objectives. +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of certain of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. In addition, the reimbursement approval process may delay the market introduction of our products. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to lower overall federal healthcare spending. The U.S. government recently enacted legislation that eliminated what is known as the “individual mandate” under the Affordable Care Act and may enact other changes in the future. The ultimate content and timing of any of these types of changes in other healthcare reform legislation and the resulting impact on us are impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +31 +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the Centers for Disease Control and Prevention, or CDC, issue diagnostic testing guidelines or recommendations, which can affect the usage of our HIV and HCV tests or other diagnostic products. For example, past sales of domestic professional OraQuick ® HIV tests have decreased in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which our OraQuick ® rapid HIV and HCV testing products or other products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the US public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use our products. In international markets, we often sell products such as our OraQuick ® HIV Self-Test to or through foreign governmental agencies or parties funded by such agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries to pay for the products and services they purchase. These research customers also purchase our genomic and microbiome laboratory tests and analytical services. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government or other funding as a result of legislative or regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products and services. +Risks Relating to Our Reliance on Third Parties +The Use of Third Party Supply Sources For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick ® HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third-party suppliers. We have contracted with third parties in Thailand for parts of the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, our subsidiary, DNAG, uses three third-party manufacturers to supply virtually all of its products, including its Oragene ® and ORAcollect ® lines of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +The COVID-19 pandemic and the measures taken to contain the spread of the virus, have disrupted, and could continue to disrupt, the normal operations of our third-party suppliers. Our third-party suppliers may not have the personnel, raw materials, capacity or capability to manufacture our products according to our schedule and specifications. To the extent any such production and distribution interruption or closures occur and continue for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations. If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our +32 +products into one or more markets or completely prevent us from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Further, our ability to enter into agreements with additional strategic partners depends in part on convincing them that our products can help achieve and accelerate their goals and efforts. Our strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +We have limited access to our collaborator’s confidential corporate information and sudden unexpected changes in ownership or strategy or other material events affecting a collaborator of which we are not made aware of in a timely manner, or at all, could adversely impact our relationship; +• +Our collaborators may be acquired by another company, sell the part of their business related to our collaboration, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Our collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +33 +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues or operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, our competitors may develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. Employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. +For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through other unforeseen means. Although we have licensed certain technology for use in our microbiome laboratory services offerings and we have developed proprietary know-how that we use in this business, we do not currently hold any patents covering the laboratory processes and analytical methods offered to our customers. The absence of patent protection in this or other parts of our business may make it more difficult to protect our intellectual property. In addition, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. An adverse determination may limit or restrict the type of work that certain employees involved with such products may perform. +We may collaborate with universities and governmental research organizations or receive funding for our products from government agencies. As a result, one or more of these entities may acquire part of the rights to any inventions or technical information derived from our collaboration or funding relationship with them. +34 +To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. +We May Become Involved in Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products, Provide Services or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product and service areas, and additional patents may be issued to third parties relating to our product and service areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products or services. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or services or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products or services. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or services or stop selling them if it is ultimately determined that our products or services infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, our involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +It could consume a substantial portion of managerial and financial resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products or services; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or services or other products or services we may develop or acquire; +• +We may be required to alter our product or services, given the proprietary rights of others; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products or services; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products or services. +We may indemnify some customers and strategic partners under our agreements with such parties if our products, services or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products or services may contain technology provided to us by other parties, such as universities, contractors, suppliers, customers or collaborators, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under Federal law, +35 +various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +Regulatory Risks +The Need to Obtain Regulatory Approvals Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products and services are subject to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products and the processes and procedure for our laboratory services. Our practice is to train our employees on the legal requirements applicable to our business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances, premarket authorizations can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances, other premarket authorizations or certifications can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product or a laboratory certification will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, premarket authorization or certification that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive such approvals, clearances, premarket authorization or certification could have a material adverse effect on our business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the essential requirements of the IVDD through May 25 th 2022. Beginning May 26 th 2022, manufacturers will be required to comply with the in vitro diagnostic regulations (IVDR). Notified Bodies need to be designated to review and certify products based on codes. If a Notified Body is not designated to review a certain code, they will not be able to certify those products. Currently there are extensions published for certain product that have a declaration of conformity prior to May 26, 2022; however, class A non-sterile products are not included in the extension. We have obtained the CE mark for several of our existing products. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU. +In addition, we or our distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. We may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable our customers to access interested funding sources for our products. We may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit our ability to market and sell our products in the relevant country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and record keeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In +36 +addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for clinical diagnostic use and they are labeled “For Research Use Only”, or RUO. If the FDA were to disagree with our RUO designation of a product, we could be forced to stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. +Our Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval and/or impose new or additional requirements as part of the approval process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Our Inability to Manufacture Products in Accordance With Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which we advertise our products. As a device manufacturer, we are required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value we have made to physicians and teaching hospitals and any +37 +physician ownership or investment interest in the Company. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +In the past, the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) has generally affected us indirectly, as the Company is generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities. We have in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. Moreover, the potential for enforcement action against us is now greater, as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of our business. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Failure to Comply With Data Protection Requirements or Privacy Laws Could Increase Our Costs . +The European Union (“EU”) has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We are implementing a plan to ensure compliance with these new requirements. [AG4] Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as the uncertainties that accompany new, comprehensive legislation. +We are also subject to the California Consumer Privacy Act of 2018 (“CCPA”), which took effect on January 1, 2020. The CCPA imposes extensive new requirements and protections on the processing of personal data, aimed at giving California consumers more visibility and control over their personal information. Failure to comply with the CCPA or other data processing or security laws, or any changes in these laws, could adversely impact our business and our business plans. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests, or LDTs, but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by the FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies will be adopted with respect to regulating LDTs. FDA has been working with regulatory advocacy groups (AdvaMed) to bring forward regulations specifically for in vitro diagnostic tests including LDTs called the VALID Act. In 2021, the VALID Act was introduced to Congress and will change IVDs and LDTs to in vitro clinical tests (IVCT). The proposed regulation will give FDA oversight of LDTs once it becomes law. +38 +Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDTs and reduce demand for DNAG’s products and adversely impact our revenues. +In 2019, the Department of Justice (“DOJ”) indicted a number of telemedicine companies and cancer genetic testing laboratories for allegedly submitting fraudulent insurance claims to Medicare. A number of these companies were customers of DNAG. As a result of these activities, the FDA has issued letters to genetic testing laboratories indicating that it plans to increase oversight of this market which has caused some of these companies to stop providing testing options or to change how they are reporting the information provided by the testing. The activities have negatively affected this market and there is a risk that these enforcement actions will continue to negatively affect this market by forcing laboratories to either stop offering such services or restricting the use of such services. Such a reduction in testing could result in decreased sales of our DNA collection devices. +Our International Sales Create Potential Exposure Under Anti-Corruption Laws . +We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act (the “FCPA”) and similar foreign laws. In 2021, approximately $45.3 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject us to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. We have operations, enter into agreements with third parties, and make sales in countries known to experience corruption. Further international expansion, including the acquisition of foreign entities, may create increased exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of operations and financial condition. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +Economic Volatility and Disruption, Including Those Related To The COVID-19 Pandemic, Could Adversely Affect Our Business, Financial Performance, Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers . +Global and U.S. markets and economies have experienced extreme volatility and disruption following the global outbreak of COVID-19 that has continued throughout 2021. Many economists and major investment banks have expressed concern that the continued spread of the virus globally has led to a world-wide economic downturn. Volatile economic conditions may occur again or continue in the future. +Although the severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, impacts that we may experience include, but are not limited to: +• +a slowdown or stoppage in the supply chain of the raw materials and components used to manufacture our products; +• +interruptions or delays in domestic and/or international shipment of our products to our distributors and customers; +• +interruptions in normal operations of certain end-use customers that could result in reductions in demand for our products; +• +disruptions to our operations, including a shutdown of our facilities or product lines; restrictions on our operations and sales, marketing and distribution efforts; and interruptions to our research and development, manufacturing, clinical/regulatory and other important business activities; +• +shutdown or interruption of our manufacturing facilities due to contamination and costs incurred to clean and disinfect a facility following contamination; +• +inefficiencies and increased costs in our production and shipping processes due to premium pay for manufacturing and certain other employees as well as social distancing and personal protective equipment requirements; +39 +• +limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions; +• +a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties; +• +an increase in exposure to credit losses for customers adversely affected by the COVID-19 pandemic; and +• +an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, including acquisitions. +These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute our products or supply us with necessary equipment, raw materials or components. Any or all of these effects would have an adverse effect on our operations, business, financial condition and results of operations. +Although there are positive signs, the duration of the COVID-19 pandemic is still unknown, and it is difficult to predict the full extent of potential impacts the pandemic will have in the future on our business, operations, and financial results, or on our customers, suppliers or logistics providers, or on the global economy as a whole. It is uncertain how materially the COVID-19 pandemic will affect our global operations, particularly if the effects continue or get worse over an extended period of time. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of an economic recovery. +An Impairment of Goodwill and Intangible Assets Could Reduce our Earnings . +At December 31, 2021, our consolidated balance sheet reflected approximately $40.3 million of goodwill and approximately $14.3 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles (“U.S. GAAP”) require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, such as intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment review often cannot be done at the level of the individual asset and it must instead be applied to a group of assets. For the purpose of our annual goodwill impairment testing based on the current circumstances of how we manage or business, this group of assets is the Company as a whole. If we determine that any of our goodwill or intangible assets were impaired, we will be required to take an immediate charge to earnings and our results of operations could be adversely affected. +We Have Experienced Losses in the Past and May Not Be Able To Maintain Profitable Operations . +We experienced annual net losses during the five years prior to 2015 and again in 2020 and 2021. In addition, as of December 31, 2021, the Company had an accumulated deficit of $120.5 million. Even though we achieved profitability in 2015 through 2019, there can be no assurance that we will be able to sustain his profitability in the future. +Our ability to continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• +Our ability to continue growing sales of our molecular collection products and related genomic and microbiome laboratory services; +• +Our ability to produce and successfully commercialize our InteliSwab ® COVID-19 Rapid Tests; +• +Our ability to grow our OraQuick ADVANCE ® HIV 1/2 test in the United States and expand sales of our OraQuick ® HIV Self-Test internationally; +• +Changes in customer buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to expand our business through the acquisition of other companies or technologies or through internal development of new or improved products; +40 +• +Our ability to improve manufacturing efficiencies and reduce cost of goods sold; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• +Failure to achieve our revenue growth targets; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or against us. +Changes in Foreign Currency Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and the revenues and expenses of our subsidiary Novosanis are recorded in Euros. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting our consolidated financial results. Our expectation is that the businesses of our foreign subsidiaries will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect the revenues and expenses of our foreign subsidiaries and the translation of those financial results into U.S. dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HIV, HCV and Molecular Solutions products and our OraQuick ® In-Home HIV test and HIV Self-Test; +• +Our efforts to expand sales of our genomic and microbiome laboratory service offerings; +• +Our efforts to produce and commercialize our InteliSwab Covid-19 Rapid Tests; +• +Future announcements concerning us and our products or services, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions; +• +Clinical results with respect to our products or services or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +41 +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or services, or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products and services; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products or services; +• +Legislative developments and industry or competitive trends; +• +Biological or medical discoveries; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +• +Terrorist attacks, civil unrest, war and national disasters, including pandemics. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Stock Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common +42 +Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +General Risk Factors +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Moreover, there is no assurance that our products will not be included in unethical, illegal or inappropriate research or applications, which may in turn put us at risk of litigation. Regardless of merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling the InteliSwab ® Covid-19 Rapid Test and the OraQuick ® In-Home HIV test in the United States OTC market, and we offer HIV Self-Tests to consumers internationally. We believe the sale of products for use by consumers increases our potential exposure to product liability and other claims. +Performance of Our Products May Affect Our Revenues, Stock Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic or specimen collection products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products and Services. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and become more widely known, and as new products and services reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products and services enter the market, our products and services may become obsolete or a competitor’s products and services may be more effective or attractive or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining +43 +regulatory approval for new products and services that would render our technologies, products and services obsolete or otherwise commercially unattractive, or introduce or commercialize such products and services before we can do so. If we fail to convince our customers of the advantages and economic value of our products and services or otherwise maintain and enhance our competitive position, our customers may decide to use products and services developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition and results of operations. +We also face competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products and services or continue growing our business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, service, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and services and develop new markets could have a material adverse effect on our business and prospects. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and scientific staff. Our business may be harmed by the loss of a significant number of our executive officers or senior managers. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products, laboratory services and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We generally do not enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively produce, market and sell our products and services, to meet the demands of our strategic partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. +If Our Essential Employees Who Are Unable To Telework Become Ill or Otherwise Incapacitated, Our Operations May Be Adversely Impacted. +As a medical device manufacturer, we fall within a “critical essential infrastructure” sector, specifically the “Healthcare/Public Health” sector, and are considered exempt under various stay at home/shelter in place orders. Accordingly, our employees may continue to work because of the importance of our operations to the health and well-being of citizens in the states in which we operate. Consistent with these Stay at Home Orders, we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures, including social distancing, face covering and increased sanitation standards. We are following guidance from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure, based on the direct threat that such exposure may present to our workforce. We continue to address other unique situations that arise among our workforce due to the COVID-19 pandemic on a case-by-case basis. While we believe that we have taken appropriate measures to ensure the health and wellbeing of our “essential” employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or that they may otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted. +44 +Increases in Demand for Our Products and Services Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We Are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products and services, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new products, machinery or new manufacturing or laboratory facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing or laboratory equipment and facilities may require FDA approval or government or industry certification before they can be used to manufacture our products or provide laboratory services. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products and services could be adversely affected. +If we are unable to develop necessary manufacturing or laboratory capabilities in a timely manner, our sales could be adversely affected. If we fail to increase these capabilities in a cost effective manner or if we experience lower than anticipated yields or production or performance problems as a result of changes that we make in our manufacturing or laboratory processes to meet increased demand, we could experience delays or interruptions and increased costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products and services could also harm our customer relationships and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, including for management of inventory, processing and analyzing laboratory specimens, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, process and analyze specimens in our laboratories, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales or the provision of laboratory services and reduced efficiency of our operations. Significant expenditures could be required to remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +Cyber-attacks could result in unauthorized access to our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. The Company has been victimized by a spear phishing attack, and such attacks are an ongoing threat. If successful, these activities could lead to the disclosure of intellectual property or personally identifiable information, which could lead to financial harm and cause reputational damage. We have taken additional steps designed to improve the security of our networks and computer systems. +45 +In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, voyeur or malfeasance. +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt our operations, require significant management attention and resources to remedy any damages that result, and damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business. +As our activities continue to evolve and expand, we may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact our business either directly or indirectly. Our failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact our business and future business plans. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our operating results. +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +We May Require Future Additional Capital. +46 +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products or services; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products and services; +• +The costs and timing of the expansion of our manufacturing and laboratory capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments. +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks, Natural Disasters, Public Health Crises, Political Unrest or Other Catastrophic Events Outside of Our Control May Adversely Affect Our Business. +Terrorist attacks, natural disasters, including disasters attributable to climate change impacts, public health crises, political unrest or other catastrophic events outside of our control, including pandemics, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for our products. For example, the COVID-19 outbreak has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, including the United States. This outbreak has resulted in, and until fully resolved is likely to continue to result in, among other things: (i) restrictions on travel, government mandated social distancing measures, and the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories; (ii) significant disruption to the business of many companies, including our customers and suppliers, as well as layoffs of employees; (iii) reduction or termination by public health and other customers of infectious disease testing programs, including for HIV and HCV, and a reallocation of personnel and monetary resources from these programs to programs intended to address COVID-19; (iv) reduction or termination of clinical and research studies by academic and other entities that use our molecular collection products and laboratory services; and (v) rapidly evolving proposals and actions by state and federal governments to address the problems being experienced by markets, businesses and the economy in general, which may have unintended consequences or may not adequately address such problems. These events have disrupted, and threaten to continue to disrupt, our normal operation, the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. Despite our efforts to manage and mitigate the impact of these events on us, it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty under applicable laws or regulations that impact us. It is clear that these types of events are impacting and will, for at least some time, continue to impact our product development and operation and in many instances the impact may be adverse and may be material. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our business and results of operation. In addition, the impacts of political unrest, including as a result geopolitical tension, such as a deterioration in the relationship between the United States and China or escalation in conflict between Russia and Ukraine, including any resulting sanctions, export controls or other restrictive actions that may be imposed by the US and/or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability and volatility in the global markets, which may have an adverse impact on our business or ability to access the capital markets. +Various types of disasters, including earthquakes, fires, floods, riots, acts of terrorism and pandemics, may also affect our manufacturing facilities and computer systems, and increase our cybersecurity risks. Although we have business interruption insurance, our facilities, +47 +including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, including pandemics, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. Moreover, we may incur incremental costs following an unforeseen event which could adversely affect our results of operation. +Future Sales of Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. Unresolve d Staff Comments. +None +ITEM 2. Pr operties. +We own a 48,000 square foot facility which is OraSure’s primary corporate office and manufacturing facility, a 31,700 square foot facility that houses our sales and marketing, research and development, human resources, and regulatory and quality offices, and a 33,500 square foot facility which is used for manufacturing activities. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse space on an as-needed basis, including a 70,000 square foot warehouse in Bethlehem Township, Northampton County, Pennsylvania. Additionally, in January 2022, we entered into an agreement to lease a 96,010 square foot facility in York, Pennsylvania, which is scheduled to commence during the first quarter of 2022 and will be used for manufacturing activities. Our subsidiary, DNAG, also leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, manufacturing, distribution, research and development, and regulatory and quality operations. Our other subsidiaries, Diversigen and Novosanis, also lease facilities for their operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +In March 2021, we filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum has filed an answer to the initial complaint, asserting that its device does not infringe our patent and that our patent is invalid. In August 2021, we amended our complaint to add a second patent to this litigation. Spectrum responded to our amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation. We believe Spectrum's counterclaims are without merit and we filed a motion to dismiss both claims in October 2021. We are seeking injunctive relief and damages in this matter. In January 10, 2022, the Court assigned a new judge to preside over the matter, which vacated all dates for the trial. Spectrum filed their reply to our motion to dismiss on January 11, 2022. Though all other dates are pending, the Court has set the hearing for the motion to dismiss for March 30, 2022. +ITEM 4. Mine Safe ty Disclosures. +Not Applicable. +48 +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “OSUR”. On February 21, 2022, there were 293 holders of record and approximately 40,810 holders in street name of our Common Stock, and the closing price of our Common Stock was $7.97 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number of +shares purchased +Average price +paid per Share +Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar value) +of shares that may yet be +repurchased under the plans +or programs (1, 2) +October 1, 2021 - October 31, 2021 +— +(3) +$ +— +— +11,984,720 +November 1, 2021 - November 30, 2021 +323 +(3) +9.98 +— +11,984,720 +December 1, 2021 - December 31, 2021 +21,027 +8.81 +— +11,984,720 +21,350 +— +(1) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no commitment to purchase any shares under this plan. +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index for the period from December 31, 2016 through December 31, 2021. The graph assumes that $100 was invested on December 31, 2016 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +49 +The Nasdaq Composite Index was chosen because it is a broad index of companies whose equity securities are traded on Nasdaq. The Nasdaq Biotechnology Index was chosen because it includes a number of our competitors. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +Fiscal year ending December 31, +2016 +2017 +2018 +2019 +2020 +2021 +OraSure Technologies, Inc. +100.00 +214.81 +133.03 +91.46 +120.56 +98.97 +NASDAQ Composite +100.00 +129.64 +125.96 +172.17 +249.51 +304.85 +NASDAQ Biotechnology +100.00 +121.63 +110.85 +138.69 +175.33 +175.37 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +50 +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2021 (this "Annual Report") generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. +Overview and Business Segments +The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment and our “Molecular Collection Systems” segment. +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our HIV product is also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business includes the operations of UrSure, Inc. (“UrSure”), which was acquired and merged into OraSure in 2020. This part of the Diagnostics business develops and commercializes products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. In 2020, we began developing a rapid antigen self-test for COVID-19 and a COVID-19 antibody enzyme-linked immunosorbent assay (“ELISA”) for use in laboratory settings. In June 2021, we received three Emergency Use Authorizations ("EUA") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab ® COVID-19 Rapid Tests for non-prescription OTC, professional point-of-care and prescription use. We began recording revenues on the sales of our InteliSwab ® COVID-19 Rapid Tests during the third quarter of 2021. Following discussions with the FDA and their de-prioritization of antibody testing in the U.S., we decided to no longer pursue an EUA for the ELISA laboratory antibody test. We have, however, continued to offer the product for research use to labs and other parties interested in COVID antibody surveillance and research applications. +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek Inc. (“DNAG”), Diversigen, Inc. (“Diversigen”), and Novosanis NV (“Novosanis”). In our Molecular Solutions business, we manufacture and sell kits that are used to collect, stabilize, transport and store a biological sample of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. Three of our collection devices are used in connection with COVID-19 molecular testing. We also sell research-use-only collection products into the microbiome market. We offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, Inc. (“CoreBiome”), a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals. +51 +Recent Developments +Impact of COVID-19 +The COVID-19 pandemic continues to impact our business operations and it is not possible for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations. During 2020, traditional HIV and HCV testing programs and drug testing in the workplace market were reduced or terminated as a result of the various “stay-at-home” orders and social distancing guidelines issued by federal, state and local governments to contain the spread of the COVID-19 pandemic and we continued to see this impact our business in early 2021. However, during the second and third quarters of 2021, we saw a resumption of HIV and HCV testing in the U.S. as domestic sales of our non-COVID diagnostic products began returning to pre-pandemic levels. On the international front, professional HIV and HCV testing in Europe and Asia also started to pick up. More recently we have experienced logistics and distribution delays, which have impacted our ability to provide our HIV self-tests in Southern and Eastern African countries due to the COVID-19 pandemic. In our Molecular Solutions segment, COVID-related disruption in clinical and research work, particularly in the academic market, had reduced demand for our products in 2020 and early 2021, but demand levels started to return to normal in the second and third quarters of 2021. Although the negative trends that materially impacted our results of operations during 2020 and early 2021 are starting to abate, it is impossible to predict if this improvement will continue and these negative trends may adversely impact certain parts of our business in future periods and for an indeterminate time period, depending on the duration and severity of the COVID-19 pandemic, the impact of COVID-19 variants and the scope and success of vaccination programs globally. +We also have experienced significant opportunities, and continue to believe there are potentially more significant opportunities, for increased revenues as a result of the COVID-19 pandemic. In 2020, we began selling our saliva collection devices for use in molecular COVID-19 testing. In 2021, we generated revenues of approximately $54.2 million from sales of our molecular collection devices related to COVID-19 testing. In the U.S., public health customers purchased increased quantities of our OraQuick ® In-Home HIV Test in order to permit continued HIV testing while allowing clients and patients to adhere to “stay-at-home” and social distancing requirements. In addition, we saw increased demand for our molecular collection products from customers who conduct both saliva and blood-based testing. As it became more difficult to collect blood in clinics or healthcare settings, these customers increasingly relied on the saliva collection alternative. However, demand for molecular COVID-19 testing during 2021 began to decline primarily due to the availability of vaccines and other testing options. We believe this trend will continue in future periods. +In June 2021, we received three Emergency Use Authorizations ("EUAs") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab ® COVID-19 Rapid Tests for non-prescription OTC, professional point-of-care ( Clinical Laboratory Improvements Amendment of 1988, " CLIA" waived) and prescription use. These lateral flow, rapid antigen diagnostic tests are designed to detect active COVID-19 infection with a simple, easy-to-use workflow, using samples self-collected from the lower nostrils. After users swab their lower nostrils, the test stick is swirled in a pre-measured buffer solution. No instrumentation, batteries, smart phone or laboratory analysis is needed to read the result, which appears on the test stick a short time later. During the second half of 2021, we recorded $22.4 million of InteliSwab ® sales. +Following discussions with the FDA and their de-prioritization of antibody testing in the U.S., we decided to no longer pursue an EUA for a COVID-19 antibody enzyme-linked immunosorbent assay ("ELISA") for use in laboratory settings. We are, however, continuing to offer this product for research use only to labs and other parties interested in COVID antibody surveillance and research applications. +Exploration of Strategic Alternatives +The COVID-19 pandemic has provided us an opportunity to fundamentally transform into a higher growth, more innovative and efficient organization with broader customer reach, both within and outside the United States. We believe we are well positioned to address current public health challenges and capitalize on diagnostic trends in the market and enhance its operational and competitive profile. Against this backdrop, our Board of Directors is exploring and evaluating a broad range of strategic alternatives with the goal of maximizing value for stockholders. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. +DLA Procurement Contract +In September 2021, we entered into a contract with the Defense Logistics Agency ("DLA") for the procurement of our OTC InteliSwab ® COVID-19 Rapid Test, which the DLA estimated to have a value of $205 million. Under the terms of the contract, the Company will provide its InteliSwab ® COVID-19 Rapid Test to up to 25,000 sites throughout the United States. The contract will run from October 2021 through September 2022. We recognized revenue of $1.9 million during the fourth quarter of 2021 related to this arrangement. +BARDA 510(k) Funding +In September 2021, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), which is part of the office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services +52 +(“HHS”), pursuant to which BARDA will provide up to $13.6 million in funding for us to obtain 510(k) clearance and CLIA waiver of our InteliSwab ® COVID-19 rapid test from the U.S. Food and Drug Administration (“FDA”). +DOD Manufacturing Capacity Funding +In September 2021, we also entered into an agreement for $109 million in funding from the U.S. Department of Defense (the “DOD”), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Under this agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding will be paid to the Company based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement. We began receiving funds from the DOD in January 2022 and had received $15.4 million as of the date of this report. +Current Consolidated Financial Results +During the year ended December 31, 2021, our consolidated net revenues increased 36% to $233.7 million, compared to $171.7 million for the year ended December 31, 2020. Net product and services revenues during the year ended December 31, 2021 also increased 36% when compared to the same period of 2020, largely due to increased revenues across all product lines, other than our international HIV self-test . Other revenues for the year ended December 31, 2021 were $6.8 million compared to $5.3 million in the same period of 2020. This increase was largely due to increased research and development funding for our COVID-19 tests and higher royalty income. +Our consolidated net loss for the year ended December 31, 2021 was $23.0 million, or $(0.32) per share on a fully diluted basis, compared to a consolidated net loss of $14.9 million, or $(0.22) per share on a fully diluted basis, for the year ended December 31, 2020. Results for the full-year 2021 reflect the negative impact of inefficiencies in our InteliSwab ® manufacturing process as we worked through our tech transfer issues and scale up and increased spending on research and development of COVID-19 products as well as higher sales and marketing spend to get our new COVID-19 product to market. +Cash used by operating activities during the years ended December 31, 2021 was $35.4 million compared to cash provided by operating activities for the year ended December 31, 2020 of $5.8 million. The use of cash in 2021 reflected the significant investment in inventory purchases in anticipation of future demand of our COVID-19 testing products. As of December 31, 2021, we had $170.0 million in cash, cash equivalents, and available-for-sale securities, compared to $257.1 million at December 31, 2020. +Results of Operations +YEAR ENDED DECEMBER 31, 2021 COMPARED TO DECEMBER 31, 2020 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +For the Year Ended December 31, +Dollars +Percentage of Total Net Revenues +2021 +2020 +% Change +2021 +2020 +Diagnostics +$ +87,030 +$ +63,601 +37 +% +37 +% +37 +% +Molecular Solutions +139,867 +102,780 +36 +60 +60 +Net product and services revenues +226,897 +166,381 +36 +97 +97 +Other +6,777 +5,340 +27 +3 +3 +Net revenues +$ +233,674 +$ +171,721 +36 +% +100 +% +100 +% +Consolidated net product and services revenues increased 36% to $226.9 million for the year ended December 31, 2021 from $166.4 million for 2020 due to increased revenues across all product lines, other than our international HIV self-test . Other revenues for the year ended December 31, 2021 were $6.8 million compared to $5.3 million in 2020. This increase was largely due to increased research and development funding for our COVID-19 tests and higher royalty income. +Consolidated net revenues derived from products sold to customers outside of the United States were $45.3 million and $40.9 million, or 19% and 24% of total net revenues, during the years ended December 31, 2021 and 2020, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +53 +Net Revenues by Segment +Diagnostics Segment +The table below shows the amount of total net revenues (dollars in thousands) generated by our Diagnostics segment. +For years Ended December 31, +Dollars +Percentage of Total Net Revenues +Market +2021 +2020 +% Change +2021 +2020 +Infectious disease testing +$ +54,645 +$ +54,407 +0 +% +61 +% +83 +% +COVID-19 +22,707 +— +NM +25 +0 +Risk assessment testing +9,678 +9,194 +5 +11 +14 +Net product revenues +87,030 +63,601 +37 +97 +97 +Other +3,010 +1,639 +84 +3 +3 +Net revenues +$ +90,040 +$ +65,240 +38 +% +100 +% +100 +% +Infectious Disease Testing Market +Sales to the infectious disease testing market remained largely flat at $54.6 million in 2021 compared to $54.4 million in 2020. What difference there was resulted from increased world-wide sales of our OraQuick ® HCV products and higher domestic sales of our OraQuick ® HIV products partially offset by lower international sales of our OraQuick ® HIV products . +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2021 and 2020. +Years ended December 31, +Market +2021 +2020 +% Change +Domestic HIV +$ +16,641 +$ +15,184 +10 +% +International HIV +25,503 +29,040 +(12 +) +Net HIV revenues +42,144 +44,224 +(5 +) +Domestic HCV +6,881 +4,793 +44 +International HCV +4,902 +3,655 +34 +Net HCV revenues +11,783 +8,448 +39 +Net OraQuick® revenues +$ +53,927 +$ +52,672 +2 +% +Domestic OraQuick ® HIV sales increased 10% to $16.6 million for the year ended December 31, 2021 from $15.2 million for the year ended December 31, 2020. This increase was primarily the result higher sales of our OraQuick ® In-Home HIV test used in a Centers for Disease Control and Prevention ("CDC") initiative to drive increased in-home testing and the increased number of stores from which this product is sold. Domestic HIV sales into the public health, hospital, and physicians markets also increased due to the recovery of these markets post the COVID-19 pandemic impact in 2020. +International sales of our OraQuick ® HIV products during 2021 decreased 12% to $25.5 million from $29.0 million in 2020. This decrease was largely due to the expiration of the Gates Foundation subsidy for certain international tests and challenges presented by the COVID-19 pandemic causing shipping delays and staffing issues at our customers. +Domestic OraQuick ® HCV sales increased 44% to $6.9 million in 2021 from $4.8 million in 2020 due to the re-opening of testing programs previously closed as a result of the COVID-19 pandemic and as resources used for COVID-19 testing and vaccinations were starting to be redirected back to HCV testing. +International OraQuick ® HCV sales increased 34% to $4.9 million in 2021 from $3.7 million in 2020 as sales into certain international markets continued to return to pre-pandemic levels. +54 +COVID-19 Testing Market +During the year ended December 31, 2021, COVID-19 revenues were $22.7 million driven by the first time sales of our InteliSwab ® COVID-19 Rapid Test which we began shipping to customers in August. +Risk Assessment Market +Sales to the risk assessment market increased 5% to $9.7 million for the year ended December 31, 2021 from $9.2 million for the year ended December 31, 2020 due to hiring increases driven by the economic recovery from the COVID-19 pandemic. +Other revenues +Other revenues for the year ended December 31, 2021 increased 84% to $3.0 million from $1.6 million for the year ended December 31, 2020 largely due to higher research and development funding for our COVID-19 tests and the inclusion of royalty income under the terms of a new licensing agreement related to our proprietary buffer solution used for the preservation and stabilization of oral fluid specimens. +Molecular Solutions Segment +The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Molecular Solutions segment for the year ended December 31, 2021 and 2020. +Years ended December 31, +Market +2021 +2020 +% Change +Genomics +$ +63,350 +$ +36,878 +72 +% +Microbiome +7,944 +5,474 +45 +COVID-19 +54,167 +50,747 +7 +Laboratory services +11,840 +8,746 +35 +Other product and service revenues +2,566 +935 +174 +Net molecular product and services revenues +$ +139,867 +102,780 +36 +Other +3,767 +3,701 +2 +Net molecular product and services revenues +$ +143,634 +$ +106,481 +35 +% +Sales of our genomics products increased 72% to $63.4 million in 2021 compared to $36.9 million in 2020 as we continued to see our customers' businesses recover from the COVID-19 pandemic and strong organic growth from customers in the commercial animal markets. +Microbiome revenues increased 45% to $7.9 million in 2021 compared to $5.5 million in 2020 due to a recovery in the market from the COVID-19 pandemic. +Sales of our molecular sample collection kits for COVID-19 testing increased 7% to $54.2 million in 2021 compared to $50.7 million in 2020 due to increased demand as the COVID-19 pandemic began late in the first quarter of 2020 and testing ramped up in the second and third quarters of 2020 and continued into the first half of 2021 contributing to the revenue growth for the full year period. Demand for COVID-19 PCR testing, in which our product is used, has shown declines in the second half of 2021 as a result of the increased availability of rapid tests. +Laboratory services revenues increased 35% to $11.8 million in 2021 compared to $8.7 million in 2020, due to customers resuming activities delayed by the COVID-19 pandemic. +Other revenues in 2021 remained largely flat at $3.8 million in 2021 compared to $3.7 million in 2020 since it is largely made up of royalty income received under a litigation settlement agreement. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit percentage was 50% for the year ended December 31, 2021 compared to 59% for 2020. The decrease in gross profit percentage was primarily due to increased scrap expense, including adjustments to inventory due to excess inventory or +55 +obsolescence, lower labor utilization, lower subsidies for the international sale of our HIV Self-Test under the charitable support agreement with the Gates Foundation, and a less favorable product mix as a result of the decline in sales of higher gross profit percentage product, partially offset by lower payroll taxes as result of applying for an Employee Retention Credit under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") , which increased gross profit by $2.5 million. +Consolidated operating loss in 2021 was $10.2 million, which was a $5.0 million increase from the $5.2 million of operating loss reported in 2020. Results in 2021 were negatively impacted by the decline in gross margin described above coupled with increased operating expenses described below. +OPERATING INCOME BY SEGMENT +Diagnostic Segment +The gross profit percentage of the Diagnostics business was 29% in 2021 compared to 42% in 2020. This decrease was due to an increase in scrap costs associated with production and tech transfer issues associated with our InteliSwab ® test and the recording of adjustments for COVID-19 antibody inventory which will not be sold, lower absorption of labor costs due to production inefficiencies, and the lower subsidies received from the Gates Foundation, partially offset by a more favorable product mix of higher gross profit percentage product sales, and lower payroll taxes resulting from the Employee Retention Credit under the CARES act. +Research and development expenses increased 13% to $24.1 million in 2021 from $21.3 million in 2020, due to higher staffing costs as a result of increased headcount and increased COVID-19 product development expenses. +Sales and marketing expenses increased 27% to $28.5 million in 2021 from $22.4 million in 2020, due to higher marketing spending associated with the introduction of our InteliSwab ® test into the market, higher commissions directly related to the increase in revenues and increased consulting costs associated with business strategy planning. These increases were partially offset by a decline in our reserve for uncollectible accounts associated primarily with one of our distributors located in Africa who has paid its over-due balance. +General and administrative expenses increased 16% to $32.6 million in 2021 from $28.1 million in 2020 largely due to higher staffing costs associated with increased headcount and higher consulting costs. These increases were partially offset by lower legal fees, lower employee bonuses, a lower allocation of building costs as administrative space was repurposed for manufacturing, and increased intercompany services fees allocated to the Molecular Solutions segment. +All of the above contributed to the Diagnostics segment’s operating loss of $57.2 million for the year ended December 31, 2021, which included non-cash charges of $4.3 million for depreciation and amortization and $4.7 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $1.5 million associated with the change in the fair value of acquisition-related contingent consideration. +Molecular Solutions Segment +The gross profit percentage of the Molecular Solutions segment was 63% in 2021 compared to 70% in 2020. This decrease is due to a less favorable product mix associated with increased sales of lower gross profit percentage products, increased costs at our third party contract manufacturers and an increase in inventory adjustments associated with expiring or excess inventory levels. +Research and development expenses increased 4% to $10.1 million in 2021 from $9.8 million in 2020 due to increased staffing and consulting costs . +Sales and marketing expenses increased 35% to $16.3 million in 2021 compared to $12.0 million in 2020 largely due to higher staffing costs, increased consulting costs associated with business strategy planning, and an increase in our reserve for uncollectible accounts. +General and administrative expenses increased 22% to $17.7 million in 2021 compared to $14.6 million in 2020, due higher legal fees, increased intercompany service fees allocated from the Diagnostics segment, increased sales tax costs, and higher staffing costs. +All of the above contributed to operating income of $47.0 million for 2021, which included non-cash charges of $7.3 million for depreciation and amortization and $673,000 for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2021 and 2020, we recorded income tax expense of $13.7 million and $11.4 million, respectively. Our overall tax expense recorded in both periods is largely comprised of foreign tax expense associated with our Canadian subsidiary. +56 +Liquidity and Capital Resources +December 31, +December 31, +2021 +2020 +(In thousands) +Cash and cash equivalents +$ +116,762 +$ +160,802 +Available for sale securities +53,288 +96,317 +Working capital +220,367 +242,404 +Our cash and cash equivalents and available-for-sale securities decreased to $170.0 million at December 31, 2021 from $257.1 million at December 31, 2020. Our working capital decreased to $220.4 million at December 31, 2021 from $242.4 million at December 31, 2020. +During the year ended December 31, 2021, net cash used in operating activities was $35.4 million. Our net loss of $23.0 million included non-cash charges for depreciation and amortization expense of $11.7 million, stock-based compensation expense of $7.8 million, an inventory reserve of $6.7 million, deferred income tax expense of $1.0 million and other non-cash expense of $456,000. Operating activities also included a benefit for the change in the estimated fair value of acquisition-related contingent consideration of $1.5 million and a $142,000 contingent consideration payment representing the excess of the total contingent consideration payment made during the year ended December 31, 2021 over the fair value of the liability estimated at the time of acquisition. Cash used to fund our working capital accounts included an increase in inventory of $27.9 million to meet anticipated demand to support COVID-19 testing programs, an increase in prepaid expenses and other assets of $8.7 million due to an asset recorded to reflect the future receipt of an Employee Retention Credit filed with the U.S. Government under the CARES Act in 2021 and prepayments made on a manufacturing contract, an increase in accounts receivable of $6.5 million due to orders placed late in the quarter and a decrease in deferred revenue of $1.9 million due to the recognition of revenue from customer prepayments. Offsetting these uses of cash were an $3.2 million increase in accounts payable due to the timing of invoices received and payments made and an increase in accrued expenses and other liabilities of $3.3 million. +Net cash used in investing activities was $5.5 million for the year ended December 31, 2021, which reflects proceeds from the maturities and redemptions of investments of $67.9 million, offset by $25.8 million used to purchase investments. Investing activities also include $36.6 million to acquire property and equipment largely to increase our manufacturing capacity and $10.9 million used to build additional manufacturing capacity as required by the $109 million agreement with the DOD. This cash outlay will be reimbursed in 2022 and represents the timing of cash used in the fourth quarter of 2021 and submitted for reimbursement. +Net cash used in financing activities was $2.8 million for the year ended December 31, 2021, which reflects $2.1 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to our employees, payments of lease liabilities of $686,000 and payment of our contingent consideration obligation of $264,000, partially offset by proceeds from stock option exercises of $246,000. +We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current and foreseeable operating and capital needs. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under our $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures including continued investment to expand our capacity to manufacture products for COVID-19 testing, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $135.8 million, or 80%, of our $170.0 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In 2022, we repatriated $65 million of such cash into the United States and will be required to pay withholding taxes to the Canada Revenue Agency. It is still our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make judgements and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our judgments and estimates on historical experience and on various other factors +57 +that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows. +Revenue Recognition . +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +We generally do not grant product return rights to our customers, except for (i) warranty returns, (ii) return rights on sales of our OraQuick ® In-Home HIV test and (iii) return rights on some of the sales of our InteliSwab ® COVID-19 Rapid Test to the retail trade. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +Service Revenues. Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligation for services rendered. +Arrangements with multiple-performance obligations. In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues. Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +Inventories . +Our inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +Deferred Tax Assets and Liabilities. +At December 31, 2021, we had federal Net Operating Loss (“NOL”) carryforwards of $188.0 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $46.8 million at December 31, 2021. Net operating losses will begin to expire in 2022. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs +58 +and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. +We currently have a full valuation allowance recorded against our total U.S. deferred tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax assets. Each year, we continue to reevaluate our valuation allowance position and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized. As such, we maintain a full valuation allowance as of December 31, 2021 and 2020 against our deferred tax assets associated with the operations subject to income tax in the U.S. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes in the ownership of our stock. The Company does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income and the Company continues to review ownership changes on an annual basis. +59 +Business Combinations and Contingent Consideration . +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting guidance. As part of our consideration for our recent acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing certain intangible assets and contingent consideration include: +• +future expected cash flows from sales and acquired developed technologies; +• +the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio; +• +the probability of meeting the future events; and +• +discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities. +ITEM 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +The information with respect to forward-looking statements within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report is incorporated herein by reference. +We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of December 31, 2021, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 5.4% of our total revenues for the year ended December 31, 2021. We do have foreign currency exchange risk related to our operating subsidiaries in Canada and in Belgium. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. Our foreign subsidiaries had net assets, subject to translation, of $198.0 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of December 31, 2021. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have increased our comprehensive loss by approximately $19.8 million in the year ended December 31, 2021. +ITEM 8. Financial St atements and Supplementary Data. +Information with respect to this Item is contained in our Consolidated Financial Statements included under Item 15 of this Annual Report on Form 10-K. +ITEM 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +Not applicable. +60 +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Interim Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2021. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2021 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Interim Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2021. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company +61 +in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 1, 2022 +ITEM 9B. Other Information. +Not applicable. +ITEM 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +62 +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2021Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. Directors, Executive Off icers and Corporate Governance. +The information required by this Item 10 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference. Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. Executiv e Compensation. +The information required by this Item 11 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this Item 12 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference.. +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference. +ITEM 14. Principal Accoun tant Fees and Services. +The information required by this Item 14 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference. +63 +PART IV +ITEM 15. Exhibits and Consolidate d Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., as amended and restated as of February 19, 2018, are incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. +4.1 +Description of Securities is incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 . +10.1 +Employment Agreement dated as of January 3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Transition Agreement dated as of January 2, 2022, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D. is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-k filed January 6, 2022* +10.3 +Employment Agreement, dated as of May 4, 2018, between the Company and Roberto Cuca is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2018. * +10.4 +Employment Agreement, dated as of July 1, 2004, between OraSure Technologies, Inc. and Jack E. Jerrett, is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.* +10.5 +Amendment No. 1 to Employment Agreement, dated as of December 16, 2008, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 19, 2008.* +10.6 +Amendment No. 2 to the Employment Agreement, dated as of December 15, 2010, between the Company and Jack E. Jerrett, is incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.* +10.7 +Amendment No. 3 to Employment Agreement, dated as of March 27, 2015, between the Company and Jack E. Jerrett is incorporated by reference to Exhibit 99.3 to the Company’s current Report on Form 8-K filed March 31, 2015.* +10.8 +Retirement Agreement, dated as November 9, 2021, between OraSure Technologies, Inc. and Jack E. Jerrett is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on For 8-K filed November 9, 2021.* +10.9 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.* +10.10 +Amendment No. 1 to Employment Agreement, dated as of December 20, 2021, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. +10.11 +Employment Agreement, dated as of May 11, 2020, between OraSure Technologies, Inc. and Lisa Nibauer is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on form 10-Q for the quarter ended June 30, 2020.* +10.12 +Employment Agreement, dated as of November 29, 2021, between OraSure Technologies, Inc. and Agnieszka M. Gallagher.* +10.13 +Severance Letter Agreement, dated August 25, 2021, between OraSure Technologies, Inc. and Michele M. Miller.* +10.14 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on form 8-K filed August 14, 2019.* +64 +10.15 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.16 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.17 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective April 4, 2020, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 9, 2020, for the 2020 Annual Meeting of Stockholders.* +10.18 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.19 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.20 +Form of Restricted Unit Award Agreement (Executive Officers-Employment Agreements) for 2021 awards.* +10.21 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.22 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.23 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.24 +Description of the OraSure Technologies, Inc. 2021 Incentive Plan is incorporated by reference to the Company’s Current Report on Form 8-K filed August 13, 2021.* +10.25 +Description of Long-Term Incentive Policy and 2021 Award Performance Measures is incorporated by reference to Item 5.02 to the Company’s Current Report on Form 8-K filed August 13, 2021.* +10.26 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.27 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.28 +Amended and Restated Code of Business Conduct and Ethics of OraSure Technologies, Inc. is incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed August 14, 2019. +10.29 +$109 Million Capital Funding Agreement with the U.S. Department of Defense, in coordination with the Department of Health and Human Services is incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the period ended September 30, 2021, filed November 4, 2021. +10.30 +Industrial Lease between Core5 at Laughman Farms Phase 1, LLC as Landlord and OraSure Technologies, Inc. as Tenant, dated January 3, 2022. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 +Consent of KPMG LLP. +24 +Powers of Attorney. +31.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 +Certification of Scott Gleason required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 +Certification of Stephen S. Tang, Ph.D. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Scott Gleason required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS Inline XBRL Instance Document +65 +101.SCH Inline XBRL Taxonomy Extension Schema Document +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase document +104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL. +* Management contract or compensatory plan or arrangement. +ITEM 16. Form 1 0-K Summary. +None +66 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2022. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Stephen S. Tang +Stephen S. Tang, Ph.D. +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 1, 2022, by the following persons on behalf of the Registrant and in the capacities indicated. +67 +SIGNATURE +TITLE +/s/ Stephen S. Tang +President, Chief Executive Officer and Director +(Principal Executive Officer) +Stephen S. Tang, Ph.D. +/s/ Scott Gleason +Interim Chief Financial Officer & Senior Vice President of Investor Relations and Corporate Communications +(Principal Financial Officer) +Scott Gleason +/s/ Michele Miller +Chief Accounting Officer +(Principal Accounting Officer) +Michele Miller +*MARA ASPINALL +Mara Aspinall +Director +*MICHAEL CELANO +Michael Celano +Director +*JAMES A. DATIN +James A. Datin +Director +*NANCY J. GAGLIANO +Nancy J. Gagliano +Director +*EAMONN P. HOBBS +Eamonn P. Hobbs +Director +*RONNY B. LANCASTER +Ronny B. Lancaster +Director +*LELIO MARMORA +Lelio Marmora +Director +*DAVID J. SHULKIN, M.D. +David J. Shulkin, M.D. +Director +*ANNE C. WHITAKER +Anne C. Whitaker +Director +*By: +/s/Agnieszka M. Gallagher +Agnieszka M. Gallagher +(Attorney-in-Fact) +68 +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Philadelphia, PA , Auditor Firm ID: 185 ) +F- 2 +Consolidated Balance Sheets +F- 4 +Consolidated Statements of Operations +F- 5 +Consolidated Statements of Comprehensive Income (Loss) +F- 6 +Consolidated Statements of Stockholders’ Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to the Consolidated Financial Statements +F- 9 +F- 1 +REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Evaluation of net realizable value adjustments to inventories for excess or obsolescence +As discussed in Notes 2 and 6 to the consolidated financial statements, the Company has inventories with a carrying value of $53,138 thousand as of December 31, 2021. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The majority of the inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the reserve. +We identified the evaluation of net realizable value adjustments to inventories for excess or obsolescence as a critical audit matter. Evaluating the Company’s specific identification procedures, which included estimates of forecasted sales and the resulting inventory consumption and ability to extend inventory expiration dates, required a high degree of auditor judgment. +F- 2 +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for determining net realizable value adjustments for inventory excess or obsolescence, which included controls related to the review of the specific identification procedures. For a selection of inventory items, we compared the Company’s historic estimates of net realizable value adjustments for excess and obsolescence to the actual physical inventory disposals to evaluate the Company’s ability to accurately estimate the net realizable value adjustments. We evaluated the Company’s ability to forecast sales by comparing prior period sales forecasts to actual results. In addition, we selected inventory items from the underlying data used in the Company’s analysis and evaluated the Company’s determination of net realizable value adjustments for those items by comparing forecasted inventory consumption to historic inventory consumption. We also selected inventory items from the underlying data used in the Company’s analysis and evaluated the ability to extend the expiration dates by inspecting relevant supporting documentation. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +March 1, 2022 +F- 3 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BA LANCE SHEETS +(in thousands, except per share amounts) +December 31, 2021 +December 31, 2020 +ASSETS +Current Assets: +Cash and cash equivalents +$ +116,762 +$ +160,802 +Short-term investments +36,279 +48,599 +Accounts receivable, net of allowance for doubtful accounts of $ 3,418 and $ 3,654 +45,323 +38,835 +Inventories +53,138 +31,863 +Prepaid expenses +7,939 +3,860 +Other current assets +28,990 +4,934 +Total current assets +288,431 +288,893 +Noncurrent Assets: +Property, plant and equipment, net +88,164 +51,860 +Operating right-of-use assets, net +9,056 +4,461 +Finance right-of-use assets, net +2,493 +1,312 +Intangible assets, net +14,343 +17,904 +Goodwill +40,279 +40,351 +Long-term investments +17,009 +47,718 +Other noncurrent assets +1,215 +1,973 +Total noncurrent assets +172,559 +165,579 +TOTAL ASSETS +$ +460,990 +$ +454,472 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current Liabilities: +Accounts payable +$ +28,024 +$ +17,407 +Deferred revenue +2,936 +4,811 +Accrued expenses and other current liabilities +33,778 +22,227 +Finance lease liability +939 +517 +Operating lease liability +2,181 +1,125 +Acquisition-related contingent consideration obligation +206 +402 +Total current liabilities +68,064 +46,489 +Noncurrent Liabilities: +Finance lease liability +1,952 +895 +Operating lease liability +7,202 +3,591 +Acquisition-related contingent consideration obligation +354 +2,049 +Other noncurrent liabilities +651 +1,682 +Deferred income taxes +2,234 +1,195 +Total noncurrent liabilities +12,393 +9,412 +TOTAL LIABILITIES +80,457 +55,901 +Commitments and contingencies (Note 15) +STOCKHOLDERS' EQUITY +Preferred stock, par value $ .000001 , 25,000 shares authorized, none issued +— +— +Common stock, par value $ .000001 , 120,000 shares authorized, 72,069 and 71,738 shares +issued and outstanding +— +— +Additional paid-in capital +511,063 +505,123 +Accumulated other comprehensive loss +( 10,077 +) +( 9,097 +) +Accumulated deficit +( 120,453 +) +( 97,455 +) +Total stockholders' equity +380,533 +398,571 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY +$ +460,990 +$ +454,472 +See accompanying notes to the consolidated financial statements. +F- 4 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STAT EMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2021 +2020 +2019 +NET REVENUES: +Products and services +$ +226,897 +$ +166,381 +$ +148,073 +Other +6,777 +5,340 +6,532 +233,674 +171,721 +154,605 +COST OF PRODUCTS AND SERVICES SOLD +116,074 +69,853 +60,022 +Gross profit +117,600 +101,868 +94,583 +OPERATING EXPENSES: +Research and development +34,170 +31,032 +19,629 +Sales and marketing +44,751 +34,459 +31,869 +General and administrative +50,328 +42,653 +35,287 +Change in the estimated fair value of acquisition-related contingent consideration +( 1,485 +) +( 1,099 +) +( 664 +) +Gain on sale of business +— +— +( 10,149 +) +127,764 +107,045 +75,972 +Operating income (loss) +( 10,164 +) +( 5,177 +) +18,611 +OTHER INCOME +872 +1,653 +2,720 +Income (loss) before income taxes +( 9,292 +) +( 3,524 +) +21,331 +INCOME TAX EXPENSE +13,706 +11,398 +4,675 +NET INCOME (LOSS) +$ +( 22,998 +) +$ +( 14,922 +) +$ +16,656 +INCOME (LOSS) PER SHARE: +BASIC +$ +( 0.32 +) +$ +( 0.22 +) +$ +0.27 +DILUTED +$ +( 0.32 +) +$ +( 0.22 +) +$ +0.27 +SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE: +BASIC +71,981 +67,505 +61,675 +DILUTED +71,981 +67,505 +62,170 +See accompanying notes to the consolidated financial statements. +F- 5 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS O F COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the years ended December 31, +2021 +2020 +2019 +NET INCOME (LOSS) +$ +( 22,998 +) +$ +( 14,922 +) +$ +16,656 +OTHER COMPREHENSIVE INCOME (LOSS) +Currency translation adjustments +( 894 +) +3,273 +5,767 +Unrealized gain (loss) on marketable securities +( 86 +) +( 234 +) +803 +COMPREHENSIVE INCOME (LOSS) +$ +( 23,978 +) +$ +( 11,883 +) +$ +23,226 +See accompanying notes to the consolidated financial statements. +F- 6 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS O F STOCKHOLDERS’ EQUITY +For the years ended December 31, 2021, 2020 and 2019 +(in thousands) +Common Stock +Additional +Paid-in +Accumulated +Other +Comprehensive +Accumulated +Shares +Amount +Capital +Loss +Deficit +Total +Balance at January 1, 2019 +61,276 +— +401,273 +( 18,706 +) +( 99,189 +) +283,378 +Common stock issued upon exercise +of options +27 +— +196 +— +— +196 +Vesting of restricted stock +717 +— +— +— +— +— +Purchase and retirement of common shares +( 289 +) +— +( 3,712 +) +— +— +( 3,712 +) +Stock-based compensation +— +— +4,057 +— +— +4,057 +Net income +— +— +— +— +16,656 +16,656 +Currency translation adjustments +— +— +— +5,767 +— +5,767 +Unrealized gain on marketable securities +— +— +— +803 +— +803 +Balance at December 31, 2019 +61,731 +$ +— +$ +401,814 +$ +( 12,136 +) +$ +( 82,533 +) +$ +307,145 +Common stock issued upon exercise +of options +402 +— +3,222 +— +— +3,222 +Vesting of restricted stock and performance stock units +653 +— +— +— +— +— +Purchase and retirement of common shares +( 248 +) +— +( 2,088 +) +— +— +( 2,088 +) +Issuance of common stock in connection with public offering, net of commissions and expenses of $ 6,200 +9,200 +— +95,036 +— +— +95,036 +Stock-based compensation +— +— +7,139 +— +— +7,139 +Net loss +— +— +— +— +( 14,922 +) +( 14,922 +) +Currency translation adjustments +— +— +— +3,273 +— +3,273 +Unrealized loss on marketable securities +— +— +— +( 234 +) +— +( 234 +) +Balance at December 31, 2020 +71,738 +$ +— +$ +505,123 +$ +( 9,097 +) +$ +( 97,455 +) +$ +398,571 +Common stock issued upon exercise +of options +33 +— +246 +— +— +246 +Vesting of restricted stock and performance stock units +451 +— +— +— +— +— +Purchase and retirement of common shares +( 153 +) +— +( 2,113 +) +— +— +( 2,113 +) +Stock-based compensation +— +— +7,807 +— +— +7,807 +Net loss +— +— +— +— +( 22,998 +) +( 22,998 +) +Currency translation adjustments +— +— +— +( 894 +) +— +( 894 +) +Unrealized loss on marketable securities +— +— +— +( 86 +) +— +( 86 +) +Balance at December 31, 2021 +72,069 +$ +— +$ +511,063 +$ +( 10,077 +) +$ +( 120,453 +) +$ +380,533 +See accompanying notes to the consolidated financial statements. +F- 7 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEM ENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2021 +2020 +2019 +OPERATING ACTIVITIES: +Net loss +$ +( 22,998 +) +$ +( 14,922 +) +$ +16,656 +Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: +Stock-based compensation +7,807 +7,139 +4,057 +Depreciation and amortization +11,658 +9,387 +7,339 +Other non-cash amortization +837 +327 +391 +Provision for doubtful accounts +( 253 +) +941 +2,248 +Inventory reserve +6,731 +736 +( 280 +) +Unrealized foreign currency (gain) loss +( 210 +) +269 +385 +Interest expense on finance leases +82 +72 +36 +Deferred income taxes +1,026 +( 392 +) +( 1,457 +) +Loss on sale of fixed assets +— +114 +147 +Gain on sale of product line +— +( 225 +) +— +Gain on sale of business +— +— +( 10,149 +) +Change in the estimated fair value of acquisition-related contingent consideration +( 1,485 +) +( 1,099 +) +( 664 +) +Payment of acquisition-related contingent consideration +( 142 +) +( 496 +) +— +Changes in assets and liabilities +Accounts receivable +( 6,451 +) +( 2,324 +) +( 2,210 +) +Inventories +( 27,941 +) +( 9,343 +) +( 1,044 +) +Prepaid expenses and other assets +( 8,674 +) +( 104 +) +200 +Accounts payable +3,234 +7,379 +( 1,537 +) +Deferred revenue +( 1,891 +) +1,051 +( 297 +) +Accrued expenses and other liabilities +3,288 +7,297 +( 4,017 +) +Net cash (used in) provided by operating activities +( 35,382 +) +5,807 +9,804 +INVESTING ACTIVITIES: +Purchases of investments +( 25,822 +) +( 90,137 +) +( 92,173 +) +Proceeds from maturities and redemptions of investments +67,925 +107,718 +93,491 +Purchases of property and equipment +( 36,622 +) +( 26,674 +) +( 9,314 +) +Purchase of property and equipment under government contracts +( 11,495 +) +— +— +Proceeds from funding under government contract +531 +— +— +Purchase of patent and product rights +— +( 2,250 +) +— +Acquisition of businesses, net of cash acquired +— +( 3,037 +) +( 23,801 +) +Proceeds from sale of business +— +— +12,000 +Other investing activities +( 18 +) +351 +— +Net cash used in investing activities +( 5,501 +) +( 14,029 +) +( 19,797 +) +FINANCING ACTIVITIES: +Repayments of loans +— +— +( 724 +) +Cash payments for lease liabilities +( 686 +) +( 687 +) +( 442 +) +Issuance of common stock in connection with public offering, net +— +95,036 +— +Proceeds from exercise of stock options +246 +3,222 +196 +Payment of acquisition-related contingent consideration +( 264 +) +( 3,004 +) +— +Repurchase of common stock +( 2,113 +) +( 2,088 +) +( 3,712 +) +Net cash (used in) provided by financing activities +( 2,817 +) +92,479 +( 4,682 +) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +( 340 +) +830 +1,952 +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS +( 44,040 +) +85,087 +( 12,723 +) +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD +160,802 +75,715 +88,438 +CASH AND CASH EQUIVALENTS, END OF PERIOD +$ +116,762 +$ +160,802 +$ +75,715 +See accompanying notes to the consolidated financial statements. +F- 8 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATE D FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +The overall goal of OraSure Technologies, Inc. (“OraSure” or “the Company”) is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business also includes the operations of UrSure, Inc. (“UrSure”), which was acquired and merged into OraSure in 2020. This part of the Diagnostics business develops and commercializes products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. In 2020, we began developing a rapid antigen self-test for COVID-19 and a COVID-19 antibody enzyme-linked immunosorbent assay (“ELISA”) for use in laboratory settings. In June 2021, we received three Emergency Use Authorizations ("EUA") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab ® COVID-19 Rapid Tests for non-prescription OTC, professional point-of-care (Clinical Laboratory Improvements Amendment of 1988, or "CLIA," waived) and prescription use. We began recording revenues on the sales of our InteliSwab ® COVID-19 Rapid Tests during the third quarter of 2021. Following discussions with the FDA and their de-prioritization of antibody testing in the U.S., we decided to no longer pursue an EUA for the ELISA antibody test. We have, however, continued to offer the product for research use to labs and other parties interested in COVID antibody surveillance and research applications. +Our Molecular Solutions business is operated by our subsidiaries, DNA Genotek Inc. (“DNAG”), Diversigen, Inc. (“Diversigen”), and Novosanis NV (“Novosanis”). In our Molecular Solutions business, we manufacture and sell kits that are used to collect, stabilize, transport and store a biological sample of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. Three of our collection devices are used in connection with COVID-19 molecular testing. We also sell research-use-only collection products into the microbiome market. We offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, Inc. (“CoreBiome”), a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNAG, Diversigen, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the fair value of assets acquired and liabilities assumed for business combinations, the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as +F- 9 +calculations related to accruals, taxes, contingent consideration and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Employee Retention Credit +In December 2021, we applied for the Employee Retention Credit for payroll taxes paid in the first and second quarters of 2021 as provided by the Coronavirus Aid, Relief and Economic Security Act . The amount due from the Internal Revenue Service of $ 5,728 is recorded in other current assets in our consolidated balance sheet as of December 31, 2021. The credit is reported in our consolidated statement of operations, for the year ended December 31, 2021, within cost of products and services sold, research and development, sales and marketing and general and administrative costs in the amounts of $ 2,536 , $ 1,134 , $ 924 , and $ 1,134 , respectively +Supplemental Cash Flow Information +In 2021, 2020 and 2019, we paid income taxes of $ 13,727 , $ 9,263 and $ 10,611 , respectively. +In 2021, 2020 and 2019, we recorded through the consolidated statements of operations an increase (decrease) in our allowance for doubtful accounts of $( 253 ), $ 941 and $ 2,248 respectively. We had write-offs of $ 115 , $ 501 and $ 110 in 2021, 2020, and 2019, respectively. +As of December 31, 2021, 2020 and 2019, we had accruals for purchases of property and equipment of $ 8,166 $ 802 , and $ 660 , respectively. +Investments +We consider all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +We record an allowance for credit loss for our available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, we review factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. During 2021, we recognized a provision for expected credit losses for our available-for-sale securities of $ 98 . +The following is a summary of our available-for-sale securities as of December 31, 2021 and 2020: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +December 31, 2021 +Guaranteed investment certificates +$ +33,249 +$ +— +$ +— +$ +33,249 +Corporate bonds +20,473 +— +( 434 +) +20,039 +Total available-for-sale securities +$ +53,722 +$ +— +$ +( 434 +) +$ +53,288 +December 31, 2020 +Guaranteed investment certificates +$ +25,132 +$ +— +$ +— +$ +25,132 +Corporate bonds +71,533 +135 +( 483 +) +71,185 +Total available-for-sale securities +$ +96,665 +$ +135 +$ +( 483 +) +$ +96,317 +At December 31, 2021, maturities of our available-for-sale +securities were as follows: +Less than one year +$ +36,386 +$ +— +$ +( 107 +) +$ +36,279 +Greater than one year +$ +17,336 +$ +— +$ +( 327 +) +$ +17,009 +F- 10 +Fair Value of Financial Instruments +As of December 31, 2021 and 2020, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +All of our available-for-sale debt securities are measured as Level 2 instruments as of December 31, 2021 and 2020. Our guaranteed investment certificates are measured as Level 1 instruments as of December 31, 2021 and 2020. +Included in cash and cash equivalents at December 31, 2021 and 2020, was $ 1,160 and $ 71,489 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. +We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds. The fair value of the plan assets as of December 31, 2021 and 2020 was $ 1,763 and $ 2,565 , respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other noncurrent assets with the same amounts included in accrued expenses and other noncurrent liabilities in the accompanying consolidated balance sheets. +As further discussed in Note 3, Business Combinations, we have identified our contingent consideration obligations as Level 3 liabilities due to significant inputs that are required to measure the fair value of these obligations. +The following table represents the change in contingent consideration: +Balance as of January 1, 2019 +$ +— +Addition related to acquisition (initial measurement) +4,350 +Change in fair value during the period +( 664 +) +Currency translation adjustment +( 74 +) +Balance as of December 31, 2019 +3,612 +Addition related to acquisition (initial measurement) +3,440 +Payments made during the period +( 3,500 +) +Change in fair value during the period +( 1,099 +) +Currency translation adjustment +( 2 +) +Balance as of December 31, 2020 +2,451 +Payments made during the period +( 406 +) +Change in fair value during the period +( 1,485 +) +Balance as of December 31, 2021 +$ +560 +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain +F- 11 +circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. +Property, Plant and Equipment +Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are typically depreciated over twenty years , while computer equipment and software, machinery and equipment, and furniture and fixtures are depreciated over two to ten years . Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. +Intangible Assets +Intangible assets consist of customer relationships, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years . +Impairment of Long-Lived Assets +Long-lived assets, which include property and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We assess the recoverability of our long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect our assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +We performed our annual impairment assessment as of July 31, 2021 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our reporting units is greater than their carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting units. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. +Revenue +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +We generally do not grant product return rights to our customers, except for warranty returns and return rights on sales of our OraQuick ® In-Home HIV test to the retail trade, and InteliSwab ® products to certain customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. +F- 12 +Service revenues. Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligations for services rendered. +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues . Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding of research and development efforts and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. +Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2021 and 2020 included customer prepayments of $ 1,843 and $ 3,216 , respectively. Deferred revenue as of December 31, 2021 and 2020 also included $ 1,093 and $ 1,595 , respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined based on expected revenues and revenue is recognized at that rate when the product is delivered to the customer. +Financing and Payment . Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract. +Revenues by product . The following table represents total net revenues by product line: +Years ended December 31, +2021 +2020 +2019 +Infectious disease testing +$ +54,645 +$ +54,227 +$ +58,016 +Risk assessment testing +9,678 +9,194 +12,189 +Cryosurgical systems +- +- +7,054 +Genomics (1) +63,350 +36,878 +56,200 +Microbiome (1) +7,944 +5,474 +7,172 +COVID-19 (1) +76,874 +50,927 +- +Laboratory services +11,840 +8,746 +6,767 +Other product and service revenues +2,566 +935 +675 +Net product and services revenues +226,897 +166,381 +148,073 +Royalty income +4,420 +3,432 +5,116 +Other non-product revenues +2,357 +1,908 +1,416 +Other revenues +6,777 +5,340 +6,532 +Net revenues +$ +233,674 +$ +171,721 +$ +154,605 +(1) 2020 Genomics, Microbiome, and COVID-19 revenues were reclassified to reflect the correct classification of the product line sales. The reclassification increased (decreased) the product line revenues for the year ended December 31, 2020 by $( 263 ), $( 682 ), and $ 945 , respectively. +F- 13 +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +Years ended December 31, +2021 +2020 +2019 +United States +$ +188,383 +$ +130,835 +$ +107,279 +Europe +13,799 +12,068 +11,752 +Other regions +31,492 +28,818 +35,574 +$ +233,674 +$ +171,721 +$ +154,605 +Customer and Vendor Concentrations. We had no customers that accounted for more than 10% of our accounts receivable as of December 31, 2021. We had one customer that accounted for 11 % of our accounts receivable as of December 31, 2020. The same customer accounted for approximately 15 % of our net consolidated revenues for the year ended December 31, 2019. We had no customers that accounted for more than 10% of our consolidated net revenues for the years ended December 31, 2021 and 2020. +We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Third-party suppliers also manufacture certain products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. We are actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Business Combinations and Contingent Consideration +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting standard. As part of our consideration for the recent acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing certain intangible assets and contingent consideration include: +• +future expected cash flows from sales and acquired developed technologies; +• +the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio; +• +the probability of meeting the future events; and +• +discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated +F- 14 +events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities . +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2021, 2020, and 2019, we incurred $ 5,103 , $ 1,126 , and $ 468 , respectively, in advertising expenses. +Stock-Based Compensation +We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than purchase shares in the open market. +Income Taxes +We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our consolidated statements of operations in the period in which the change occurs. Net foreign exchange losses resulting from foreign currency transactions that are included in other income in our consolidated statements of operations were $( 667 ), $( 337 ), and $( 1,339 ) for the years ended December 31, 2021, 2020, and 2019, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares +F- 15 +of common stock at the average market price during the reporting period. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive . +The computations of basic and diluted earnings (loss) per share are as follows: +Years ended December 31, +2021 +2020 +2019 +Net income (loss) +$ +( 22,998 +) +$ +( 14,922 +) +$ +16,656 +Weighted-average shares of common stock outstanding: +Basic +71,981 +67,505 +61,675 +Dilutive effect of stock options, restricted stock, and performance stock units +— +— +495 +Diluted +71,981 +67,505 +62,170 +Earnings (loss) per share: +Basic +$ +( 0.32 +) +$ +( 0.22 +) +$ +0.27 +Diluted +$ +( 0.32 +) +$ +( 0.22 +) +$ +0.27 +For the years ended December 31, 2021 and 2020, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 769 and 984 shares, respectively, were excluded from the computation of diluted loss per share. +For the year ended December 31, 2019 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 768 were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. +Accumulated Other Comprehensive Loss +We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets. +We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and we have defined the Euro as the functional currency of our Belgian subsidiary, Novosanis. The results of operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2021 consists of $ 9,643 of currency translation adjustments and $ 434 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio. Accumulated other comprehensive loss at December 31, 2020 consists of $ 8,749 of currency translation adjustments and $ 348 of net unrealized losses on marketable securities. +Recent Accounting Pronouncements +In November 2021, the Financial Accounting Standards Board ("FASB") issu ed Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, The purpose of this update is to improve transparency by requiring business entities to disclose information about certain types of government assistance they receive in their financial statements . Required disclosures include i) the nature of the transactions and related accounting policy used, ii) the financial statement line items affected and amounts thereof and iii) significant terms and conditions of the transactions. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, with early application permitted. We have adopted this guidance within this 2021 Form 10-K. See Note 5 for required disclosures. +3. BUSINESS COMBINATIONS +UrSure +On July 22, 2020, the Company acquired all of the outstanding stock of UrSure, Inc. (“UrSure”), pursuant to the terms of a merger agreement. The initial aggregate purchase price of this transaction was $ 3,000 , adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement. +F- 16 +During the year ended December 31, 2020, we incurred a total of $ 393 of acquisition related costs, including accounting, legal, and other professional fees, all of which were expensed and reported as a component of general and administrative expense in the consolidated statement of operations for the year ended December 31, 2020. +Pursuant to our acquisition agreement, we may pay up to an additional $ 28,000 of contingent consideration over the three years following the acquisition date based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue dollars, and the achievement of certain clinical milestones associated with the development of certain new technology. The Company, with the assistance of an independent valuation specialist, determined the estimated acquisition-date fair value of the acquisition-related contingent consideration of $ 3,440 . The fair value was determined using a probability-weighted model based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including the likelihood of the achievement of clinical milestones and revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. +The following table represents the change in contingent consideration: +Estimated fair value of contingent consideration as of acquisition date +$ +3,440 +Change in fair value during the period +( 989 +) +Balance as of December 31, 2020 +2,451 +Payments made during the period +( 406 +) +Change in fair value during the period +( 1,485 +) +Balance as of December 31, 2021 +$ +560 +The change in fair value during the years ended December 31, 2021 and 2020 is a result of delays in achieving certain product development milestones and a decrease in associated revenue forecasts as result of these delays. +Revenues from UrSure primarily consist of grant money received to fund the development of certain new technology. Effective as of July 22, 2020, the financial results of UrSure are included in our Diagnostics segment. +The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +285 +Other current assets +24 +Other assets +6 +Intangibles +3,600 +Goodwill +3,586 +Total assets acquired +7,501 +Liabilities Assumed +Current liabilities +335 +Deferred tax liability +689 +Total liabilities assumed +1,024 +Net Assets Acquired +6,477 +Estimated fair value of contingent consideration +( 3,440 +) +Net Cash Paid (net of cash acquired of $ 111 ) +$ +3,037 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, which is subject to amortization on a straight-line basis and is being amortized over a ten year estimated useful life. +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of UrSure. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +F- 17 +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisition was a result of gaining a complementary product offering that will enable us to leverage those products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Diagnostics segment. +We continue to evaluate the fair value of certain assets acquired and liabilities assumed, related to the acquisition. Additional information that existed as of the acquisition date, but was at that time unknown to us, may become known during the remainder of the measurement period. Changes to amounts recorded as a result of the final determination may result in a corresponding adjustment to these assets and liabilities, including goodwill. The determination of the estimated fair values of all assets acquired is expected to be completed within one year from the date of acquisition. +Diversigen +On November 8, 2019, the Company acquired all of the outstanding stock of Diversigen pursuant to the terms of a merger agreement. The aggregate purchase price for this transaction was $ 12,000 , adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement noted above. +During the year ended December 31, 2019, we incurred a total of $ 1,198 of acquisition related costs, including investment banking fees and accounting, legal and other professional fees, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2019. +Pursuant to the merger agreement, we were to pay up to an additional $ 1,500 of contingent consideration in 2020 based on the achievement of certain 2019 revenue metrics as defined under the agreements which did not occur. +Revenues from Diversigen primarily consist of microbiome laboratory services that provide metagenomics sequencing, bioinformatics and statistical analysis for the study of the microbiome. Effective as of November 8, 2019, the financial results of Diversigen are included in our Molecular Solutions segment. +The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +1,234 +Other current assets +45 +Property, plant, and equipment, net +1,916 +Acquired intangible assets +3,560 +Goodwill +6,317 +Total assets acquired +13,072 +Liabilities Assumed +Current liabilities +1,123 +Deferred tax liability +598 +Other long-term liabilities +893 +Total liabilities assumed +2,614 +Net Assets Acquired +10,458 +Estimated fair value of contingent consideration +- +Net Cash Paid (net of cash acquired of $ 479 ) +$ +10,458 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets included customer relationships and tradenames, all of which are subject to amortization on a straight-line basis and are being amortized over estimated useful lives as summarized below: +F- 18 +Estimated Useful +Description +Life (in years) +Amount +Customer relationships +10 +2,900 +Tradenames +9 +660 +Total acquired intangibles +$ +3,560 +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of Diversigen. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisitions was a result of providing us a complementary service and product offering that will enable us to leverage those services and products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Molecular Solutions segment. +CoreBiome and Novosanis +On January 4, 2019, the Company acquired all of the outstanding stock of CoreBiome, pursuant to the terms of a merger agreement, dated January 3, 2019. CoreBiome has subsequently been merged into Diversigen in December 2020. Also on January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of Novosanis, pursuant to a share purchase agreement, dated January 3, 2019. We began operating these entities as of the January 4, 2019 closing date. The aggregate purchase price for both of these transactions was $ 13,320 adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into escrow accounts for a limited period after closing, in order to secure the potential payment of certain indemnification obligations of the selling stockholders under each agreement noted above. +During the year ended December 31, 2019, we incurred a total of $ 639 of acquisition-related costs in connection with these acquisitions, including success-based investment banking fees and accounting, legal and other professional fees, related to both acquisitions, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of operation. +Pursuant to our acquisition agreements, we were to pay up to an additional $ 32,400 of contingent consideration over three years based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue dollars, the achievement of a large customer contract, and the development of certain new technology. The Company, with the assistance of an independent valuation specialist, utilized a Monte Carlo simulation to determine the estimated acquisition-date fair value of the acquisition-related contingent consideration of $ 4,350 . The simulation calculated the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration obligation changed from $ 4,350 as of the acquisition date to $ 3,612 as of December 31, 2019. This change was a result of changes in our estimated revenue forecasts and an amendment to one of the agreements, entered into in October 2019, in which management agreed to settle the contingent consideration associated with one of the acquisition’s 2019 results for $ 3,500 . The fair value of the contingent consideration obligation changed from $ 3,612 as of December 31, 2019 to $ 0 as of December 31, 2020. This change is a result of a $ 3,500 payment made in the first quarter of 2020, changes in our estimated revenue forecasts and an amendment to one of the agreements. +Revenues from CoreBiome primarily consist of microbiome laboratory services that utilize optimal analytical algorithms to deliver speed and scalability in the lab with precise analytics. Revenues from Novosanis primarily consist of the sale of its Colli-Pee collection device which was designed for the standard collection of first-void urine used in the liquid biopsy and sexually transmitted infection screening market. Effective as of January 4, 2019, the financial results of CoreBiome and Novosanis are included in our Molecular Solutions segment. +F- 19 +The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Accounts receivable +$ +791 +Inventories +310 +Other current assets +82 +Property, plant, and equipment, net +414 +Other assets +5 +Acquired intangible assets +8,400 +Goodwill +10,368 +Total assets acquired +20,370 +Liabilities Assumed +Current liabilities +1,180 +Notes payable, short-term +730 +Deferred tax liability +819 +Other long-term liabilities +74 +Total liabilities assumed +2,803 +Net Assets Acquired +17,567 +Estimated fair value of contingent consideration +( 4,350 +) +Net Cash Paid (net of cash acquired of $ 103 ) +$ +13,217 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, customer relationships, and tradenames, all of which are subject to amortization on a straight-line basis and are being amortized over estimated useful lives as summarized below: +Estimated Useful +Description +Life (in years) +Amount +Developed Technology +10 +$ +5,000 +Customer relationships +10 +2,200 +Tradenames +8.34 +1,200 +Total acquired intangibles +$ +8,400 +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of CoreBiome and Novosanis. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisitions was a result of providing us a complementary service and product offering that will enable us to leverage those services and products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our Molecular Solutions segment. +Unaudited Pro Forma Financial Information +The unaudited pro forma results presented below include the results of the UrSure, Diversigen, CoreBiome and Novosanis acquisitions as if they had been consummated as of January 1, 2019. The unaudited pro forma results include the amortization associated with acquired intangible assets and the estimated tax effect of adjustments to income before income taxes but do not include changes in the fair value of our contingent consideration obligations. Material nonrecurring charges, directly attributable to the transactions, including direct acquisition costs, are also excluded. In addition, the unaudited pro forma results do not include any expected benefits of the +F- 20 +acquisitions. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2019. +Year Ended December 31, +2020 +2019 +Revenue +$ +172,563 +$ +159,632 +Net income (loss) +( 14,937 +) +16,261 +Net income (loss) per share, basic +( 0.22 +) +0.26 +Net income (loss) per share, diluted +( 0.22 +) +0.26 +4. SALE OF CRYOSURGICAL BUSINESS +On August 16, 2019, we sold all rights and title to the assets necessary to operate our cryosurgical systems line of business to +a third party for $ 12,000 . This business consisted of medical devices used for the removal of benign skin lesions by cryosurgery or freezing. The products were sold in both the professional and OTC markets in North America, Europe, Central and South America and Australia. We also entered into a transition services agreement with CryoConcepts in which both parties agreed to provide certain transition services beginning after the closing. The Company recorded a gain on sale of business of $ 10,149 reflected in our statement of operations for the year ended December 31, 2019. The gain includes the $ 12,000 of proceeds net of the fair value of the assets sold, which consisted entirely of inventory and fully-depreciated fixed assets, the legal fees associated with the transaction, and a value attributed to the transition services. +5. GOVERNMENT CAPITAL CONTRACTS: +In September 2021, we entered into an agreement for $ 109,000 in funding from the U.S. Department of Defense (the “DOD”), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Funding will be paid to the Company based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement. In accordance with the milestone payment schedule, 15 % of the total will not be funded until the completion of the final validation testing, which is scheduled to occur in late 2023 and early 2024. We began making payments to vendors for the capital project during the fourth quarter of 2021. We began receiving funds from the DOD in January 2022 and had received $ 15,428 as of the date of this report. +Additionally, during 2021, we received $ 531 in funding from the Commonwealth of Pennsylvania, acting through the Department of Community and Economic Development, for the purchase of machinery and equipment as part of an expansion of manufacturing operations in Pennsylvania. All related purchases were completed in 2021. + +Activity for these capital contracts is accounted for pursuant to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. Funding earned in relation to capital-related costs incurred for government contracts is recorded as a reduction to the cost of property, plant and equipment and reflected within investing activities in the consolidated statements of cash flows; and associated unpaid liabilities and government proceeds receivable are considered non-cash changes in such balances within the operating section of the consolidated statements of cash flows. Amounts earned in excess of our expected cost of the project for project management are recognized straight-line in other income over the term of the government contract. We recognized $ 561 of such income, which is reported as other income in our consolidated statement of operations for the year ended December 31, 2021. +The balances corresponding to government contracts included in our consolidated balance sheet as of December 31, 2021, are as follows: +F- 21 +December 31, +2021 +Other current assets: +Billed receivables +$ +9,913 +Unbilled receivables +9,716 +Total other current assets +19,629 +Property, plant and equipment, net: +Cost of assets +11,495 +Reduction for funding earned, not yet received +( 10,964 +) +Reduction for funding received +( 531 +) +Total property, plant and equipment, net +- +Accrued expenses and other current liabilities +( 8,103 +) +6. INVENTORIES: +December 31, +2021 +2020 +Raw materials +$ +33,168 +$ +15,425 +Work in process +2,252 +2,572 +Finished goods +17,718 +13,866 +$ +53,138 +$ +31,863 +During 2021, 2020, and 2019, we recorded adjustments to inventory which had a cost of $ 13,400 , $ 2,564 , and $ 1,318 , respectively. The adjustments in 2021 included a write-off of $ 3,008 of COVID-19 antibody inventory, which we do not believe we can sell as a result of the decision to no longer pursue an EUA for the ELISA antibody test. Additionally, a significant portion of our 2021 adjustments were related to production and tech-transfer issues associated with our COVID-19 rapid test. +7. PROPERTY, PLANT AND EQUIPMENT: +December 31, +2021 +2020 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +35,420 +26,480 +Machinery and equipment +57,919 +36,878 +Computer equipment and software +14,700 +13,024 +Furniture and fixtures +4,228 +3,545 +Construction in progress +35,936 +24,419 +149,321 +105,464 +Less accumulated depreciation +( 61,157 +) +( 53,604 +) +$ +88,164 +$ +51,860 +Depreciation expense was $ 7,498 , $ 5,514 , and $ 4,421 for 2021, 2020, and 2019, respectively. +8. GOODWILL AND OTHER INTANGIBLE ASSETS: +The following table represents total goodwill by operating segment: +December 31, +2021 +2020 +Diagnostics +$ +3,604 +$ +3,586 +Molecular Solutions +36,675 +36,765 +$ +40,279 +$ +40,351 +F- 22 +The changes in goodwill are as follows: +December 31, +2021 +2020 +Balance as of January 1 +40,351 +36,201 +Goodwill acquired during the year +— +3,586 +Purchase price adjustment +18 +( 126 +) +Change related to foreign currency translation +( 90 +) +690 +Balance as of December 31 +$ +40,279 +$ +40,351 +Intangible assets consist of the following: +December 31, 2021 +Amortization +Period (Years) +Gross +Accumulated Amortization +Net +Customer relationships +10 +$ +15,016 +$ +( 11,205 +) +$ +3,811 +Patents and product rights +5 +7,785 +( 6,241 +) +1,544 +Developed technology +7 - 10 +16,293 +( 9,725 +) +6,568 +Tradename +5 - 15 +5,661 +( 3,241 +) +2,420 +$ +44,755 +$ +( 30,412 +) +$ +14,343 +December 31, 2020 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer relationships +10 +$ +14,997 +$ +( 9,685 +) +$ +5,312 +Patents and product rights +5 +7,766 +( 5,792 +) +1,974 +Developed technology +7 - 10 +16,603 +( 8,880 +) +7,723 +Tradename +5 - 15 +5,645 +( 2,750 +) +2,895 +$ +45,011 +$ +( 27,107 +) +$ +17,904 +Amortization expense for 2021, 2020, and 2019 was $ 3,260 , $ 3,246 , and $ 2,522 , respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2022 +2,305 +2023 +2,305 +2024 +2,265 +2025 +2,012 +2026 +1,630 +Beyond +3,826 +$ +14,343 +9. ACCRUED EXPENSES: +December 31, +2021 +2020 +Payroll and related benefits +$ +15,570 +$ +14,769 +Commitment to purchase under government contract +8,103 +— +Professional fees +3,335 +978 +Sales tax payable +2,227 +2,400 +Other +4,543 +4,080 +$ +33,778 +$ +22,227 +10 . LEASES: +We determine whether an arrangement is a lease at inception. We have operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of December 31, 2021, we are the lessee in all agreements. Our leases have remaining +F- 23 +lease terms of 1 to 7 years , some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year. +As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. +We have lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, we account for lease components separate from non-lease components. During 2021, we entered into various purchase agreements for our molecular solutions business which include a finance lease component for the use of specialized molds made and used by the vendor for purposes of manufacturing the goods to be purchased. We recorded an aggregate ROU asset and offsetting lease liability of $ 2,074 upon commencement of these contracts. The consideration to be paid under the agreements is variable based on the amounts purchased with a fixed amount charged if specified purchase minimums are not met. Only the fixed amount has been included in the measurement of the finance right-of-use asset and lease liability and the variable costs are recognized as purchases are made within cost of products and services sold in our consolidated statements of operations. The consideration for the contract has been allocated between the lease and non-lease components based on their relative estimated stand-alone selling prices. +The components of lease expense are as follows: +Years ended December 31, +2021 +2020 +2019 +Operating lease cost +$ +2,226 +$ +1,291 +$ +964 +Variable lease cost +201 +— +— +Finance lease cost: +Amortization of right-of use assets +900 +627 +410 +Interest on lease liabilities +82 +72 +36 +Total finance lease cost +982 +699 +446 +Total lease cost +$ +3,409 +$ +1,990 +$ +1,410 +Supplemental cash flow information related to leases is as follows: +Years ended December 31, +2021 +2020 +2019 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases +$ +3,733 +$ +1,280 +$ +937 +Operating cash flows from financing leases +82 +72 +33 +Financing cash flows from financing leases +686 +687 +442 +Non-cash activity: +Right-of-use assets obtained in exchange for operating lease obligations +6,480 +498 +1,829 +Right-of-use assets obtained in exchange for finance lease obligations +2,074 +46 +2,069 +Supplemental balance sheet information related to leases is as follows: +December 31, +2021 +2020 +Operating Leases +Right-of-use assets +$ +9,056 +$ +4,461 +Lease liabilities: +Current lease liabilities +2,181 +1,125 +Non-current lease liabilities +7,202 +3,591 +Total operating lease liabilities +$ +9,383 +$ +4,716 +F- 24 +Finance Leases +Right-of-use assets +$ +2,493 +$ +1,312 +Lease liabilities: +Current lease liabilities +939 +517 +Non-current lease liabilities +1,952 +895 +Total finance lease liabilities +$ +2,891 +$ +1,412 +Weighted Average Remaining Lease Term +Weighted-average remaining lease term—operating leases +5.26 years +4.45 years +Weighted-average remaining lease term—finance leases +2.21 years +2.67 years +Weighted Average Discount Rate +Weighted-average discount rate—operating leases +3.90 +% +4.28 +% +Weighted-average discount rate—finance leases +3.57 +% +4.35 +% +As of December 31, 2021, minimum lease payments by period are expected to be as follows: +Finance +Operating +2022 +815 +2,494 +2023 +946 +1,775 +2024 +1,275 +1,807 +2025 +— +1,442 +2026 +— +1,215 +Thereafter +— +1,592 +Total minimum lease payments +3,036 +10,325 +Less: imputed interest +( 145 +) +( 942 +) +Present value of lease liabilities +$ +2,891 +$ +9,383 +In January 2022, we entered into an operating lease for warehouse space, which is scheduled to commence during the first quarter of 2022. The agreement stipulates escalating fixed rent payments aggregating $ 7,154 to be paid over a lease term of 124 months . +11. INCOME TAXES: +Income (loss) before income tax expense consists of the following: +Years Ended December 31, +2021 +2020 +2019 +United States +$ +( 60,500 +) +$ +( 47,995 +) +$ +3,106 +Foreign +51,208 +44,471 +18,225 +$ +( 9,292 +) +$ +( 3,524 +) +$ +21,331 +F- 25 +The components of income tax expense are as follows: +Years Ended December 31, +2021 +2020 +2019 +Current +Federal +$ +— +$ +— +$ +— +State +163 +( 106 +) +1,033 +Foreign +12,517 +11,896 +5,099 +12,680 +11,790 +6,132 +Deferred +Federal +( 10,318 +) +( 20,946 +) +3,568 +State +( 965 +) +( 1,053 +) +125 +Foreign +( 151 +) +( 410 +) +( 697 +) +( 11,434 +) +( 22,409 +) +2,996 +Increase (decrease) in valuation allowance +12,460 +22,017 +( 4,453 +) +1,026 +( 392 +) +( 1,457 +) +Total income tax expense +$ +13,706 +$ +11,398 +$ +4,675 +For the years ended December 31, 2021, 2020, and 2019 we recorded foreign income tax expense of $ 13,543 , $ 12,185 , and $ 4,607 , respectively. +The Tax Cuts and Jobs Act imposed a U.S. tax on GILTI that is earned by certain foreign affiliates owned by a U.S. shareholder effective in 2018. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying tangible property. The Company has made a policy election related to its treatment of GILTI and will treat it as a current period expense in the reporting period in which the tax is incurred. +Final GILTI regulations were released in 2020. Among the changes was a GILTI “High-Tax Exception,” which allows foreign income deemed taxed at a sufficient effective rate to be excluded from a US owner’s GILTI income. All foreign income in 2021 and 2020 fell under this exception. It is expected that foreign income will continue to qualify for the exception in future years. +A reconciliation of the statutory United States federal income tax rate to our effective tax rate for each of the years ended December 31, 2021, 2020, and 2019 is as follows: +2021 +2020 +2019 +Statutory U.S. federal income tax rate +21.0 +% +21.0 +% +21.0 +% +GILTI tax +— +— +16.9 +Nondeductible executive compensation +( 6.1 +) +( 0.9 +) +0.4 +Impact of share-based payment awards +( 3.3 +) +( 12.4 +) +( 5.3 +) +Tax effect of foreign items +( 30.8 +) +( 70.7 +) +4.5 +State income taxes, net of federal benefit +6.8 +26.0 +4.0 +U.S. and foreign tax credits +2.5 +34.9 +( 1.1 +) +Nondeductible transaction costs +- +( 2.8 +) +1.6 +Nondeductible expenses and other +( 4.0 +) +( 2.6 +) +0.4 +NOL adjustment due to change in GILTI regulations +— +308.9 +— +Change in valuation allowance, federal and state +( 133.6 +) +( 624.8 +) +( 20.5 +) +Effective tax rate +( 147.5 +) +% +( 323.4 +) +% +21.9 +% +F- 26 +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of our deferred tax assets (liabilities) as of December 31, 2021 and 2020 are as follows: +2021 +2020 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +44,191 +$ +31,701 +Inventories +4,642 +1,593 +Capitalized research and development costs +453 +746 +Accruals and reserves currently not deductible +3,245 +3,200 +Acquired intangible assets +( 3,117 +) +( 3,870 +) +Depreciation and amortization +( 8,536 +) +( 2,804 +) +Right-of-use assets +( 2,777 +) +( 2,415 +) +Lease liabilities +2,957 +2,524 +Stock-based compensation +1,891 +1,354 +Tax credit carryforwards +3,855 +3,354 +Net deferred tax asset +46,804 +35,383 +Valuation allowance +( 49,038 +) +( 36,578 +) +Net deferred tax liability +$ +( 2,234 +) +$ +( 1,195 +) +In assessing the realizability of our deferred tax asset, we consider all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, we established a full valuation allowance against our U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of December 31, 2021 and 2020 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2021, 2020, and 2019. +Our Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2022 - 2032 +$ +38,444 +2033 - 2037 +26,631 +Non-Expiring +122,920 +$ +187,995 +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. We do not believe that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income. We continue to review ownership changes on an annual basis and we do not believe we have had a subsequent ownership change that would impact the NOLs. +In January 2022, approximately $ 65,000 was repatriated from our Canadian subsidiary as a one-time event. It is still our intention to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiary to the extent that we will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2021. +F- 27 +As of December 31, 2021, our gross unrecognized tax benefits totaled $ 805 , and based upon the valuation allowance for our U.S. operations, the recognition of any tax benefit would not impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2021, 2020, and 2019. As a result of our net operating loss carryforward position, we are subject to audit by the Internal Revenue Service since our inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2021. +A reconciliation of our unrecognized tax benefits is as follows: +2021 +2020 +2019 +Balance as of January 1 +$ +1,172 +$ +1,308 +$ +1,676 +Additions for tax positions of prior periods +1 +1 +4 +Reductions for tax positions of prior periods +( 368 +) +( 137 +) +( 372 +) +Balance as of December 31 +$ +805 +$ +1,172 +$ +1,308 +12. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2021, 4,613 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including our officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years , with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2021 +2020 +2019 +Risk-free interest rate (1) +0.47 +% +1.33 +% +2.52 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +50 +% +42 +% +41 +% +Expected life of stock options (in years) (2) +4 +5 +5 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of our stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2021, 2020 and 2019 was $ 6.14 , $ 2.79 and $ 5.19 , respectively. +Compensation expense recognized in the financial statements related to stock options was as follows: +Years Ended December 31, +2021 +2020 +2019 +Total compensation cost during the year +$ +1,063 +$ +892 +$ +1,161 +Amounts capitalized into inventory during the year +( 538 +) +( 466 +) +( 343 +) +Amounts recognized in cost of products sold for amounts previously capitalized +502 +360 +405 +Amounts charged against income +$ +1,027 +$ +786 +$ +1,223 +F- 28 +The aggregate intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $ 130 , $ 3,117 , and $ 92 , respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted- +Average +Exercise Price +Per Share +Weighted- +Average +Remaining +Contractual +Term +(in years) +Aggregate Intrinsic Value +Outstanding on January 1, 2021 +1,232 +$ +10.12 +Granted +366 +13.68 +Exercised +( 33 +) +7.50 +Expired +( 88 +) +15.80 +Forfeited +( 67 +) +10.67 +Outstanding on December 31, 2021 +1,410 +$ +10.73 +6.88 +$ +1,113 +Vested or expected to vest as of December 31, 2021 +1,378 +$ +10.68 +6.84 +$ +1,081 +Exercisable on December 31, 2021 +786 +$ +10.39 +5.43 +$ +729 +As of December 31, 2021, there was $ 2,571 of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 2.8 years. +Net cash proceeds from the exercise of stock options were $ 246 , $ 3,222 and $ 196 for the years ended December 31, 2021, 2020 and 2019, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2021: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$ 5.37 -$ 8.24 +588 +6.7 +$ +6.92 +353 +$ +6.75 +$ 8.87 -$ 13.31 +437 +6.4 +10.59 +282 +10.67 +$ 14.95 -$ 22.43 +385 +7.8 +16.70 +151 +18.37 +1,410 +6.9 +$ +10.73 +786 +$ +10.39 +The Stock Plan also permits us to grant restricted shares and restricted units of our common stock to eligible employees, including officers, and our outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by our Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the vesting restrictions lapse. Compensation cost of $ 4,094 $ 4,094 and $ 2,979 related to restricted shares was recognized during the years ended December 31, 2021, 2020 and 2019, respectively. +F- 29 +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2021 +659 +$ +9.95 +Granted +454 +13.23 +Vested +( 328 +) +10.84 +Forfeited +( 84 +) +11.02 +Issued and unvested, December 31, 2021 +701 +$ +11.53 +Issued and expected to vest, December 31, 2021 +638 +$ +11.32 +As of December 31, 2021, there was $ 4,640 of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 1.9 years. +In connection with the vesting of restricted shares during the years ended December 31, 2021, 2020 and 2019, we purchased and immediately retired 107 , 127 and 76 shares with aggregate values of $ 1,417 , $ 1,219 and $ 949 , respectively, in satisfaction of minimum tax withholding and exercise obligations. +We grant performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of certain performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in our service for three years from the grant date. Prior to 2021, performance during the one-year period was based on a one-year income before tax target. Performance during the three-year period was based on achievement of a three-year compound annual growth rate for consolidated revenues. In 2021, performance shares were granted based on the achievement of three-year cumulative revenue metrics with a market-based condition, or a total shareholder return modifier. PSUs are converted into shares of our common stock once vested and the number of shares actually earned at the end of the performance period will vary, based on actual performance, from 0 % to 200 % of the target number of performance share units granted. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $ 2,650 , $ 2,153 and $( 83 ) related to the PSUs was recognized during the years ended December 31, 2021, 2020 and 2019, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2021 +651 +$ +11.30 +Granted (1) +182 +10.99 +Performance adjustment (2) +41 +N/A +Vested +( 123 +) +16.66 +Forfeited +( 129 +) +14.28 +Issued and unvested, December 31, 2021 +622 +$ +9.88 +Issued and expected to vest, December 31, 2021 +470 +$ +9.56 +(1) Grant activity for all PSUs disclosed at target. +(2) Reflects the performance adjustment based on actual performance measured at the end of the performance period. +As of December 31, 2021, there was $ 2,349 of unrecognized compensation expense related to unvested performance stock units that is expected to be recognized over a weighted average period of 1.8 years. +In connection with the vesting of performance stock units during the year ended December 31, 2021, 2020 and 2019, we purchased and immediately retired 46 , 1 21 , and 213 shares with aggregate values of $ 696 , $ 869 and $ 2,763 , respectively. +F- 30 +Public Offering +On June 1, 2020, we entered into an underwriting agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Evercore Group LLC, as representatives of several underwriters, relating to the issuance and sale of 8,000 shares of our common stock. The price to the public in the offering was $ 11.00 per share. Under the terms of the underwriting agreement, we also granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,200 shares of common stock. On June 3, 2020, we announced the full exercise by the underwriters of their option to purchase these additional shares. +The offering was made pursuant to an effective registration statement on Form S-3 (File No. 333-228877) we had previously filed with the SEC, and a prospectus supplement thereunder. The net proceeds from the offering were approximately $ 95,000 after deducting underwriting discounts and offering expenses paid by the Company. +Share Repurchase Program +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $ 25,000 of our outstanding common shares. No shares were purchased and retired in 2021, 2020, and 2019. +13. TRANSITION COSTS +On December 31, 2021, the Company's Board of Directors approved the termination of Stephen S. Tang, the Company’s President and Chief Executive Officer, without cause under his existing employment agreement with the Company, with such termination effective as of March 31, 2022. On January 2, 2022, Dr. Tang and the Company entered into a Transition Agreement providing for the terms of the cessation of Dr. Tang’s employment with the Company, including the cessation of his service as President and Chief Executive Officer of the Company and as a member of the Board. Under the Transition Agreement, Dr. Tang’s service to the Company in all capacities is expected to end on March 31, 2022. Pursuant to the Transition Agreement, as of December 31, 2021, a severance accrual of $ 1,569 is included in the consolidated financial statements. +14. BUSINESS SEGMENT INFORMATION: +Our business consists of two segments, which are described in Note 1: our “Diagnostics” segment and our “Molecular Solutions” segment. +We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income. We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +F- 31 +The following table summarizes operating segment information for the years ended December 31, 2021, 2020, and 2019, and asset information as of December 31, 2021 and 2020: +Years ended December 31, +2021 +2020 +2019 +Net revenues: +Diagnostics +$ +90,040 +$ +65,240 +$ +78,225 +Molecular Solutions +143,634 +106,481 +76,380 +Total +$ +233,674 +$ +171,721 +$ +154,605 +Operating income (loss): +Diagnostics +$ +( 57,177 +) +$ +( 43,156 +) +$ +154 +Molecular Solutions +47,013 +37,979 +18,457 +Total +$ +( 10,164 +) +$ +( 5,177 +) +$ +18,611 +Depreciation and amortization: +Diagnostics +$ +4,325 +$ +3,345 +$ +3,039 +Molecular Solutions +7,333 +6,042 +4,300 +Total +$ +11,658 +$ +9,387 +$ +7,339 +Capital expenditures: +Diagnostics (1) +$ +26,994 +$ +17,860 +$ +6,073 +Molecular Solutions +9,628 +8,814 +3,241 +Total +$ +36,622 +$ +26,674 +$ +9,314 +(1) Excludes $ 11,495 for purchases of property and equipment under government contracts for the year ended December 31, 2021. +December 31, +2021 +2020 +Total assets: +Diagnostics +$ +209,674 +$ +242,613 +Molecular Solutions +251,316 +211,859 +Total +$ +460,990 +$ +454,472 +The following table represents total long-lived assets by geographic area: +December 31, +2021 +2020 +United States +$ +76,232 +$ +36,897 +Canada +11,003 +10,616 +Other regions +929 +4,347 +$ +88,164 +$ +51,860 +15. COMMITMENTS AND CONTINGENCIES: +Purchase Commitments +As of December 31, 2021, we had outstanding non-cancelable purchase commitments related to inventory, supplies, capital expenditures, and other goods or services as follows: +2022 +36,721 +2023 +25,429 +2024 +16,934 +2025 +8,667 +2026 +— +$ +87,751 +Additionally, we have entered into manufacturing agreements with certain third party vendors, in which minimum purchase commitments are required. If the minimum commitments are not achieved, we will be required to make annual penalty payments over +F- 32 +the next three years. Based on current forecasts, these penalties aggregate to approximately $ 2,209 for the three-year period. These estimated penalties can fluctuate based on changes in forecasted demand. +Employment Agreements +Under terms of employment agreements with certain employees, which extend through 2024, we are required to pay each individual a base salary for continuing employment with us as follows: +2022 +$ +2,911 +2023 +821 +2024 +426 +2025 +— +2026 +— +$ +4,158 +Litigation +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, based upon the advice of counsel, the outcomes of such actions are not expected, individually or in the aggregate, to have a material adverse effect on our future financial position or results of operations. +Spectrum Patent Litigation +In March 2021, we filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum has filed an answer to the initial complaint, asserting that its device does not infringe our patent and that our patent is invalid. In August 2021, we amended our complaint to add a second patent to this litigation. Spectrum responded to our amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation. We believe Spectrum's counterclaims are without merit and we filed a motion to dismiss both claims in October 2021. We are seeking injunctive relief and damages in this matter. On January 10, 2022, the Court assigned a new judge to preside over the matter, which vacated all dates for the trial. Spectrum filed their reply to our motion to dismiss on January 11, 2022. Though all other dates are pending, the Court has set the hearing for the motion to dismiss for March 30, 2022. +16. RETIREMENT PLANS: +Substantially all of our U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for us to match employee contributions up to $ 4 per year. We contributed $ 1,295 , $ 994 and $ 754 to the 401(k) Plan, net of forfeitures, in 2021, 2020, and 2019, respectively. +In addition to our 401(k) plan, we offer a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. We also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2021 and 2020, the value of the assets associated with this plan was $ 1,763 and $ 2,565 , respectively, and is included in current assets and other assets in our consolidated balance sheets. Our obligation related to the deferred compensation plan is included in accrued expenses and other liabilities in our consolidated balance sheets. As of December 31, 2021 and 2020, our total obligation under this plan was $ 1,763 and $ 2,565 , respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Revenue Canada. The RRSP also provides for DNAG to match employee contributions up to $ 4 per year. We contributed $ 448 , $ 366 and $ 184 to the RRSP in 2021, 2020, and 2019, respectively. +F- 33 \ No newline at end of file diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/filing_metadata.csv b/raw/filings/0001116463/2021/0000950170-22-002556/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..08a6e3c9de5d145724293b1fe8f1de34426f4fb9 --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2022-03-01,2021-12-31,2022-03-01T21:32:16.000Z,0000950170-22-002556,osur-20211231.htm,10-K,21434918,1,1,https://www.sec.gov/Archives/edgar/data/1116463/000095017022002556/osur-20211231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000095017022002556/,2021,2021,1 diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/item1.txt b/raw/filings/0001116463/2021/0000950170-22-002556/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..88c0429110176db8f2853a5a28056a4d467cf6d1 --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/item1.txt @@ -0,0 +1,282 @@ +ITEM 1. Bu siness. +The overall goal of OraSure Technologies, Inc. (“OraSure” or “the Company”) is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Our business consists of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +Diagnostics +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. +Molecular Solutions +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek, Inc. ("DNAG"), Diversigen, Inc. ('Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. +We have expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. We have also developed new collection devices for the emerging microbiome market, which focuses on studying microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene® • GUT, is focused on the human gut microbiome (microbes living in human stool). In 2021, the OMNIgene® • GUT collection device (OMD-200) was granted “FDA De Novo classification for the preservation and stabilization of the relative abundance of microbial nucleic acids in clinical samples.” We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. +Our Molecular Solutions segment includes the Colli-Pee® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Our Molecular Solutions business also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, we received three Emergency Use Authorizations ("EUA") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab ® COVID-19 Rapid Tests (“InteliSwab®”) for non-prescription OTC, professional point-of-care use and prescription home use. We began recording revenues on the sales of our InteliSwab® tests during the third quarter of 2021. In September 2021, the Defense Logistics Agency awarded the Company a procurement contract for the InteliSwab® for OTC use, which the Defense Logistics Agency estimated to have a value of $205 million and which will provide InteliSwab® tests to up to 20,000 sites throughout the United States from October 2021 through September 2022. Also in September 2021, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), which is part of the office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services (“HHS”), pursuant to which BARDA would provide the Company with up to $13.6 +1 +million in funding to obtain 510(k) clearance and Clinical Laboratory Improvement Amendments (“CLIA”) waiver of the InteliSwab® tests. +In the latter part of 2021, we have focused our efforts on scaling up our operations to meet the increasing demand for the InteliSwab® tests. In September 2021, we receive $109 million in funding from the U.S. Department of Defense (the “DOD”), in coordination with the HHS, to build additional manufacturing capacity in the United States for our InteliSwab® test as part of the nation’s pandemic preparedness plan. This funding will be used to expand the Company’s production capacity by 100 million tests annually and will be paid based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick ® HIV Self-Test and OraQuick ® HCV Test. +Exploration of Strategic Alternatives +The COVID-19 pandemic has provided us an opportunity to fundamentally transform into a higher growth, more innovative and efficient organization with broader customer reach, both within and outside the United States. We believe we are well positioned to address current public health challenges and capitalize on diagnostic trends in the market and enhance its operational and competitive profile. Against this backdrop, our Board of Directors is exploring and evaluating a broad range of strategic alternatives with the goal of maximizing value for stockholders There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. +Diagnostics Segment Products +The following is a summary of our principal products for the infectious disease and risk management markets, which comprise the Diagnostics segment of our business: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is our rapid immunoassay platform designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received emergency use authorization (“EUA”) from the U.S. Food and Drug Administration (“FDA”) for non-prescription, over-the-counter home use in individuals aged 2 years or older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the over-the-counter version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the U.S. FDA for use by laboratories located in the United States certified under CLIA. We have also received a CLIA waiver for use of the test enabling the test to be used by numerous additional sites in the United States not certified under CLIA to perform high and moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged two years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the U.S. FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +OraQuick ® is our rapid point-of-care test platform designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies or analytes. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a +2 +screening test and requires a confirmation test where an initial positive result is obtained. This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received pre-market approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”) for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under the Clinical Laboratory Improvements Amendment of 1988 (“CLIA”), to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered for sale in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received World Health Organization (“WHO”) pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. The OraQuick® HIV Self-Test received CE Mark in 2021 and is being sold in certain European Countries. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +We have received FDA pre-market approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +We have received 510(k) clearance from the FDA for our rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate (“OMT”), a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, OMT testing is a highly accurate method for detecting HIV-1 infection and other analytes. +3 +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with a blood-based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate "OMT" for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the tradename “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. Our MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and we are selling a NIDA-5 panel of microplate assays supplied by Thermo Fisher to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Molecular Solutions Segment +Genomic Products +4 +We sell many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. Our lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. +Our genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and immediately protect the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids that are required for most genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• +The reliable collection of high-quality and stable genetic samples. +• +The use of simple, non-invasive collection methods. +• +The ability to store and transport collected samples for extended periods at ambient temperatures. +• +Compatibility with fully automated laboratory testing systems. +We also sell the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. +COVID Collection Products +Since 2020, we have actively engaged with several laboratories and researchers to demonstrate the effectiveness of our existing collection products for use with COVID-19 molecular testing. The stabilization solution in our molecular collection products can accommodate a vast spectrum of microbiome activity, spanning bacteria to viruses. We have collected data on the usability of our kits for this purpose. We believe that oral samples collected using devices from our product lines for liquid saliva or oral swab samples are a suitable alternative to more commonly used samples collected with a nasopharyngeal or oropharyngeal swab. Our products are optimized for self-collection, unlike nasopharyngeal and oropharyngeal swabs, which cannot be self-administered easily. That means healthcare providers, retailers, and online vendors can ship our kits directly to an individual’s home, eliminating unnecessary trips to hospitals, doctors’ offices, and testing facilities. Self-collection also supports the social distancing guidelines in many communities, reduces the burden on testing sites and healthcare facilities, and provides wider access to testing. Moreover, the chemistry in our products stabilizes nucleic acids, including RNA, which is the nucleic acid used by most labs for COVID-19 testing. The chemistry is bacteriostatic and inactivates viral activity in the sample. These products' usability and form factors are conducive to use at home or in clinic settings. As a result, since 2020, we have sold our ORAcollect ® • RNA and OMNIgene ® • ORAL collection devices for use in connection with COVID-19 molecular testing. These products have become an increasingly important part of our business and accounted for 47% of 2020 revenue generated by our Molecular Solutions segment and 40% in 2021. +Microbiome Products +We also market several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. Unlike genomic DNA, the microbiome of a sample can change over time, especially when exposed to temperature and environmental fluctuations. A reliable method captures and preserves ("snapshots") the microbiome after collection until an analysis is required to optimize and standardize sample results. We believe our products provide such a reliable method. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We believe our product ensures that the microbial DNA in the fecal sample is fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Recently, we have applied these principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. In 2021, the Microbiome portfolio grew to support collecting and stabilizing metabolites found in fecal samples. +5 +Laboratory and Data Analytical Services +Our Molecular Solutions business also offers our customers microbiome laboratory testing and analytical services. These services reflect the collective benefits of our Diversigen subsidiaries, which were combined under the Diversigen name during 2020. Our services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. Our goal is to help customers unleash the translational potential of the microbiome and providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. We also offer comprehensive microbiome and metagenomics services to improve human, animal, and environmental health. Diversigen has extensive experience with highly diverse microbiome sample types and provides complete project life cycle consulting services, including pre-project consulting, study design, extraction, and sequencing to complete bioinformatics analysis. Diversigen is at the forefront of setting quality standards for this industry and has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. We are also in the process of integrating the services offered through GenoFIND TM , under the Diversigen brand. +Products Under Development +Diagnostic Products +Our research and development efforts include programs targeted at expanding and enhancing our diagnostics business. These programs typically focus on products related to drug adherence and rapid tests for various diseases. In 2021, significant time and resources were dedicated to the development of our COVID-19 Rapid Antigen Self-Test (InteliSwab®). We introduced our antigen test to the market in 2021 for three different uses: +▪ +Professional Test (CLIA Waived) for use at drive-through sites, physician offices, public health testing sites, and employer/university health centers. In this instance, a physician would prescribe the test and the patient would conduct a self-swab in the presence of a healthcare provider who would then interpret the result. +▪ +Prescription Self-Test for use by individual consumers (with prescription) at home or in any location, by employers/universities on- or off-site, or by physicians or public health via remote testing. In this instance, a physician would prescribe the test and the patient would conduct a self-swab at home, or in any location, where they would then interpret their own result. +▪ +OTC Self-Test for use by consumers who would purchase online or at retail without prescription, and conduct the test and receive the result themselves anytime, anywhere. +We completed the InteliSwab ® product development and clinical studies in 2021 and received three EUA authorizations for this test in June 2021. +In the first and second quarter of 2021, the clinical studies were completed and the EUAs were submitted to the FDA. Throughout 2021, limit of detection studies were completed with live coronavirus in certified third party analytical laboratories, confirming that InteliSwab ® is able to detect all the variants of concern thus far including Omicron. The company has transferred the technology for the making of the devices to manufacturing which is ramping up and optimizing operations. +In 2021, we also received a $13.6 million grant from BARDA, which provides the funding necessary to obtain a 510(k) for InteliSwab ® for both professional use (CLIA waived) and OTC use. +Molecular Solutions +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. Our development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to our customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +Sales and Marketing +6 +We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. +We market our products in the United States and internationally. Consolidated net revenues attributable to customers in the United States were $188.4 million, $130.8 million, and $107.3 million in 2021, 2020, and 2019, respectively. Consolidated net revenues attributable to international customers amounted to $45.3 million, $40.9 million, and $47.3 million or 19%, 24%, and 31% of our total revenues in 2021, 2020, and 2019 respectively. For more information about our revenues and long-lived assets attributable to U.S. and international customers, please see Notes 2 and 14 to o ur consolidated financial statements included elsewhere in this Annual Report. +Diagnostics - Professional +Our InteliSwab® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. It is also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. We sell our OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, we distribute our OraQuick ® HIV test in certain foreign countries through distributors. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ® ADVANCE HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +Diagnostics - OTC and Self-Test +We sell our InteliSwab® COVID-19 Rapid Test product in the U.S. retail and consumer markets. The OTC InteliSwab® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the US military. +We sell our OraQuick ® In-Home test in the U.S. retail or consumer market. The product is also available for purchase on-line through certain retailers and from our website, www.oraquick.com. The primary target population for our HIV-OTC test comprises young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. We also sell our OraQuick ® HIV Self-Test in certain international markets. Under a Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) we are able to offer our OraQuick ® HIV Self-Test at an affordable price in 50 developing countries in Africa and Asia with funding from the Gates Foundation. The funding consists of support payments tied to the volume of product we sell and reimbursement of certain related costs. The agreement was entered into in 2017 and has a four-year term and enables non-governmental organizations in the eligible countries that receive funding from government or public sector agencies and donors to access our HIV Self-Test at reduced pricing. The agreement with the Gates Foundation provides for an aggregate funding amount not to exceed $20.0 million over the four-year term or $6.0 million each year of the agreement. The term of this agreement expired in June 2021. +Our OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we +7 +have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +As discussed above, we also sell our next generation Intercept i2 ® he collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Molecular Solutions +Our Molecular Solutions business sells its products directly to its customers, primarily through its own internal sales force in U.S. domestic markets. However, in many international markets, distributors are used. +Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. Sales to commercial customers providing consumer genetics and clinical diagnostic services have been increasing and account for a majority these revenues. A significant portion of total sales are derived from repeat customers in both markets. Molecular Solutions also has customers in the livestock and companion animal markets. +We have expanded the market focus of our Molecular Solutions business by selling certain existing collection products for use in COVID-19 tests and by developing new collection devices for the emerging microbiome market, which is focused on the study of microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene ® • GUT, is focused on the human gut microbiome (microbes living in human stool). We are leveraging our existing sales force and global research connections to engage microbiome customers around the world and establish ourselves as among the leaders in ease-of-collection, stabilization and transport of this challenging sample type. +Our Molecular Solutions segment includes the Colli-Pee ® device, a product developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. +This segment is offering laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of its customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. During 2019, we substantially expanded our ability to offer microbiome laboratory and bioinformatics services with the acquisition of CoreBiome and Diversigen. The laboratory operations of CoreBiome and Diversigen were combined during 2020 under the Diversigen brand. +Significant Products and Customers +Several different product lines have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands). +For the years ended December 31, +2021 +2020 +2019 +Genomics +$ +63,350 +$ +36,878 +$ +56,200 +OraQuick ® HIV +42,373 +44,224 +43,092 +COVID-19 collection kits +54,167 +50,927 +— +Inteliswab ® +22,405 +— +— +One of our customers accounted for approximately 15% of our net consolidated revenues in 2019. We had no customers that accounted for more than 10% of our net consolidated revenues for the years ended December 31, 2021 and 2020. +8 +Supply and Manufacturing +We manufacture all of our OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTOLYTE and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +We have contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV In-Home Test in order to supply certain international markets. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. We have long-term agreements in place for the contract manufacturing in Thailand and one of our suppliers has been manufacturing for us for the past 20 years. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +We manufacture all of the proprietary chemistry and assay cards for our InteliSwab ® COVID-19 Rapid Tests in our Bethlehem, Pennsylvania facilities. We made significant capital investments during 2021 in order to scale this manufacturing. On September 30, 2021, we entered into an agreement for $109 million in capital funding from the US Department of Defense, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Under the Agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding will be paid to us based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. An existing Company location in Bethlehem, PA is being retrofitted to accommodate increased manufacturing and an additional new facility will be added in another U.S. location to be determined. +Our MICROPLATE and AUTO-LYTE assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +Our wholly-owned subsidiary, DNA Genotek, Inc. ("DNAG") has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. We are actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products in our Molecular Solutions segment are produced in Canada. We have increased the capacity for our molecular collection kits to meet demand for COVID molecular testing to 60 million kits per year (including non-COVID kits) with another 20 million kits per year to be qualified by end of 2022. +Our Colli-Pee ® device is currently manufactured at our Belgian assembly facility with components supplied by third party vendors. +Our GenoFIND TM genomics laboratory services are provided to our customers by a third party laboratory. We believe there are other laboratories that can also provide these services. Our microbiome laboratory testing and analytical services are provided by our subsidiary, Diversigen. +Human Capital Resources +In order to achieve the goals and expectations of our Company, it is crucial that we continue to attract and retain top talent. To facilitate talent attraction and retention, we strive to make OraSure a safe and rewarding workplace with opportunities for our employees to grow and develop in their careers. +9 +As of December 31, 2021, we had 785 full-time employees, which compares to 570 employees as of December 31, 2020. The increase in employees during 2021 was primarily the result of the need to add manufacturing capacity for our InteliSwab® COVID-19 Rapid Test and molecular collection devices used in COVID-19 molecular testing. Our employees are not currently represented by a U.S. collective bargaining agreement. +We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention to attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +During 2021, in response to the changing impact of the COVID-19 pandemic, we continued to implement safety protocols and new procedures to protect our employees, our subcontractors and our customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. In addition, we continued to modify the way we conduct many aspects of our business to reduce the number of in-person interactions. +As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefits programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering a diverse, equitable, and inclusive workplace that reflects and contributes to the global communities in which we do business and the customers and partners we serve. This includes all communities impacted by our corporate presence. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a Code of Conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. We strive to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. We have an active Diversity, Equity and Inclusion Council that strives to drive diversity, equity and inclusion within the workplace. At OraSure, we believe a variety of perspectives are critical to achieving success, and that diversity, equity and inclusion are key drivers to growth-based innovation and profitability. We aim to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgement. We believe that when all voices are heard, we honor and exemplify our core values and best serve our communities. +Competition +Diagnostics Segment +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. We have many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, we differentiate based on our tests’ ease of use, which has enabled us to expand our self-testing offering. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +10 +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables us to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. Our OraQuick ADVANCE HIV rapid test is the only oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our OraQuick® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the US OTC market. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below our HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the US with WHO Prequalification status and the CE mark. The majority of our sales outside the US are in Africa due to the greater incidence of HIV in that region. In 2021, we obtained the CE mark for our OraQuick ® HIV Self-Test which will enable us to enter the European over-the-counter market for HIV. In addition, in 2021, we received registration of our OraQuick ® HIV Self-Test, and the Thai Free Sales Certificate which enables us to obtain registrations in Asia and Latin America. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as over-the-counter tests purchased and used by consumers. Currently, there are 45 professional point-of-care EUA authorizations by the US FDA. There are also 13 OTC Antigen rapid tests and 3 OTC rapid molecular tests authorized under EUA by the FDA. Our InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +11 +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, we believe that these tests are qualitative tests that we believe are lower in quality and provide fewer benefits than our Q.E.D. ® test. +Molecular Solutions Segment +Our Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although we believe the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. With the receipt of authorizations for use in connection with COVID-19 molecular tests, our Oragene ® and ORAcollect ® products now compete against COVID-19 testing systems and the collection methods used in those systems. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, we are one of the few vendors to offer a solution that fully meets these requirements. +Our genomic and microbiome laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have two United States patents and numerous foreign patents for the OraSure ® and Intercept ® collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluid, formulations for the manufacture of synthetic oral fluid, and methods to control the volume of oral fluid collected and dispersed. The U.S. patents expire from June 2022 to December 2026. We have also applied for additional patents, in both the United States and certain foreign countries, on such products and technology. +We have one United States patent for our OraQuick ® platform expiring in 2028, as well as corresponding related international patents. We also have patent applications pending internationally. We have five pending patent applications in the United States for our InteliSwab® COVID-19 Rapid Test, and we have filed and expect to file additional patent applications for this product in certain international markets. +We hold, through our subsidiary, DNAG, twenty-four granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from February 2022 through April 2035. +We hold through our subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. +Our subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological samples containing polynucleotide molecules. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also +12 +provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure QuickFlu ® , Q.E.D. ® , Inteliswab®, Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, de novo classification, premarket approval, or emergency use authorization. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act. To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety +13 +and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a request for de novo classification or a premarket approval application (“PMA”) before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a de novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an Emergency Use Authorization (“EUA”). FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made following a determination by the Secretary of Health and Human Services that there is a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to our marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement +14 +must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of our products are used for research only or other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire lifecycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other post-market requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) prohibit any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by our subsidiary, Diversigen, are subject to CLIA and consist of microbiome and metagenomics sequencing, bioinformatics and analysis. Diversigen has recently received a CLIA certificate of registration in Minnesota, and is pursuing accreditation from the College of American Pathologists (CAP). A CLIA certificate of compliance is issued once a state regulator or the Center for Medicare and Medicaid Services determines that the laboratory is compliant with the applicable CLIA requirements. Under CLIA, certain organizations—including CAP—can accredit laboratories performing testing on specimens from human beings or animals, using methodologies and clinical applications within the expertise of the laboratory accreditation program. +Certain of our products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. We are presently working with legislators or regulators in certain of these states in an effort to modify or remove any restrictions affecting our ability to sell products. +15 +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission (“FTC”) and by other federal and state regulatory and enforcement authorities, including the Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. FTC enforcement actions often result in consent decrees that constrain future actions. DOJ prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or FTC, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. ISO 13485 certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +In the European Union (“EU”), products that fall under the scope of the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Medical Devices Directive (“IVDD”) are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. +In addition, the EU has adopted the EU Medical Devices Regulation (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (the “EU IVDR”), which will repeal and replace the MDD and IVDD. The EU MDR and EU IVDR impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU MDR requirements are in effect as of May 2021 and manufacturers of currently approved medical devices have until May 2022 to meet the EU IVDR requirements. Compliance with these regulations may be expensive and +16 +time-consuming. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. We also note that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to our international strategy. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). We received this certification for our Diagnostics segment (previously named "OSUR") in January 2019 as well as for our Molecular Business Unit in February 2020. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require us to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to health care providers. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +17 +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Conduct for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, or AdvaMed, a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which we are subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. We also are subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which we are subject as a result of our international sales also include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in European Union, or EU, markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require us to alter our manufacturing processes, thereby increasing our manufacturing costs, or may impose other additional obligations on us or our products. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +18 \ No newline at end of file diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/item13.txt b/raw/filings/0001116463/2021/0000950170-22-002556/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5c31fdf2bb5164abb339bc39a24a83ccda06452 --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 of Form 10-K will be included in our 2022 Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/item9a.txt b/raw/filings/0001116463/2021/0000950170-22-002556/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba67e31fc5bc728cfd9aacc0124c9afed3fbbc83 --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Interim Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2021. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2021 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Interim Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2021. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company +61 +in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 1, 2022 \ No newline at end of file diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/rp_note.txt b/raw/filings/0001116463/2021/0000950170-22-002556/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2021/0000950170-22-002556/rpt_disclosure.txt b/raw/filings/0001116463/2021/0000950170-22-002556/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..baea4c53fb3de4a5e601bcdc105b70a474cc5f3f --- /dev/null +++ b/raw/filings/0001116463/2021/0000950170-22-002556/rpt_disclosure.txt @@ -0,0 +1,9 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2021 there have been no transactions with related persons that would require disclosure in this Proxy Statement. +The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could +be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit +Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the +Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. +25 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/filing.txt b/raw/filings/0001116463/2022/0000950170-23-006037/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..022ca3968acf1c735308286d7efd7b04f8ff6796 --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/filing.txt @@ -0,0 +1,4123 @@ +10-K +0001116463 http://fasb.org/us-gaap/2022#AssetImpairmentCharges two years two years two years false five years FY --12-31 0001116463 us-gaap:MachineryAndEquipmentMember 2021-12-31 0001116463 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File No. 001-16537 +ORASURE TECHNOLOGIES, INC . +(Exact name of registrant as specified in its charter) +Delaware +36-4370966 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem , Pennsylvania +18015 +(Address of principal executive offices) +(Zip Code) +(Registrant’s telephone number, including area code): ( 610 ) 882-1820 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class +Trading Symbol +Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share +OSUR +The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☒ +Non-accelerated filer +☐ +Smaller reporting company +☐ +Emerging Growth Company +☐ +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2022) : $ 197,743,692 +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 24, 2023: 73,244,807 shares. +Documents Incorporated by Reference: +Part III of this Annual Report on Form 10-K will be incorporated by reference from certain portions of the Registrant's Definitive Proxy Statement for its 2023 Annual Meeting of Shareholders, or will be included in an amendment hereto, to be filed not later than 120 days after the close of the fiscal year ended December 31, 2022. Except with respect to information specifically incorporated by reference in the Annual Report on Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part hereof. +Table of Contents +PART I +Page +ITEM 1. +Business +1 +ITEM 1A. +Risk Factors +20 +ITEM 1B. +Unresolved Staff Comments +50 +ITEM 2. +Properties +50 +ITEM 3. +Legal Proceedings +51 +ITEM 4. +Mine Safety Disclosures +51 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +52 +ITEM 6. +Reserved +53 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +54 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +63 +ITEM 8. +Financial Statements and Supplementary Data +63 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +63 +ITEM 9A. +Controls and Procedures +63 +ITEM 9B. +Other Information +65 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions That Prevent Inspections +65 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +66 +ITEM 11. +Executive Compensation +66 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +66 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +66 +ITEM 14. +Principal Accountant Fees and Services +66 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +67 +ITEM 16. +Form 10-K Summary +69 +Signatures +70 +Use of Names +References in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022, (the "Annual Report") to "OraSure" mean OraSure Technologies, Inc. References in this Annual Report to “DNAG” mean DNA Genotek, Inc., references to “Diversigen” mean Diversigen, Inc., and references to “Novosanis” mean Novosanis NV. References in this Annual Report to "we", "us", "our", or the "Company" mean OraSure and its consolidated subsidiaries, DNAG, Diversigen, and Novosanis, unless otherwise indicated. +Disclosure Regarding Forward Looking Statements +This Annual Report contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings/losses per share, net income (loss), expenses, cash flow or other financial performance, or developments, clinical trial or development activities, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: +• +Our ability to market and sell products, whether through our internal, direct sales force or third parties; +• +Our ability to fulfill our commitments under our contracts with the U.S. government for InteliSwab ® COVID-19 Rapid Tests; +• +Failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; +• +Significant customer concentrations that exist or may develop in the future: +• +Our ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; +• +Our ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; +• +Our ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (or the "FDA”), or other regulators; +• +The impact of the COVID-19 pandemic on our business, supply chain and workforce; +• +The impact of the U.S. government ending the COVID-19 related Public Health Emergency; +• +Changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; +• +Our ability to meet increased demand for our products; +• +The impact of replacing distributors on our business; +• +Inventory levels at distributors and other customers; +• +Our ability to achieve our financial and strategic objectives and continue to increase our revenues, including the ability to expand international sales; +• +The impact of competitors, competing products and technology changes on our business; +• +Reduction or deferral of public funding available to customers; +• +Competition from new or better technology or lower cost products; +• +Our ability to develop, commercialize and market new products; +• +Market acceptance of oral fluid or urine testing, collection or other products; +• +Market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services; +• +Changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention, (the “CDC”) or other agencies; ability to fund research and development and other products and operations; +• +Our ability to obtain and maintain new or existing product distribution channels; +• +Reliance on sole supply sources for critical products and components; +• +Availability of related products produced by third parties or products required for use of our products; +• +The impact of contracting with the U.S. government on our business; +• +The impact of negative economic conditions on our business; +• +Our ability to maintain sustained profitability; +• +Our ability to increase our gross margins; +• +The ability to utilize net operating loss carry forwards or other deferred tax assets; +• +Volatility of our stock price; +• +Uncertainty relating to patent protection and potential patent infringement claims; +• +Uncertainty and costs of litigation relating to patents and other intellectual property; +• +Availability of licenses to patents or other technology; +• +Ability to enter into international manufacturing agreements; +• +Obstacles to international marketing and manufacturing of products; +• +Our ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; +• +Adverse movements in foreign currency exchange rates; +• +Loss or impairment of sources of capital; +• +Our ability to attract and retain qualified personnel; +• +Our exposure to product liability and other types of litigation; +• +Changes in international, federal or state laws and regulations; +• +Customer consolidations and inventory practices; +• +Equipment failures and ability to obtain needed raw materials and components; +• +The impact of terrorist attacks and civil unrest; and +• +General political, business and economic conditions, including inflationary pressures. +These and other factors that could affect our results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements and Risk Factors are made as of the date of this Annual Report and we undertake no duty to update these statements, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time. +Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +Trademarks, Trade Names and Service Marks +This Annual Report contains certain trademarks, which are protected under applicable intellectual property laws and are the Company's property. Solely for convenience, the Company's trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure Quick Flu ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® , and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +PART I +ITEM 1. Bu siness. +Our primary goal is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Our business previously consisted of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the two segments into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. +Diagnostics +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. In 2022, after obtaining a CE mark, we launched our OraQuick® HIV Self-Test, an oral swab in-home test for HIV-1 and HIV-2, in Europe, making it available in several European countries. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"). +In September 2022, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), pursuant to which BARDA will provide $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform, with the objective of developing increased sensitivity and shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. +Molecular Solutions +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek, Diversigen, and Novosanis. Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, and also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, nutrition, companion animal and environmental markets. +In 2020, we expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. In 2022, demand for COVID-19 PCR testing declined, which was primarily driven by the availability of antigen tests, the reduction in the numer of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. We have also developed additional collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. In 2022, we launched the OMNIgene ® • GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. Additionally, our OMNIgene ® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. Through our partnership with Grifols, we received FDA clearance for our ORAcollect®•Dx saliva collection device for OTC use, which allows our commercial partners to use and market the device with their therapeutics or devices. +Our Molecular Solutions products include the Colli-Pee ® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and +1 +collaborations in the liquid biopsy and sexually transmitted disease markets. In 2022, Novosanis obtained a CE mark for its Colli-Pee ® device containing a prefilled tube with UAS ® chemistry, which is designed to stabilize urinary analytes. Our Diversigen subsidiary also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +In 2022, Diversigen launched its metatranscriptomics sequencing and analysis services for gut microbiome samples, which generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, we received three Emergency Use Authorizations ("EUA") from the FDA for our InteliSwab ® COVID-19 Rapid Tests (“InteliSwab ® ”) for non-prescription OTC, professional point-of-care use and prescription home use. We began recording revenues on the sales of our InteliSwab ® tests during the third quarter of 2021. In January 2022, InteliSwab ® received FDA authorization for pediatric use in children ages 2 to 14. In September 2021, the Defense Logistics Agency (“DLA”) awarded the Company a procurement contract for the InteliSwab® tests for OTC use, which the DLA estimated to have a value of $205 million and which will provide InteliSwab ® tests to up to 20,000 sites throughout the United States. In 2022, the Company began to deliver tests to sites throughout the United States under this contract, and DLA has provided delivery orders against which it can continue to issue shipping instructions into 2023. On November 22, 2022, the DLA awarded us a second procurement contract for the InteliSwab ® tests for OTC use. Under the terms of the award, the contract estimate is 18 million tests, with a maximum award of 36 million tests and a guaranteed minimum award of 3.6 million tests. The contract will run from November 2022 through November 2023. In December 2022, the U.S. Department of Health and Human Services ("HHS") awarded the Company a fully funded firm fixed price contract for a total of 3.2 million InteliSwab ® tests which were delivered in February 2023. In September 2021, we entered into an agreement with BARDA, which is part of the office of the Assistant Secretary for Preparedness and Response at HHS, pursuant to which BARDA would provide the Company with up to $13.6 million in funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) waiver of the InteliSwab ® tests. In May, 2022, InteliSwab ® was selected by HHS to be distributed across the United States for nationwide school testing. +Through 2022, we have scaled up our operations to meet the increased demand for the InteliSwab ® tests. We significantly expanded our United States production capacity for InteliSwab ® tests to achieve capacity targets, set out in our 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the HHS), of more than 100 million tests annually. +Conclusion of Exploration of Strategic Alternatives +In 2021, our Board of Directors announced that it would explore and evaluate a broad range of strategic alternatives with the goal of maximizing value for stockholders. In May, 2022, our Board of Directors concluded its review of strategic alternatives without a transaction. +Diagnostics Products +The following is a summary of our principal Diagnostics products for the infectious disease and risk management markets: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is our rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received EUA from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +In 2022, the InteliSwab ® test became available for purchase on Amazon’s online store to customers in the United States. The tests are sold and orders fulfilled by Amazon. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test +2 +has received EUA from the FDA for use by laboratories located in the United States certified under CLIA. We have also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +The OraQuick ® Rapid HIV Test is our rapid point-of-care test product designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and requires a confirmation test where an initial positive result is obtained. This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received approval of a premarket approval (“PMA”) application from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered for sale in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received World Health Organization (“WHO”) pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +We have received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +3 +OraQuick ® Ebola Rapid Antigen Test +We have received 510(k) clearance from the FDA for our rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, we entered into an agreement with BARDA, pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick ® testing platform. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate, a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, oral mucosal transudate testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with a blood-based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +4 +Our MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and we are selling a NIDA-5 panel of microplate assays supplied by Thermo Fisher to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Molecular Solutions Products +Genomic Products +We sell many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. Our lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. In 2022, we received FDA clearance for our ORAcollect ® •Dx saliva collection device for OTC use through our partnership with Grifols, which allows our commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +Our genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• +Reliable high-quality and stable genetic samples. +• +Simple, non-invasive collection methods. +• +The ability to store and transport collected samples for extended periods at ambient temperatures. +• +Compatibility with fully automated laboratory testing systems. +We also sell the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. +COVID Collection Products +Since 2020, we have actively engaged with several laboratories and researchers to demonstrate the effectiveness of our existing collection products for use with COVID-19 molecular testing. We believe that oral samples collected using devices from our product lines for liquid saliva or oral swab samples are a suitable alternative to more commonly used samples collected with a nasopharyngeal or oropharyngeal swab. As a result, since 2020, we have sold our ORAcollect ® • RNA and OMNIgene ® • ORAL collection devices for use in connection with COVID-19 molecular testing. Due in part to the reduction in the number of COVID-19 cases and the shift toward +5 +the use of antigen testing, the demand for COVID-19 PCR testing declined in 2022, which negatively impacted the sales of our collection products . +Microbiome Products +We also market several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. Our microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. In 2022, our OMNIgene® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We believe our product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Recently, we have applied these principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +We also launched the OMNIgene ® •GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device . +Laboratory and Data Analytical Services +Our Molecular Solutions business also offers our customers microbiome laboratory testing and analytical services. Our services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. Our goal is to help customers unleash the translational potential of the microbiome by providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. We also offer comprehensive microbiome and metagenomics services to improve human, animal, and environmental health and, in 2022, we launched our metatranscriptomics sequencing and analysis services for gut microbiome samples. These services generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. Diversigen has extensive experience with highly diverse microbiome sample types and provides complete project life cycle consulting services, including pre-project consulting, study design, extraction, and sequencing to complete bioinformatics analysis. Diversigen is at the forefront of setting quality standards for this industry and has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. +Products Under Development +Diagnostic Products +Our research and development efforts include programs targeted at expanding and enhancing our diagnostics business. These programs typically focus on products related to drug adherence and rapid tests for various diseases. +We are working to develop a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under our contract with BARDA. +Molecular Solutions +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. Our development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to our customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +6 +Sales and Marketing +We market our products in the United States and internationally. We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. Our revenues by geographic area are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +Our InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. We sell our OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, we distribute our OraQuick ® HIV test in certain foreign countries through distributors. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +Diagnostics - OTC and Self-Test +We sell our InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by US customers on Walmart and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the US military. +We sell our OraQuick ® In-Home HIV test in the U.S. retail or consumer market. The product is also available for purchase on-line through certain retailers and from our website, www.oraquick.com. The primary target population for our HIV-OTC test comprises young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. We also sell our OraQuick ® HIV Self-Test in certain international markets. +Our OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +7 +We also sell our next generation Intercept i2 ® he collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Molecular Solutions +Our Molecular Solutions business sells its products directly to its customers, primarily through its own internal sales force in U.S. domestic markets. However, in many international markets, distributors are used. +Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. Our commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. Molecular Solutions also has customers in the livestock, companion animal and pharmaceutical markets. +We have expanded the market focus of our Molecular Solutions business by selling certain existing collection products for use in infectious disease testing, including COVID-19 tests, and by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. Our primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). We are leveraging our existing sales force and global research connections to engage microbiome customers around the world and establish ourselves as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +Our Molecular Solutions products include the Colli-Pee ® device, a product developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. +We also offer laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of its customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. During 2019, we substantially expanded our ability to offer microbiome laboratory and bioinformatics services with the acquisition of CoreBiome and Diversigen. The laboratory operations of CoreBiome and Diversigen were combined during 2020 under the Diversigen brand. +Significant Products and Customers +Several different product lines have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands). +For the years ended December 31, +2022 +2021 +2020 +InteliSwab® +$ +233,666 +$ +22,405 +$ +— +Genomics +54,335 +63,350 +36,878 +OraQuick® HIV +38,812 +42,144 +44,224 +COVID-19 collection kits +9,659 +54,167 +50,927 +One of our customers accounted for approximately 58% of our net consolidated revenues in 2022. We had no customers that accounted for more than 10% of our net consolidated revenues for the years ended December 31, 2021 and 2020. +Supply and Manufacturing +We manufacture all of our OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +8 +We have contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV In-Home Test in order to supply certain international markets. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. We have long-term agreements in place for the contract manufacturing in Thailand and one of our suppliers has been manufacturing for us for the past 20 years. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +We manufacture all of the proprietary chemistry and assay cards for our InteliSwab ® COVID-19 Rapid Tests in our Bethlehem, Pennsylvania facilities. We significantly scaled up manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests and have achieved manufacturing capacity targets under our 2021 contract with the US DOD, in coordination with HHS. Funding under the contract has been, and will be, paid to us based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. An existing Company location in Bethlehem, PA has been retrofitted to accommodate increased manufacturing capacity. +Our MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. We are actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products in our Molecular Solutions business are produced in Canada. +Our Colli-Pee ® device is currently manufactured at our Belgian assembly facility with components supplied by third party vendors. +Our genomic, microbiome and metatranscriptomics laboratory testing and analytical services are provided by our subsidiary, Diversigen. +Human Capital Resources +In order to achieve the goals and expectations of our Company, it is crucial that we continue to attract and retain top talent. To facilitate talent attraction and retention, we strive to make OraSure a safe and rewarding workplace with opportunities for our employees to grow and develop in their careers. +As of December 31, 2022, we had 840 full-time employees, which compares to 785 employees as of December 31, 2021. The increase in employees during 2022 was primarily the result of the need to add manufacturing capacity for our InteliSwab ® COVID-19 Rapid Test. In February 2023, we announced an 11% reduction in our non-production workforce. Our employees are not currently represented by a U.S. collective bargaining agreement. +We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention to attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +9 +As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefits programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering a diverse, equitable, and inclusive workplace that reflects and contributes to the global communities in which we do business and the customers and partners we serve. This includes all communities impacted by our corporate presence. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a Code of Conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. We strive to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. We have an active Diversity, Equity and Inclusion Council that strives to drive diversity, equity and inclusion within the workplace. At OraSure, we believe a variety of perspectives are critical to achieving success, and that diversity, equity and inclusion are key drivers to growth-based innovation and profitability. We aim to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgment. We believe that when all voices are heard, we honor and exemplify our core values and best serve our communities. +2022 Developments +On March 31, 2022, the termination of Dr. Tang as President and Chief Executive Officer (the "CEO") of the Company became effective. Dr. Nancy Gagliano served as interim CEO for a period commencing on April 1, 2022 and ending on June 4, 2022, at which time Carrie Eglinton Manner was appointed as President and CEO. +On June 9, 2022, we announced the termination of Agnieszka Gallagher's employment with the Company as Executive Vice President, General Counsel and Chief Compliance Officer. +On August 8, 2022 our Board of Directors appointed Ken McGrath as the Company’s Chief Financial Officer. Mr. McGrath replaced Interim Chief Financial Officer, Scott Gleason. +On November 7, 2022 our Board of Directors promoted Kathleen Weber from President, Molecular Solutions to Chief Product Officer. +Competition +Diagnostics +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. We have many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, we differentiate based on our tests’ ease of use, which has enabled us to expand our self-testing offering. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +10 +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables us to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. Our OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the US OTC market. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below our HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the US with WHO Prequalification status and the CE mark. The majority of our sales outside the US are in Africa due to the greater incidence of HIV in that region. Our OraQuick ® HIV Self-Test is CE marked, which enables us to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. Our InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, we believe that these tests are qualitative tests that we believe are lower in quality and provide fewer benefits than our Q.E.D. ® test. +Molecular Solutions +Our Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although we believe the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our +11 +Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. With the receipt of authorizations for use in connection with COVID-19 molecular tests, our Oragene ® and ORAcollect ® products now compete against COVID-19 testing systems and the collection methods used in those systems. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, we are one of the few vendors to offer a solution that fully meets these requirements. +Our genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have patents throughout our product and service lines. Our patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools, and services and analysis. Our portfolio protects our innovative sampling tools, services and diagnostics that provide access to accurate, essential information that advances global health and well-being. +Diagnostics and testing products include the OraSure ® and Intercept ® collection devices that are covered by one utility and one design patent in each of the U.S., Canada, Japan, and throughout Europe. We have numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. The utility patents will expire in January 2028, and the design patents will expire in 2025. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications will enter their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications will expire in March 2041. +We have a U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application and will enter its national phase in countries throughout the world, beginning in May 2023 and patents issuing from these applications will expire in December 2041. Related design patent applications are pending in the U.S., Canada, and Europe. +We have additional pending applications directed to new direct sample collection pads for our InteliSwab ® COVID-19 Rapid Test. These applications will enter their national phase in countries throughout the world, beginning in October 2023, and patents issuing from these applications will expire in December 2042. A related design patent issued in 2022 in the U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2035. +We have registered design patents for a collection funnel and corresponding plunger device in Europe, China, and India and a corresponding U.S. design patent application is pending. +We have pending patent applications throughout our product and service lines directed to assays, methods, devices, and reagents for monitoring adherence to HIV medications, such as nucleoside reverse transcriptase inhibitors used in PrEP regimens. +We have two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +We hold, through our subsidiary, DNAG, thirty granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from June 2023 through October 2037. +12 +We hold through our subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. We have also applied for additional patents, in both the United States and certain foreign countries, in novel urine collection devices. +Our subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological sample containing polynucleotide molecules. These patents will expire in May 2036. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure QuickFlu ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® , and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +13 +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, de novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for de novo classification before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a de novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made following a determination by the Secretary of Health and Human Services that there is a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to our marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +14 +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of our products are used for research only or for other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other post-market requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has +15 +obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by our subsidiary, Diversigen, consist of microbiome, metatranscriptomics and metagenomics sequencing, bioinformatics and analysis. Diversigen has elected to obtain a license from CLIA and has received a certificate of accreditation from the College of American Pathologists (CAP). +Certain of our products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The European Union (“EU”) adopted the EU Medical Devices Regulation (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (the “EU IVDR”), which repealed and replaced the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Medical Devices Directive (“IVDD”), respectively. The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became applicable on May 26, 2022. There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be +16 +placed on the EU market for a certain period before requiring certification under the IVDR; however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022. +In the EU, products that fall under the scope of the MDR and the IVDR are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. We also note that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to our international strategy. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). We received this certification for our Diagnostics segment (previously named "OSUR") in January 2019 as well as for our Molecular Business Unit in February 2020. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require us to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are +17 +wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which we are subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. We also are subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which we are subject as a result of our international sales also include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require us to alter our manufacturing processes, thereby increasing our manufacturing costs, or may impose other additional obligations on us or our products. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +18 +Information Available on the Internet +Our filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on our website (www.orasure.com) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on our website is not a part of this Annual Report. +19 +ITEM 1A. Ris k Factors +Summary of Risk Factors +Investing in our securities involves risk. Below is a summary of the principal factors that could adversely affect our business, operations and financial results. You should carefully consider the following risks and uncertainties, together with all other information in this Annual Report, including our consolidated financial statements and related notes and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, before investing in our Company. This summary does not address all of the risks that we face. Additional discussion of the summarized risks can be found below following this summary. +Risks Relating to Products, Marketing and Sales +• +Changes in the genomics market may adversely affect our business. +• +Our future success depends upon market acceptance of our existing and future products and service offerings. +• +We may not realize anticipated revenue from our InteliSwab ® COVID-19 rapid test. +• +The COVID-19 pandemic continues to cast uncertainty over our consolidated results of operations, financial position and cash flows, while the consequences of COVID-19 and the governmental response to the pandemic and pandemic-related macroeconomic impacts could negatively affect our operations and share price; +• +Marketing of our COVID-19 tests and collection kits under EUAs from the FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of the EUAs is subject to government discretion. +• +If acceptance and adoption of oral fluid testing and collection products does not continue, our further results may suffer. +• +We expect to face increasing competition from other providers of diagnostic tests, sample collection products and molecular laboratory services. +• +Our inability to expand international sales could adversely affect our business and results of operations. +• +Our international presence may increase our risks and expose our business to regulatory, cultural or other restraints. +• +Our U.S. government contracts require compliance with numerous laws and increases our risk and liability. +• +Our inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect our business. +• +Our business will suffer if we do not effectively manage challenges to our manufacturing processes and we may be unable to successfully scale-up manufacturing of our products in sufficient quality and quantity to meet demand, which would negatively impact revenue expectations. +• +Our business results depend on our ability to manage disruptions in our domestic and global supply chains and distribution channels. +• +Certain of our products depend on components from a sole-source supplier, the loss of which would cause us to be unable to deliver such products. +• +Our U.S. government contracts may affect our intellectual property rights. +• +We may not be able to fulfill our obligations under government contracts, which could result in reduced sales and profits, contract penalties or terminations and damages to customer relationships. +Risks Relating to Our Industry, Business and Strategy +• +Consolidation in the healthcare industry could adversely affect our future revenues and operating results. +• +Our research, development and commercialization efforts may not succeed and our competitors may develop and commercialize more effective or successful offerings. +• +Customer concentration creates risk for our business. +• +Acquisitions or investments may not generate the expected benefits and could disrupt our ongoing business, distract our management, increase our expenses and adversely affect our business. +• +There are risks relating to our recent acquisitions. +20 +• +Our revenues could be affected by third-party reimbursement policies and potential cost constraints. +• +Changes in healthcare regulation could affect our revenues, costs and financial condition. +• +Reductions in government funding and research budgets could adversely affect our business and financial results. +Risks Relating to Our Reliance on Third Parties +• +The use of third party supply sources for critical components of our products could adversely affect our business. +• +Our failure to maintain existing distribution channels, or develop new distribution channels, may result in lower revenues. +Risks Relating to Intellectual Property +• +Our success depends on our ability to protect our proprietary technology. +• +We may become involved in intellectual property disputes, which could increase our costs and limit or eliminate our ability to sell products, provide services or use certain technologies. +Regulatory Risks +• +The need to obtain regulatory approvals, clearances, authorizations or certifications could increase our costs and adversely affect our financial performance. +• +Failure to comply with FDA or other regulatory requirements may require us to suspend production or sale of our products or institute a recall which could result in higher costs and loss of revenues. +• +Our inability to respond to changes in regulatory requirements could adversely affect our business. +• +We are subject to numerous government regulations in addition to FDA requirements, which could increase our costs and affect our operations. +• +FDA regulation of laboratory-developed tests and genetic testing could affect demand for our products. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +• +We have experienced losses in the past and may not be able to again achieve and maintain profitable operations. +• +Economic volatility and disruption, including those related to the COVID-19 pandemic could adversely affect our business, financial performance, results of operations, cash flow and financial condition or those of our customers and suppliers. +• +An impairment of goodwill and intangible assets could reduce our earnings. +• +Changes to foreign currency exchange rates could negatively affect our operating results. +Risks Relating to Our Common Stock +• +Our stock price could continue to be volatile. +• +Future sales of our Common Stock by existing stockholders, executive officers or directors could depress the market price of our Common Stock and make it more difficult for us to sell stock in the future. +• +Certain provisions in our Certificate of Incorporation and Bylaws and under Delaware law could make a third-party acquisition of us difficult. +Risk Factors +You should carefully consider the risks and uncertainties described below. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not disclosed or not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Changes in the Genomics Market May Adversely Affect our Business . +21 +The genomics market has been the largest component of our overall molecular business segment for some time and the major drivers of this market have been the consumer genomics segment, which offers products and services to consumers to provide them with personalized health and genealogical information, and the disease risk management segment which offers genetic testing through physicians for a variety of applications including prenatal testing, risk screening and pharmacogenomics. The ancestry portion of the consumer genomics market may be maturing and our sales to customers with offerings in this market have been volatile. Our genomics revenues have also been volatile due to changes in promotional strategies and purchasing patterns by one of our largest customers which serves the consumer ancestry and genetic testing market and cost cutting and de-stocking efforts at some of our larger disease risk management customers. These trends in the ancestry testing market may continue and revenues in this segment may continue to be volatile. +In an effort to increase our molecular revenues, we have devoted increasing time and attention to expanding sales of our genomics products both domestically and internationally, with both new and existing accounts, including co-clearances and co-promotions with strategic partners. While we believe these new markets represent large growth opportunities, there is no assurance that we will be successful in capitalizing on these opportunities or that we will be able to increase our product sales consistent with our expectations. Factors include, but are not limited to, the market acceptance of our products, available funding, cost containment strategies implemented by customers, increasing competition and regulatory constraints could limit sales of our genomics products. To the extent that we are unsuccessful or limited in expanding our business into new markets, our revenues and results of operations could be negatively affected. +Despite these challenges, we believe there is significant growth opportunity for our genomics products in the area of disease risk management (“DRM”), which includes genetic risk testing, prenatal testing, carrier screening, pharmacogenomics testing and population heath studies. +Our Future Success Depends Upon Market Acceptance of Our Existing and Future Products and Service Offerings. +Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as InteliSwab ® , OraQuick ® HIV Self-Test, OraQuick ® Ebola test and OMNIgene ® • GUT product offerings, and other new products or technologies that may be developed or acquired. In addition, our future revenues will depend on market acceptance of new uses for our saliva collection products, including for COVID-19 testing, and our new service offerings, such as the microbiome laboratory testing and analytical services we provide through Diversigen. To commercially market new uses of our products and to achieve market acceptance, we will likely be required to undertake clinical studies to validate the new uses for our products and spend significant funds to complete product development and clinical studies and then undertake substantial marketing efforts to inform potential customers and the public of the existence and perceived benefits of these products and services. In addition, governmental funding may be needed to help complete development, obtain required regulatory approvals, clearances or EUAs and create market acceptance and expand the use of these products and services. +There may be limited evidence on which to evaluate the market reaction to products and services that may be developed and our marketing efforts for new products and services or products with new uses may not be successful. The market for microbiome products and services is in its early stages and its future development and acceptance by our customers is uncertain. Also, we continue to develop and seek 510(k) regulatory clearance for the InteliSwab® tests, and it is uncertain whether we will be successful in our development and validation efforts or whether these products will prove effective, receive applicable regulatory approvals and gain widespread acceptance in the marketplace. As such, there can be no assurance that any products or services will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. It is possible that our expenses to develop and market any such products, including, without limitation our InteliSwab ® tests, will exceed any benefit in revenues, which may be short-lived. In addition, other products that compete with ours may achieve 510(k) clearance earlier than we do, providing market advantages. +We May Not Realize Anticipated Revenue From Our InteliSwab® COVID-19 Rapid Test . +While we expect to continue to see significant demand for our InteliSwab ® COVID-19 Rapid Test, other companies are working to produce or have produced rapid tests for COVID-19 which may lead to the diversion of customers, including governmental and quasi-governmental entities, away from us and toward other companies. Moreover, the dangers posed by COVID-19 may subside over time. A number of preventative vaccines have been approved for use in human populations by regulatory agencies in the U.S. and around the world. The uptake of these vaccines will likely limit the spread of COVID-19 and potentially reduce the market size for COVID-19 testing. +We expect that, if and when the current COVID-19 pandemic subsides, there could be significantly reduced demand for testing, and thus, for our InteliSwab ® COVID-19 Rapid Tests. We have seen a reduction in the prevalence of COVID-19 since the height of the pandemic, and we expect that revenues relating to our COVID-19 testing products will decline in the future if the prevalence of COVID-19 remains low. Further, if the COVID-19 pandemic becomes a seasonal virus or experiences fluctuations in prevalence, we could +22 +experience fluctuations in our revenues associated with our InteliSwab® COVID-19 Rapid Tests. While there is still demand for COVID-19 testing products, there is no guarantee that current or anticipated demand will continue, or if demand does continue, that we will be able to produce our InteliSwab® COVID-19 Rapid Test in quantities to meet the demand. A significant decline in demand for our InteliSwab ® COVID-19 Rapid Test without a corresponding increase in our other businesses could have a material, adverse effect on our results of operations, cash flow and financial position. +The COVID-19 Pandemic Continues to Cast Uncertainty Over Our Consolidated Results of Operations, Financial Position and Cash Flows, While the Consequences of COVID-19 and the Governmental Response to Contain the Pandemic and Pandemic-Related Macroeconomic Impacts Could Negatively Affect Our Operations and Share Price . +Although we have experienced heavy demand for our InteliSwab ® tests and certain specimen collection devices for use in COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on our performance, the duration and level of the demand for COVID-19 testing is highly uncertain. In addition, the COVID-19 pandemic has continued to negatively impact our ability to provide our HIV self-tests in Southern and Eastern African countries due to logistics challenges and, in our Molecular Solutions segment, COVID-related disruptions in clinical and research work, particularly in the academic market, had reduced demand for our products. We believe the COVID-19 pandemic's continued impact on our consolidated results of operations, financial position and cash flows will be primarily driven by; (i) the severity and duration of the COVID-19 pandemic; (ii) the COVID-19 pandemic's impact on the U.S. healthcare system and the U.S. economy; (iii) the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic, including the development and deployment of vaccine, and (iv) the COVID-19 pandemic's impact on global clinics, research markets and global logistics. Each of these factors are difficult to predict and the nature, length and severity of any adverse consequences as a result of any given factor are uncertain. +Management has closely monitored the impact of the COVID-19 pandemic, with a focus on the health and safety of our employees and business continuity. +In response to, or as a result of, the current COVID-19 pandemic and emergence of variants, we may experience, among other things, voluntary or mandated temporary closures of one or more of our facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on our supply ‎chain and distribution channels; the potential of increased network vulnerability and risk of data loss resulting from ‎increased use of remote access and removal of data from our facilities; and required reallocation or adjustment of resources, which may ‎impact our business plans and product offerings. In addition, the direct or indirect impacts of ‎COVID-19 may extend to disrupt our suppliers, partners, manufacturers, customers and other ‎stakeholders, which in turn could materially adversely affect our business, results of operations or financial condition. Any change or disruption in operations could impact and have a material adverse effect on our operations and/or results from operations. In addition, the re-introduction of voluntary or mandated efforts ‎to slow the spread of COVID-19 could impact our operations and sales. If portions or all of our, our partners’, or our customer’s operations are disrupted or suspended as a result of preventative or reactionary ‎measures in response to the ongoing spread of COVID-19, it could have a material adverse impact on our ‎profitability, results of operations, financial condition and share price. Further, there continue to be significant economic and social impacts of the COVID-19 pandemic, including rising inflation rates, continued levels of higher unemployment, and market volatility, among other impacts; any of which may have an impact on consumer behavior, including use of our products.‎ +Given the uncertainties associated with the ongoing COVID-19 pandemic, including ‎the uncertainty surrounding the remaining duration and outcome, COVID-19 variants and vaccine efficacy, we are unable to estimate the full impact of the COVID-19 pandemic on its business, financial condition, results of operations, and/or cash flows; however, the impact could be material. +Marketing of Our COVID-19 Tests and Collection Kits Under EUAs From The FDA Is Subject To Certain Limitations and We Are Required To Maintain Compliance With The Terms of The EUA, Among Other Things, And The Continuance of The EUAs Is Subject To Government Discretion. +On February 4, 2020, the HHS issued a declaration that the threat to public health posed by COVID-19 justifies the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of SARS-CoV-2. Under Section 564 of the FDCA, because HHS has issued this declaration, the FDA Commissioner is authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA reflects an FDA conclusion that based on the totality of scientific evidence available to the FDA, it is reasonable to believe that the product may be effective in diagnosing COVID-19, the known potential benefits of the product outweigh the known and potential risks, and there is no adequate, approved, and available alternative to the emergency use of the product. +23 +During 2020, our ORAcollect ® ·RNA and OMNIgene ® ·ORAL collection devices were included in EUAs granted by the FDA to certain third parties for use in the detection of SARS-CoV-2, and we have separately obtained EUAs for these products. In addition, we obtained three EUAs for our new our InteliSwab® COVID-19 Rapid Test. Although there are certain regulatory requirements the FDA has waived for the duration of the EUAs, we remain subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events. As part of the conditions of authorization, OraSure was required to conduct a clinical study in a pediatric population ages 2-14 and an asymptomatic population in addition to launching an app for consumers to report their test results to public health jurisdictions. OraSure has completed the required conditions of authorization with respect to the pediatric claim and launched the InteliSwab ® Connect application for reporting test results to public health jurisdictions. As a result of the National Institutes of Health study (Performance of Screening for SARS-CoV-2 using Rapid Antigen Tests to Detect Incidence of Symptomatic and Asymptomatic SARS-CoV-2 Infection: findings from the Test Us at Home prospective cohort study), FDA has requested modifications to labeling to include serial testing and has removed the required for the Company to conduct a study in an asymptomatic population. Labeling has been modified as required for inclusion of serial testing and authorized by FDA. +As with other FDA-regulated products, issues could emerge during the course of the marketing and use of our products under an EUA that could impact our ability to continue the sale and distribution of these products (for example, compliance or product performance issues). The applicable EUAs remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety. If that were to occur then in order market our diagnostic products or collection kits for the purpose of detecting COVID-19, we would be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations for device manufacturers, including the QSR under 21 CFR Part 820. It is possible that we may not be able to obtain those clearances or approvals in a timely manner, or at all, and that one or more of our competitors may obtain the necessary clearances or approvals for their products before we do. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, Our Future Results May Suffer. +We have made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Our subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications including testing for SARS-CoV-2. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. Our future sales will depend, in part, on our ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. Even if we can demonstrate that our products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. In addition, demand for our new rapid tests for SARS-CoV-2 or PrEP adherence may not develop consistent with our expectations. Our failure to achieve and expand market acceptance of our rapid point-of-care diagnostic tests with customers would have a negative effect on our future sales growth. +We Expect to Face Increasing Competition From Other Providers of Diagnostic Tests, Sample Collection Products and Molecular Laboratory Services. +Our rapid point-of-care tests compete with other point-of-care products made by our competitors. This competition is particularly evident with respect to our OraQuick ADVANCE ® HIV-1/2 test and our HIV Self-Test outside of the US. The Oragene ® product line sold by our subsidiary, DNAG, competes against other molecular collection products, such as blood collection kits and buccal swabs and will likely face additional competition from collection devices similar in design and operation to our Oragene ® and ORAcollect ® products. There are a number of products currently in or expected to enter the market for the detection of antigen to SARS-CoV-2 that currently or will compete with our InteliSwab ® COVID -19 diagnostic test. +Our genetic and microbiome laboratory services business is expected to face increasing competition, primarily from large commercial reference laboratories, hospital-based laboratories and specialty laboratories. We believe there is significant opportunity in the markets for these services, particularly the microbiome market which is still in the early stages. As these markets evolve and expand, we expect competition for genomic and microbiome laboratory services to intensify. +24 +There is significant competition, including from other companies and governmental organizations, who make and distribute rapid tests for COVID-19. Many of these entities have substantially greater resources (including capital and personnel) than we do. Even if we are successful in marketing our InteliSwab® tests, there is no guarantee that competitors will not take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority. +A number of our competitors are making investments in competing technologies, products and services, and several may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and service offerings, aggressively discount prices for their products and services and may have greater name recognition than we have. We also face competition from certain of our distributors or former customers that have created, or may decide to create, their own products to compete with ours. If our competitors take market share from our offerings through more effective marketing or competitive pricing, higher quality or technological superiority, our revenues, margins and operating results could be adversely affected. In addition, our revenues and operating results could be negatively impacted if some of our customers use internally developed or acquired sample collection devices or services in order to reduce costs. +Our Product Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in Our Operating Results. +The sales cycles for certain of our products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of our products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years our OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. Our OraQuick ® HCV test has been purchased by customers who receive government funding, and we believe increased funding from the CDC and other agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions at all or on a schedule and in an amount consistent with our objectives. +Our Inability To Expand International Sales Could Adversely Affect Our Business and Results of Operations. +One of our strategic priorities is to substantially expand our product sales internationally. An opportunity to accomplish this objective is with the sale of our OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. Our OraQuick ® HIV Self-Test is also currently available in six European countries: United Kingdom, Germany, France, Italy, Spain and Portugal. We are also working to expand international sales of our professional HIV and HCV products and our molecular collection kits. We also believe there is a significant opportunity for international sales of our InteliSwab ® COVID-19 Rapid Test once the necessary studies and registrations are complete. +While we believe international sales of these and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will materialize, continue or increase. Among other factors, competition from competitive lower priced products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not occur or increase or if we are otherwise unable to expand international sales of our products, our revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that we sell our products at a price below our typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to our business. To the extent these international sales comprise a large or increasing part of our business, our gross margins will be negatively affected. In addition, we may have difficulty selling our products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If we are unable to obtain or continue this funding support at sufficient levels, or at all, our revenues and results of operations could be negatively affected. +Our International Presence May Increase Our Risks and Expose Our Business to Regulatory, Cultural or Other Restraints. +We seek to increase revenue derived from international sales of our products. Our international sales accounted for $37.3 million, or 10% of consolidated net revenues in 2022, $45.3 million, or 24%, of consolidated net revenues in 2021, and $40.9 million, or 24%, of consolidated net revenues in 2020. In addition, our subsidiary DNAG, which accounted for $75.0 million or 19% of consolidated net revenues in 2022, is operated in Canada. We have previously acquired foreign companies and we may acquire other foreign companies as part of our business development efforts. +25 +A number of factors could adversely affect the performance of our business and/or cause us to incur substantially increased costs because of our international presence and sales, including, but not limited to those set forth below: +• +Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• +The potential for inconsistent imposition of legal and regulatory requirements; +• +Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of our products; +• +Cultural and language differences that make international operations and business management more difficult; +• +Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• +Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• +Regulatory requirements, including compliance with applicable customs regulations and the need to obtain or maintain regulatory approvals, registrations or reimbursement approvals for our products; +• +Trade protection measures, additional trade sanctions and import/export licensing requirements; +• +The inability to obtain or maintain ISO certification for our or our suppliers’ manufacturing facilities; +• +Our inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• +Diversion to the U.S. of our products that are sold at lower prices into international markets; +• +The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• +Differing tax laws across jurisdictions, as well as changes in those laws; +• +An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• +The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• +Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• +Difficulty collecting amounts owed by foreign governments or other customers; +• +Economic conditions, inflation, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• +Exposure to infectious disease and epidemics, including the effects of the COVID-19 outbreak on our business operations in geographic locations impacted by the outbreak and on the business operations of our customers and suppliers; +• +Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• +The sale of competing products by foreign competitors at prices at or below the prices we offer for our products; +• +Restrictions on our ability to repatriate investments and earnings from foreign operations; +• +Changes in shipping costs; +• +The unavailability of licenses to certain patents in force in a foreign country which cover our products; and +• +Reduced protection for, or enforcement of, our patents and other intellectual property rights in foreign countries. +In addition, we have contracted with a third party in Thailand for the manufacture of a portion of our OraQuick ® HIV tests and a portion of the assembly of our InteliSwab ® COVID-19 Rapid Tests, and all of DNAG’s products are produced in Canada. We may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States. Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing our products in foreign countries. In addition, the ongoing COVID-19 pandemic has resulted in increased government-imposed travel restrictions and extended shutdowns of certain businesses in the affected locations as well as logistics delays due to the global logistical crisis from the pandemic. These or any further political or governmental responses to pandemic diseases could result +26 +in social, economic and labor instability of foreign countries, which could have a material adverse effect on our business, results of operations and financial condition. +Our U.S. Government Contracts Require Compliance With Numerous Laws and Increases Our Risk and Liability. +From time to time, we receive funding from the U.S. government and we sell some of our products to the federal government. Historically, we have sold a number of our products to the government under contracts with the General Services Administration and the Veterans Administration. +In September 2022 we entered into an $8.6 million contract with BARDA to develop a second generation Ebola test on the OraQuick ® testing platform and we were selected to provide our OraQuick ® In-Home HIV tests in support of the CDC "Together Take me Home," HIV self-test program. Under the program, the CDC is expected to provide $41.5 million over a five-year period to support community testing. During the third quarter of 2022, we entered into a contract with the DLA for the second procurement of our InteliSwab ® COVID-19 Rapid Test for OTC use. During the same quarter, we entered into a contract with the BARDA to provide us with up to $13.6 million in funding to obtain FDA 510(k) clearance and CLIA waiver for our InteliSwab® test. In September 2021, we entered into a contract with the U.S. Department of Defense, in coordination with the HHS for $109 million in funding to build additional manufacturing capacity in the United States for our InteliSwab ® test. +As a result of our U.S. government funding and product sales to the U.S. government, we must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to us as compared to competitors that do not rely on government contracts. For example, the government has the right to terminate one or more of these contracts at its convenience even if we have not defaulted in any of our obligations. +As a U.S. government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to our entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect our business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, we could suffer serious reputational harm and the value of our common stock could be negatively affected if allegations of impropriety related to such contracts are made against us. +Our Inability to Manufacture Products in Accordance with Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Our Business. +The materials and processes used to manufacture our products must meet detailed specifications, performance standards and quality requirements to ensure our products will perform in accordance with their label claims, our customers’ expectations and applicable regulatory requirements. As a result, our products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause our products or the materials used to produce or assemble our products to fail inspections and quality testing or otherwise not perform in accordance with our label claims or the expectations of our customers. +Any failure or delay in our ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect our ability to manufacture and sell our products or comply with regulatory requirements. These events could, in turn, adversely affect our revenues and results of operations. +Our Business Will Suffer if We Do Not Effectively Manage Challenges to Our Manufacturing Processes and We May be Unable to Successfully Scale-Up Manufacturing of Our Products in Sufficient Quality and Quantity to Meet Demand, Which Would Negatively Impact Revenue Expectations. +Challenges in the manufacture of our products in the face of significant demand for our InteliSwab ® COVID-19 Rapid Tests have adversely affected, and could in the future adversely affect, our operating efficiency and results of operations. We have contracted with +27 +the U.S. Department of Defense to add additional manufacturing capacity of our InteliSwab ® COVID-19 Rapid Tests. However, we face risks, including with respect to expanding our overall production capacity, that could increase costs, divert management attention and reduce our operating results, with no guarantee of success. The expansion of our manufacturing and scale-up of additional commercial production and capacity involves significant risks and challenges, including, but not limited to, design and construction delays, implementation of new systems and expertise and cost overruns. There can be no assurance that our scale-up and manufacturing expansion will be operational, on time, or contribute the production capacity that we anticipate, and we cannot guarantee that any such scale-up will operate at costs acceptable to us or that demand for our products will remain at levels high enough to meet the return on investment necessary to justify our investment in these projects. +As we increase our manufacturing capacity to meet market demand or begin to manufacture new products at scale, we may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. In addition, we could experience delays in production as we increase our manufacturing capacity or begin to manufacture new products that may result in our inability to meet product demand as the products ordered by our customers being on back-order as initial production issues are addressed. If we experience production delays or inefficiencies, a deterioration in the quality of our products or other complications in managing changes to our manufacturing processes, including those that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, we may not achieve the benefits that we anticipate from these actions when expected, or at all, and our operations could experience disruptions, our manufacturing efficiency could suffer and our business, financial condition and results of operations could be materially and adversely affected. Any such delays could allow our competitors to seize market advantage. In addition, global supply chain and workforce challenges related to the COVID-19 pandemic increase the risks in scaling-up manufacturing as global supply challenges may increase the difficulty in obtaining necessary materials and a dynamic and unpredictable labor market may make the necessary labor and staffing challenges more difficult. If we are unable to successfully meet our manufacturing challenges, we may be unable to meet the demand for our InteliSwab® COVID-19 Rapid Tests, which could have a material, adverse effect on our reputation, revenues, results of operations, cash flow and financial position. +Our Business Results Depend on our Ability to Manage Disruptions in our Domestic and Global Supply Chains and Distribution Channels. +Our ability to meet our customers needs and achieve our financial objectives depends on our ability to maintain key manufacturing, supply and distribution arrangements. The loss or disruption of such manufacturing and supply arrangements could, in the future, interrupt our ability to obtain necessary raw materials and manufacture our products. Such disruptions could result from labor disputes, financial liquidity, natural disasters, extreme weather conditions, public health emergencies and pandemics, supply constraints and general economic and political conditions that could limit the ability of our suppliers to timely provide us with raw materials and components and distribute our products in a timely manner in accordance with applicable quality requirements. Disruptions in the global supply chain could also delay or preclude the ability of our distributors to sell and deliver our products to customers. +The availability and price of these materials, parts, products and services are affected by a variety of factors beyond our control, including the willingness of suppliers to sell into the medical device industry, changes in supply and demand, general economic conditions, labor costs, fuel-related transportation costs, liability concerns, climate change (including new and existing laws and regulations to address climate change), competition, import duties, tariffs, currency exchange rates, inflationary pressures and political uncertainty around the world. Our suppliers often pass some of their cost increases on to us, and if such increased costs are sustained or increase further, our suppliers may pass further cost increases on to us. In addition, transportation costs have generally increased and may further increase if crude oil prices increase. Our transportation and service providers are typically able to pass any significant increases in oil prices on to us. Our costs may also be impacted by laws to increase minimum wages, including the potential increase to the federal minimum wage in the United States that has been recently proposed by the current administration. +Our ability to recover such increased costs may depend upon our ability to raise prices on our products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers and third-party payers, we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs through price increases or offset these increases through cost reductions, or we experience terminations or interruption of our relationships with our suppliers, we could experience lower margins and profitability, and our results of operations, financial condition and cash flows could be materially harmed. +Recently, the global supply chain has experienced significant disruptions caused by the COVID-19 pandemic, resulting in shortages of labor and equipment. These conditions, if not mitigated or remedied in a timely manner, could delay or preclude delivery of raw materials needed to manufacture our products or delivery of our products to customers, particularly in international markets. This in turn could have an adverse impact on our business, financial condition, results of operations or cash flows. +Certain of Our Products Depend on Components From a Sole-Source Supplier, the Loss of Which Would Cause Us to be Unable to Deliver Such Products. +28 +Our Intercept i2 ® he collection device is manufactured and supplied under a long-term agreement with Thermo Fisher, the sole-source supplier for these products. If Thermo Fisher were unable or unwilling to supply the necessary components for the manufacture of the Intercept i2 ® he collection devices, we would be unable to produce this product or offer it to our customers. Any interruption in, or change in the cost or quality of, the supply of the necessary raw materials, manufacturing services, product and process development, or other materials necessary to manufacture the product could adversely impact the efficacy of the product and negatively affect our reputation with our customers. In addition, many of the raw materials used in our DNAG products, including our Oragene ® product line, and components used in these products are also purchased from third parties, some of which are purchased from a sole source supplier. If our sole source suppliers were to be acquired by a competitor, they may elect not to provide us with the product, raw materials or other components, as applicable. If our sole source suppliers were to otherwise cease supplying us, go out of business, or were unable to meet their obligations in a timely fashion or at an acceptable price, or at all, we may be forced to incur higher costs to obtain the necessary raw materials elsewhere, if we could even source such materials at all. +Our U.S. Government Contracts May Affect our Intellectual Property Rights. +Provisions in our U.S. government contracts may affect our intellectual property rights. Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including our contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States. +Our U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review our performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review our compliance with government regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on our business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, we may be subjected to government scrutiny that could delay or otherwise adversely affect our ability to compete for or perform government contracts or collect our revenue in a timely manner. An unfavorable outcome of an audit of our government contracts could adversely affect our results of operations. +We May Not be Able to Fulfill Our Obligations Under Government Contracts, Which Could Result in Reduced Sales and Profits, Contract Penalties or Terminations, and Damages to Customer Relationships. +If we are unable to successfully scale-up our manufacturing of our InteliSwab ® COVID-19 Rapid Tests, we may be unable to meet our obligations under our government contracts. In addition, certain of our government contracts require us to meet production and manufacturing milestones. Failure to meet these milestones would result in not receiving payments under the contract. Our inability to fulfill our obligations under government contracts could result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships, leading the government to turn to other companies to fulfill the contract. +Risks Relating to Our Industry, Business and Strategy +Consolidation in the Healthcare Industry Could Adversely Affect Our Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. We +29 +may not be able to compete successfully in such a consolidated industry. We believe industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of our products. +Our Research, Development and Commercialization Efforts May Not Succeed and Our Competitors May Develop and Commercialize More Effective or Successful Offerings. +In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new or enhanced products and services. The research and development process generally takes a significant amount of time from inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a new or enhanced product or service in which we have invested substantial time and money. +Successful products and services can require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval or clearance must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. Similarly, regulatory clearances or registrations, such as a CLIA certification, and compliance with industry guidelines, may be required in order to provide competitive laboratory services. As noted above, regulatory authorities may not issue such approvals, clearances or certifications or may substantially delay or condition such action. Even if a product or service is developed and all applicable regulatory approvals, clearance or certifications are obtained, there may be little or no market for the product or service and entry into or development of new markets for our products and services may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, we may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product or service. Other factors that could affect the success of our efforts include our ability to manufacture products or provide laboratory services in a cost-effective manner and whether we can obtain necessary intellectual property rights and protection in the markets where the product or service is sold. +If we fail to develop and gain commercial acceptance for our products and services, or if competitors develop more effective products and services or a greater number of successful new products and services, customers may decide not to purchase our products and services or may purchase and use products and services developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flow and business. +Customer Concentration Creates Risk for Our Business. +One of our customers accounted for approximately 58% of our net consolidated revenues for the year ended December 31, 2022. We expect that sales to the large non-commercial customer will continue to be a significant contributor to our net consolidated revenue. Certain parts of our business may continue to have a high customer concentration and depend disproportionately on a few large customers. To the extent that such a large customers fail to meet their purchase commitments, change their ordering patterns or business strategies, or otherwise reduce their purchases or stop purchasing our products, or if we experience difficulty in meeting the high demand by these larger customers for our products, our revenues and results of operations could be adversely affected. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt Our Ongoing Business, Distract Our Management, Increase Our Expenses and Adversely Affect Our Business. +Since the beginning of 2019, we have acquired several companies through which we have gained access to new technologies, products and services which are complementary to our existing business and aligned with our long-term business strategy. We will likely continue to pursue strategic acquisitions or investments as a way to expand our business. These activities, and their impact on our business, are subject to many risks, including the following: +• +Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to us or consistent with our objectives; +• +We may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• +The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, our inexperience with new businesses or markets, general economic conditions and increased competition; +• +We may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products, services and/or technology into our business; +30 +• +Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• +Acquisitions may require substantial expense and management time and could disrupt our business; +• +We may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• +We may have difficulties in coordinating geographically separate organizations; +• +We may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• +An acquisition may result in a diversion of resources from our existing products, business and technologies; +• +An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• +To the extent we agree to pay contingent consideration for an acquisition, if and how much of such consideration we are required to pay may be subject to dispute, resulting in the distraction of our management team and the incurrence of legal costs; +• +An acquisition may result in employee anxiety, morale and/or engagement issues; +• +An acquisition may result in disparate information technology, internal control, financial reporting and record-keeping systems; +• +An acquisition may result in new partners or customers who may operate on terms and programs different than ours; +• +An acquisition may result in employees not familiar with our operations; +• +An acquisition may result in new products and services, including the risk that any underlying intellectual property associated with such products and services may not have been adequately protected or that such products and services may infringe on the proprietary rights of others; +• +An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• +An acquisition may result in the loss of our or the acquired company’s key personnel, customers, distributors or suppliers; and +• +An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and our inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial and strategic objectives. +There Are Risks Relating To Our Recent Acquisitions. +The success of the acquisitions will depend, in part, on our ability to successfully combine and integrate our legacy business with those businesses acquired. The integration of the businesses with our existing business can be complex, costly and time-consuming processes. It is possible that a number of factors, including, without limitation, the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruptions of ongoing businesses or inconsistencies in standards, controls, procedures and policies, could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisitions. If we experience difficulties with the integration process, the anticipated benefits of the acquisitions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on us for an undetermined period following the acquisitions. +As a general matter, the market for microbiome laboratory testing and analytical services provided by Diversigen is at an early stage and is still developing. In addition, the Colli-Pee ® urine collection devices manufactured and sold by Novosanis are relatively new products that are not yet widely accepted by customers. There is no assurance that we will be successful in creating or expanding demand for these services and products. To the extent that the markets for these services and products fail to develop or increase, our revenues and results of operations could be adversely affected and we may not meet our growth objectives. +31 +Our Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of certain of our products include hospitals, physicians and other healthcare providers. Use of our products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of our products from their patients’ healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for our products or our ability to sell our products on a profitable basis. In addition, the reimbursement approval process may delay the market introduction of our products. +Changes in Healthcare Regulation Could Affect Our Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of changes to healthcare reform legislation and the resulting impact on us are impossible to predict. If significant reforms continue to be made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase our costs or otherwise have an adverse effect on our financial condition and results of operations. +New or Changed Testing Guidelines Could Affect Sales of Our Diagnostic Products. +From time to time, governmental agencies such as the CDC issue diagnostic testing guidelines or recommendations, which can affect the usage of our HIV and HCV tests or other diagnostic products. For example, past sales of domestic professional OraQuick ® HIV tests have decreased in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which our OraQuick ® rapid HIV and HCV testing products or other products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as our OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of our products and our results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect Our Business and Financial Results. +We sell our OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the US public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. We also sell these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use our products. In international markets, we often sell products such as our OraQuick ® HIV Self-Test to or through foreign governmental agencies or parties funded by such agencies. +Many of our molecular collection products are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries to pay for the products and services they purchase. These research customers also purchase our genomic and microbiome laboratory tests and analytical services. +32 +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government or other funding as a result of legislative or regulatory changes or other factors, could cause our customers to delay, reduce or forego purchases of our products and services. +Risks Relating to Our Reliance on Third Parties +The Use of Third Party Supply Sources For Critical Components of Our Products Could Adversely Affect Our Business. +We currently purchase certain critical components of our products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make our OraQuick ® HIV, HCV and Ebola products are currently purchased from sole source suppliers. Our OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with our Intercept i2 ® device are manufactured and supplied by sole source suppliers and the conjugates used in our MICROPLATE oral fluid drugs-of-abuse assays are obtained from third-party suppliers. We have contracted with third parties in Thailand for parts of the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, our subsidiary, DNAG, uses three third-party manufacturers to supply virtually all of its products, including its Oragene ® and ORAcollect ® lines of collection kits. Many of the raw materials and components used in its products are also purchased from third parties, a critical one of which is obtained from a sole source supplier. +The COVID-19 pandemic and the measures taken to contain the spread of the virus, have disrupted, and could continue to disrupt, the normal operations of our third-party suppliers. Our third-party suppliers may not have the personnel, raw materials, capacity or capability to manufacture our products according to our schedule and specifications. To the extent any such production and distribution interruption or closures occur and continue for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations. If our third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting our specifications, we may need to find another source and/or manufacturer. This could require that we perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. We may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to our products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce our control over pricing, quality and timely delivery. These events could either disrupt our ability to manufacture and sell certain of our products into one or more markets or completely prevent us from doing so, and could increase our costs. Any such event could have a material adverse effect on our results of operations, cash flow and business. +Our Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors. Our sales depend to a substantial degree on our ability to sell products to these customers and on the marketing and distribution abilities of the companies with which we collaborate. +Relying on distributors or others to market and sell our products could harm our business for various reasons, including: +• +We may not be able to find suitable distributors to distribute our products on satisfactory terms, or at all; +• +Our distributors or other customers may not fulfill their contractual obligations to us or otherwise market and distribute our products in the manner or at the levels we expect; +• +We do not control the incentives provided by our distributors to their sales personnel and the effectiveness of these incentives could affect sales of our products; +• +Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• +We may not be able to renew existing distribution agreements on acceptable terms, or at all; +• +Our distributors may not devote sufficient resources or priority to the sale of our products; +• +Our distributors may prioritize their own private label products that compete with our products; +• +Our existing distributor relationships or contracts may preclude or limit us from entering into arrangements with other distributors; and +33 +• +We may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although we will try to maintain and expand our business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, our revenues and business could be adversely affected. +We May Need Strategic Partners to Assist in Developing and Commercializing Some of Our Products. +Although we may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners. Further, our ability to enter into agreements with additional strategic partners depends in part on convincing them that our products can help achieve and accelerate their goals and efforts. Our strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to our business for a number of reasons, including: +• +We may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• +Our collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of our collaboration; +• +Our collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• +We have limited access to our collaborator’s confidential corporate information and sudden unexpected changes in ownership or strategy or other material events affecting a collaborator of which we are not made aware of in a timely manner, or at all, could adversely impact our relationship; +• +Our collaborators may be acquired by another company, sell the part of their business related to our collaboration, decide to terminate our collaborative arrangement or become insolvent; +• +Our collaborators may develop technologies or components competitive with our products; +• +Our collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• +Disagreements with collaborators could result in the termination of the relationship or litigation; +• +Collaborators may not have sufficient capital resources; and +• +We may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While we generally expect that our collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast our future revenues or operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Risks Relating to Intellectual Property +Our Success Depends on Our Ability to Protect Our Proprietary Technology. +Our industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If we cannot continue to develop, obtain and protect intellectual property rights, our revenues and profits could be adversely affected. Moreover, our current and future licenses or other rights to patents and other technologies may not be adequate for the operation of our business. +As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. +34 +We also rely on trade secrets, know-how and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. Our employees and third-party consultants also sign agreements requiring that they assign to us interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +We cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements we enter into with employees, consultants, advisors or collaborators will provide adequate protection of our intellectual property rights. For example, our competitors may develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. Employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. +For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the U.S. Our trade secrets could become known through other unforeseen means. Although we have licensed certain technology for use in our microbiome laboratory services offerings and we have developed proprietary know-how that we use in this business, we do not currently hold any patents covering the laboratory processes and analytical methods offered to our customers. The absence of patent protection in this or other parts of our business may make it more difficult to protect our intellectual property. In addition, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once our patents expire, we may be faced with increased competition, which could reduce our revenues. We may also not be able to successfully protect our rights to unpatented trade secrets and know-how. +Some of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisers have prior employment or consulting relationships. An adverse determination may limit or restrict the type of work that certain employees involved with such products may perform. +We may collaborate with universities and governmental research organizations or receive funding for our products from government agencies. As a result, one or more of these entities may acquire part of the rights to any inventions or technical information derived from our collaboration or funding relationship with them. +To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. +We May Become Involved in Intellectual Property Disputes, Which Could Increase our Costs and Limit or Eliminate Our Ability to Sell Products, Provide Services or Use Certain Technologies. +From time to time, we may seek to enforce our patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in our product and service areas, and additional patents may be issued to third parties relating to our product and service areas. We, our customers or our suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products or services. Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue. We may also have disputes with parties that license patents to us if we believe the license is no longer needed for our products or services or the licensed patents are no longer valid or enforceable. +Our industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products or services. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or services or stop selling them if it is ultimately determined that our products or services infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against our employees or us relating to claims of misuse or misappropriation of another party’s proprietary rights. +35 +Intellectual property litigation is costly. As such, our involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: +• +It could consume a substantial portion of managerial and financial resources; +• +Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products or services; +• +An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect our future earnings; +• +Governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights; +• +Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or services or other products or services we may develop or acquire; +• +We may be required to alter our product or services, given the proprietary rights of others; +• +The pendency of any litigation may in and of itself cause our distributors and customers to reduce or terminate purchases of our products or services; and +• +A court could award a preliminary and/or permanent injunction, which would prevent us from selling our current or future products or services. +We may indemnify some customers and strategic partners under our agreements with such parties if our products, services or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, our products or services may contain technology provided to us by other parties, such as universities, contractors, suppliers, customers or collaborators, and we may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify us in the event that an infringement or misappropriation claim is asserted against us. +We may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under Federal law, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. +Regulatory Risks +The Need to Obtain Regulatory Approvals, Clearances, Authorizations or Certifications Could Increase Our Costs and Adversely Affect Our Financial Performance. +Many of our proposed and existing products and services are subject to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products and the processes and procedure for our laboratory services. Our practice is to train our employees on the legal requirements applicable to our business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances, other premarket authorizations or certifications can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances, other premarket authorizations or certifications can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations or certifications. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product or a laboratory certification will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, premarket authorization or certification that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization or certification, even though a product has been approved or registered without restrictions or limitations in another country or by another +36 +agency. Delays in receipt or failure to receive such approvals, clearances, premarket authorization or certification could have a material adverse effect on our business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the requirements of the relevant EU in vitro diagnostic medical devices legislation. The new EU Regulation 2017/746 on in vitro diagnostic medical devices ("IVDR"), became applicable on May 26, 2022 and repealed the previous Directive 98/79/EC, ("IVDD"). There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the IVDR; however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022. We have obtained the CE mark for several of our existing products [under the IVDD]. We also intend to apply for CE marks for certain of our future products and are not aware of any material reason why we would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the IVDR will be demonstrated and the CE mark will be obtained or maintained for all products that we desire to sell in the EU. The failure to obtain or maintain the CE mark for one or more of our products could lead to the termination of strategic alliances and agreements for sales of those products in the EU and mean that we are unable to sell such products in the EU. +In addition, we or our distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. We may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable our customers to access interested funding sources for our products. We may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit our ability to market and sell our products in the relevant country. In addition, any change in our arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting our ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production or Sale of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of our operations, and the operations of our suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and recordkeeping. We are subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. We believe that our facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and we cannot be sure that the FDA or other regulators will agree with our compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on our or our distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of our suppliers to supply critical components or materials and of our distributors to sell our products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect our revenues, costs and results of operations. +Some of our products, particularly those sold by DNAG, are sold for research purposes in the U.S. We do not promote these products for clinical diagnostic use and they are labeled “For Research Use Only” ("RUO"). If the FDA were to disagree with our RUO designation of a product, we could be forced to recall and/or stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. +Our Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. +37 +We believe that our products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of our products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to our products, necessitate additional clinical trials or procedures, or make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval or clearance and/or impose new or additional requirements as part of the approval or clearance process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell our products. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +We Are Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase Our Costs and Affect Our Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict our ability to sell products in those states. While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts. +We must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which we advertise our products. As a device manufacturer, we are required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value we have made to physicians and teaching hospitals and any physician ownership or investment interest in our business. In the U.S., before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we generally must first receive either 510(k) clearance or de novo authorization or approval of a PMA from the FDA. Similarly, most major markets for medical devices outside the U.S. also require clearance, approval, authorization or compliance with certain standards before a product can be commercially marketed. Compliance with these laws or any new or changed laws regulating our business could result in substantial costs. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that we do not comply, our business and results of operations could be adversely affected. +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase Our Costs. +In the past, the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) has generally affected us indirectly, as we are generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities. We have in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. We are required to comply with varying state privacy, security and breach reporting laws. If we do not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, we could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, we may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. Moreover, the potential for enforcement action against us is now greater, as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of our business. For example, we could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Failure to Comply With Data Protection Requirements or Privacy Laws Could Increase Our Costs . +The EU has adopted a comprehensive overhaul of its data protection regime from the prior national legislative approach to a single European Economic Area Privacy Regulation called the General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018. The new EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as had been the case under the prior data protection regime, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create +38 +inconsistencies on a country-by-country basis. We are implementing a plan to ensure compliance with these new requirements. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, we have no assurances that violations will not occur, particularly given the complexity of the GDPR, as well as the uncertainties that accompany new, comprehensive legislation. +We are also subject to the California Consumer Privacy Act of 2018 (“CCPA”), which took effect on January 1, 2020. The CCPA imposes extensive new requirements and protections on the processing of personal data, aimed at giving California consumers more visibility and control over their personal information. Failure to comply with the CCPA or other data processing or security laws, or any changes in these laws, could adversely impact our business and our business plans. In 2020, the California residents voted the California Privacy Rights Act (the "CPRA") into law. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. The CPRA also created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the CPRA provisions became effective on January 1, 2023, and additional compliance investment and potential business process changes may be required. Similar laws have been proposed, and likely will be proposed, in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that would make compliance challenging. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For Our Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests ("LDTs"), but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by the FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. We cannot predict what policies will be adopted with respect to regulating LDTs. FDA has been working with regulatory advocacy groups to bring forward legislative approaches specifically for in vitro diagnostic tests including LDTs. For example, in 2021, the Verifying Accurate, Leading-edge, IVCT Development ("VALID") Act was introduced to Congress and provided a framework to change IVDs and LDTs to in vitro clinical tests ("IVCTs"). The proposed regulation would give FDA oversight of LDTs once it becomes law. In 2022, the VALID Act was incorporated into the Senate user fee bill but was not included in the year-end Consolidated Appropriations Act of 2022. Absent congressional legislation to clarify FDA's authorities, the FDA may consider administrative action, such as rule making, to clarify requirements for LDT's. +Our subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDTs and reduce demand for DNAG’s products and adversely impact our revenues. +In 2019, the Department of Justice indicted a number of telemedicine companies and cancer genetic testing laboratories for allegedly submitting fraudulent insurance claims to Medicare. A number of these companies were customers of DNAG. As a result of these activities, the FDA has issued letters to genetic testing laboratories indicating that it plans to increase oversight of this market which has caused some of these companies to stop providing testing options or to change how they are reporting the information provided by the testing. The activities have negatively affected this market and there is a risk that these enforcement actions will continue to negatively affect this market by forcing laboratories to either stop offering such services or restricting the use of such services. Such a reduction in testing could result in decreased sales of our DNA collection devices. +Our International Sales Create Potential Exposure Under Anti-Corruption Laws . +We have a policy in place prohibiting our employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the FCPA and similar foreign laws. In 2022, approximately $37.3 million of our consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject us to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. We have operations, enter into agreements with third parties, and make sales in countries known to experience corruption. Further international expansion, including the acquisition of foreign entities, +39 +may create increased exposure to such practices. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of our distributors. However, our existing safeguards and any future improvements may not prove to be effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and we may be subject to other liabilities, which could negatively affect our reputation, business, results of operations and financial condition. +Risks Relating to the Economy, Our Financial Results, Investments, Credit Facilities and Need for Financing +We Have Experienced Losses in the Past and May Not Be Able To Again Achieve and Maintain Profitable Operations . +We experienced annual net losses during the five years prior to 2015 and again in 2020, 2021 and 2022. In addition, as of December 31, 2022, we had an accumulated deficit of $138.4 million. Even though we achieved profitability in 2015 through 2019, there can be no assurance that we will be able to achieve or sustain profitability in the future. +Our ability to achieve and continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• +Our ability to continue growing sales of our molecular collection products and related genomic and microbiome laboratory services; +• +Our ability to produce and successfully commercialize our InteliSwab® COVID-19 Rapid Tests and compete with comparable products; +• +Our ability to grow our OraQuick ADVANCE ® HIV 1/2 test in the United States and expand sales of our OraQuick® HIV Self-Test internationally; +• +Changes in the markets in which we operate, including changes in the prevalence of COVID-19; +• +Changes in customer buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; +• +The level of expenditures we are required to make in order to develop, obtain regulatory approvals for and successfully commercialize our new products; +• +Our ability to expand our business through the acquisition of other companies or technologies or through internal development of new or improved products; +• +Our ability to improve manufacturing efficiencies and reduce cost of goods sold; +• +Our ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• +The degree to which our major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• +Whether we are successful in obtaining and maintaining required regulatory approvals and registrations for our new products; +• +The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with our products; +• +Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• +Failure to achieve our revenue growth targets; and +• +The costs and results of patent infringement, product liability and other litigation or claims asserted by or against us. +We began a strategic restructuring of our business in early 2023 by combining our Molecular Solutions and Diagnostics business units into a single commercial organization, and eliminated approximately 11% of our non-production workforce. While we believe this strategic restructuring will result in new efficiencies and a decrease in expenses, there can be no assurance that we will achieve such operational efficiencies, and our consolidated financial results may be adversely impacted as a result. +40 +Recent Volatility In Capital Markets And Lower Market Prices For Our Securities May Affect Our Ability To Access New Capital Through Sales Of Shares Of Our Common Stock Or Issuance Of Indebtedness, Which May Materially Harm Our Liquidity, Limit Our Ability To Grow Our Business, Pursue Acquisitions Or Improve Our Operating Infrastructure And Restrict Our Ability To Compete In Our Markets . +Our operations consume substantial amounts of cash, and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new solutions, retain or expand our current levels of personnel, improve our existing solutions, enhance our operating infrastructure, and potentially acquire complementary businesses and technologies. Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including the need to: +• +finance unanticipated working capital requirements; +• +develop or enhance our technological infrastructure and our existing solutions; +• +pursue acquisitions or other strategic relationships; and +• +respond to competitive pressures. +Accordingly, we may need to pursue equity or debt financing to meet our capital needs. With uncertainty in the capital markets and other factors, such financing may not be available on terms favorable to us or at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, we could face significant limitations on our ability to invest in our operations and otherwise suffer harm to our business. +Economic Volatility and Disruption, Including Those Related To The COVID-19 Pandemic, Could Adversely Affect Our Business, Financial Performance, Results of Operations, Cash Flow and Financial Condition or Those of Our Customers and Suppliers . +Global and U.S. markets and economies have experienced extreme volatility and disruption following the global outbreak of COVID-19 that has continued throughout 2022. Many economists and major investment banks have expressed concern that the continued spread of the virus globally has led to a world-wide economic downturn. Volatile economic conditions may occur again or continue in the future. +Although the severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, impacts that we may experience include, but are not limited to: +• +a slowdown or stoppage in the supply chain of the raw materials and components used to manufacture our products; +• +interruptions or delays in domestic and/or international shipment of our products to our distributors and customers; +• +interruptions in normal operations of certain end-use customers that could result in reductions in demand for our products; +• +disruptions to our operations, including a shutdown of our facilities or product lines; restrictions on our operations and sales, marketing and distribution efforts; and interruptions to our research and development, manufacturing, clinical/regulatory and other important business activities; +• +shutdown or interruption of our manufacturing facilities due to contamination and costs incurred to clean and disinfect a facility following contamination; +• +inefficiencies and increased costs in our production and shipping processes due to premium pay for manufacturing and certain other employees as well as social distancing and personal protective equipment requirements; +• +limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions; +• +a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties; +• +an increase in exposure to credit losses for customers adversely affected by the COVID-19 pandemic; and +41 +• +an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, including acquisitions. +These conditions could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could also adversely affect our access to liquidity needed to conduct or expand our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute our products or supply us with necessary equipment, raw materials or components. Any or all of these effects would have an adverse effect on our operations, business, financial condition and results of operations. +Although there are positive signs that COVID-19 has begun to subside as compared to the height of the pandemic, the duration of the COVID-19 pandemic is still unknown, and it is difficult to predict the full extent of potential impacts the pandemic will have in the future on our business, operations, and financial results, or on our customers, suppliers or logistics providers, or on the global economy as a whole. It is uncertain how materially the COVID-19 pandemic will affect our global operations, particularly if the effects continue or get worse over an extended period of time. Even with the improvement of economic conditions, it may take time for our customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. We cannot predict the re-occurrence of any economic slowdown or the strength or sustainability of an economic recovery. +Rising Inflation Rates Could Negatively Impact Our Revenues And Profitability If Increases In The Prices Of Our Products Or A Decrease In Consumer Spending Results In Lower Sales. In Addition, If Our Costs Increase And We Are Not Able To Pass Along These Price Increases To Our Customers, Our Net Income Would Be Adversely Affected, And The Adverse Impact May Be Material. +Inflation rates, particularly in the United States, have increased recently to levels not seen in years. Increased inflation may result in decreased demand for our products and services, increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, we may be unable to raise the sales prices of our products at or above the rate at which our costs increase, which could/would reduce our profit margins and have a material adverse effect on our financial results and net income. We also may experience lower than expected sales and potential adverse impacts on our competitive position if there is a decrease in consumer spending or a negative reaction to our pricing. A reduction in our revenue would be detrimental to our profitability and financial condition and could also have an adverse impact on our future growth. +An Impairment of Goodwill and Intangible Assets Could Reduce our Earnings . +At December 31, 2022, our consolidated balance sheet reflected approximately $35.1 million of goodwill and approximately $11.7 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles (“U.S. GAAP”) require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, such as intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment review often cannot be done at the level of the individual asset and it must instead be applied to a group of assets. For the purpose of our annual goodwill impairment testing based on the current circumstances of how we manage or business, this group of assets is the Company as a whole. If we determine that any of our goodwill or intangible assets were impaired, we will be required to take an immediate charge to earnings and our results of operations could be adversely affected. We recognized a pre-tax impairment charge of $3.6 million during the year ended December 31, 2022, which is reported in loss on impairments in our consolidated statement of operations. +Changes in Foreign Currency Exchange Rates Could Negatively Affect Our Operating Results. +Our financial statements are stated in U.S. Dollars and, historically, most of our international sales have also been denominated in U.S. Dollars. As a result, in the past our exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of our subsidiary, DNAG, are recorded in Canadian Dollars and the revenues and expenses of our subsidiary Novosanis are recorded in Euros. Revenues and expenses denominated in foreign currencies are translated into U.S. +42 +dollars for purposes of reporting our consolidated financial results. Our expectation is that the businesses of our foreign subsidiaries will continue to grow and our exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect the revenues and expenses of our foreign subsidiaries and the translation of those financial results into U.S. dollars. Favorable movement in exchange rates have benefited us in prior periods. However, where there are unfavorable currency exchange rate fluctuations, our consolidated financial statements including our balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, we have not generally entered into hedging instruments to manage our currency exchange rate risk, but we may need to do so in the future. However, our attempts to hedge against these risks may not be successful. If we are unable to successfully hedge against unfavorable foreign currency exchange rate movements, our consolidated financial results may be adversely impacted. +Risks Relating to Our Common Stock +Our Stock Price Could Continue to be Volatile. +Our stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for our Common Stock: +• +The performance of our business, including our efforts to increase sales of our OraQuick ® HIV, HCV and Molecular Solutions products and our OraQuick ® In-Home HIV test and HIV Self-Test; +• +Our efforts to expand sales of our genomic and microbiome laboratory service offerings; +• +Our efforts to produce and commercialize our InteliSwab Covid-19 Rapid Tests; +• +Future announcements concerning us and our products or services, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• +Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions; +• +Clinical results with respect to our products or services or those of our competitors; +• +The status of clinical studies and pending submissions for required regulatory approvals; +• +The announcement of regulatory or enforcement actions by the FDA or other agencies against us, our products or services, or one or more of our customers; +• +The gain or loss of significant contracts and availability of funding for the purchase of our products and services; +• +Delays in the development, regulatory approval or commercialization of new or enhanced products or services; +• +Legislative developments and industry or competitive trends; +• +Biological or medical discoveries; +• +Disputes or developments with key customers, distributors or suppliers; +• +Developments in patent or other proprietary rights; +• +Litigation or threatened litigation; +• +Complaints or concerns about the performance or safety of our products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• +Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; +• +Governmental regulation; +• +Changes in the level of competition; +• +Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• +Period-to-period fluctuations in our operating results; +• +Additions or departures of key personnel; +• +General market and economic conditions; and +43 +• +Terrorist attacks, civil unrest, war and national disasters, including pandemics. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and experience a subsequent diversion of our management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. +Future Sales of Our Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future. +Sales of our Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of our Common Stock. We are unable to estimate the number of shares of our Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors. +We have a number of institutional stockholders that own significant blocks of our Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected. In addition, it is possible that one or more of our executive officers or non-employee members of our Board of Directors could sell shares of our Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock. +Because We Do Not Intend to Pay Cash Dividends on Our Common Stock, an Investor in Our Common Stock Will Benefit Only if Our Common Stock Appreciates in Value. +We currently intend to retain our current earnings and future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in Our Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of Us Difficult. +Our Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price investors might be willing to pay in the future for shares of our Common Stock. +General Risk Factors +We May Face Product Liability Claims for Injuries Resulting From the Use of Our Products. +We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that we would be successful in defending any product liability lawsuits brought against us. Moreover, there is no assurance that our products will not be included in unethical, illegal or inappropriate research or applications, which may in turn put us at risk of litigation. Regardless of merit or eventual outcome, product liability claims could result in: +• +Decreased demand for our products; +• +Lost revenues; +• +Damage to our image or reputation; +• +Costs related to litigation; +• +Increased product liability insurance costs; +44 +• +Diversion of management time and attention; and +• +Incurrence of damages payable to plaintiffs. +We are selling the InteliSwab ® COVID-19 Rapid Test and the OraQuick ® In-Home HIV test in the United States OTC market, and we offer HIV Self-Tests to consumers internationally. We believe the sale of products for use by consumers increases our potential exposure to product liability and other claims. +Performance of Our Products May Affect Our Revenues, Stock Price and Reputation. +Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, our products may not perform as expected. For example, a defect in one of our diagnostic or specimen collection products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used our product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing product or otherwise stop using our products, and our revenues could be adversely affected. Under such circumstances, we may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase our costs. In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock. +Our Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products and Services. +The markets we serve are highly competitive and rapidly changing and we expect competition to intensify as technological advances are made and become more widely known, and as new products and services reach the market. Many of our principal competitors have considerably greater financial, technical and marketing resources than we do. As new products and services enter the market, our products and services may become obsolete or a competitor’s products and services may be more effective or attractive or more effectively marketed and sold than ours. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for new products and services that would render our technologies, products and services obsolete or otherwise commercially unattractive, or introduce or commercialize such products and services before we can do so. If we fail to convince our customers of the advantages and economic value of our products and services or otherwise maintain and enhance our competitive position, our customers may decide to use products and services developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on our business, financial condition and results of operations. +We also face competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products. We may also be required to increase our marketing efforts in order to compete effectively, which would increase our costs. +Failure to Achieve Our Financial and Strategic Objectives Could Have a Material Adverse Impact on Our Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our financial and strategic objectives, including our efforts to increase sales of our products and services or continue growing our business. In addition, the funds for research, clinical development and other projects have in the past come primarily from our business operations. If our business slows and we have less money available to fund research and development and clinical programs, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our business. Our operations will be adversely affected if our total revenue and gross profits do not correspondingly increase or if our technology, product, service, clinical and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new or enhanced products and services and develop new markets could have a material adverse effect on our business and prospects. +If We Fail To Establish and Maintain Proper And Effective Internal Control Over Financial Reporting, Our Operating Results and Our Ability to Operate Our Business Could Be Harmed. +Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are required to +45 +comply with the requirements of The Sarbanes-Oxley Act of 2002, or SOX, which requires that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation, document our controls and perform testing of our key control over financial reporting to allow management and our independent public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of SOX. Our testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. For instance, during the quarter ended December 31, 2022, management identified and remediated a material weakness in internal control over financial reporting related to user access controls to adequately restrict user and privileged access over certain information technology systems that support our financial reporting processes and to ensure appropriate segregation of duties. While no misstatement arose as a result of this deficiency, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits, sanctions or investigations by regulatory authorities, which would require additional financial and management resources. Additionally, any failure to maintain the adequacy of our internal controls could prevent us from accurately reporting our financial results, which could result in investors losing confidence in the accuracy of our financial statements and reporting systems and our stock price could decline. +If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed. +Our success depends to a large extent upon the contributions of our executive officers, management and sales, marketing, operations and scientific staff. Our business may be harmed by the loss of a significant number of our executive officers or senior managers. We may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products, laboratory services and other life science businesses. Our ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of our Company, and the possibility for advancement within our organization. We generally do not enter into employment agreements requiring our employees to work for us for any specified period. +If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively produce, market and sell our products and services, to meet the demands of our strategic partners in a timely fashion, or to support research, development and clinical programs. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. +We have recently experienced significant changes in our senior leadership, including the appointment of a new Chief Financial Officer and Chief Product Officer, as well as a new Interim Chief Executive Officer, who was followed by a new President and Chief Executive Officer. Although we have endeavored to implement any management and director transition in a non-disruptive manner, such transitions might impact our business, and give rise to uncertainty among our customers, investors, vendors, employees and others concerning our future direction and performance, which may materially and adversely affect our business, financial condition, results of operations and cash flows, and our ability to execute our business model. +In addition, because certain members of our management and board of directors have served in their respective capacities for only limited durations, we face the additional risks that these persons have limited familiarity with our past practices, our business and our industry and lack established track records in managing our business strategy. +In addition, we have recently experienced turnover in other key leadership roles. Any future changes to the executive management team, including hires or departures, could cause further disruption to the business and have a negative impact on operating performance, while these operational areas are in transition. We can provide no assurance that we will find suitable successors to key roles as transitions occur or that any identified successor will be successfully integrated into our management team. +If Our Essential Employees Who Are Unable To Telework Become Ill or Otherwise Incapacitated, Our Operations May Be Adversely Impacted. +As a medical device manufacturer, we fall within a “critical essential infrastructure” sector, specifically the “Healthcare/Public Health” sector, and are considered exempt under various stay at home/shelter in place orders. Accordingly, our employees may continue to work because of the importance of our operations to the health and well-being of citizens in the states in which we operate. Consistent with these Stay at Home Orders, we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures, including social distancing, face covering and increased sanitation standards. We are following guidance from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis +46 +among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure, based on the direct threat that such exposure may present to our workforce. We continue to address other unique situations that arise among our workforce due to the COVID-19 pandemic on a case-by-case basis. While we believe that we have taken appropriate measures to ensure the health and well-being of our “essential” employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or that they may otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted. +Increases in Demand for Our Products and Services Could Require Us to Expend Considerable Resources or Harm Our Customer Relationships if We Are Unable to Meet That Demand. +If we experience significant or unexpected increases in the demand for our products and services, we and our suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new products, machinery or new manufacturing or laboratory facilities. This would increase our capital costs, which could adversely affect our earnings. Our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing or laboratory equipment and facilities may require FDA approval or government or industry certification before they can be used to manufacture our products or provide laboratory services. To the extent we are unable to obtain or are delayed in obtaining such approvals, our ability to meet the demand for our products and services could be adversely affected. +If we are unable to develop necessary manufacturing or laboratory capabilities in a timely manner, our sales could be adversely affected. If we fail to increase these capabilities in a cost effective manner or if we experience lower than anticipated yields or production or performance problems as a result of changes that we make in our manufacturing or laboratory processes to meet increased demand, we could experience delays or interruptions and increased costs, which could also have a material adverse effect on our revenues and profitability. +Unexpected increases in demand for our products may require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our ability to meet increased demand for our products. This could negatively affect our total revenues or cost of sales and related profits. +Our inability to meet customer demand for our products and services could also harm our customer relationships and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects. +We Rely on Information Technology in Our Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Our Ability to Efficiently Operate Our Business. +We rely heavily on enterprise resource planning and other complex information technology systems across our operations and on the internet, including for management of inventory, processing and analyzing laboratory specimens, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale of our products, process and analyze specimens in our laboratories, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales or the provision of laboratory services and reduced efficiency of our operations. Significant expenditures could be required to remediate any such problem. +Security Breaches and Other Disruptions Could Compromise Our Information, Expose Us To Liability and Harm Our Reputation and Business. +In the ordinary course of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees in our data centers and on our networks. Secure maintenance and transmission of this information is critical to our operations business strategy. We generally rely on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive date. +47 +Cyber-attacks could result in unauthorized access to our computer systems or our third party IT service provider’s systems and, if successful, misappropriate personal or confidential information. We have been victimized by a spear phishing attack, and such attacks are an ongoing threat. If successful, these activities could lead to the disclosure of intellectual property or personally identifiable information, which could lead to financial harm and cause reputational damage. We have taken additional steps designed to improve the security of our networks and computer systems. +In addition, a contractor or other third party with whom we do business may attempt to circumvent our security measures or obtain such information, and may purposefully or inadvertently cause a breach involving sensitive information. While we will continue to evaluate and implement additional protective measures to reduce the risk and detect cyber incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite our cybersecurity measures (including employee and third party training, monitoring of networks and systems and maintenance of back up of protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, voyeur or malfeasance. +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of our or our third party’s IT service providers’ data security and access, public disclosure, or loss of personal or confidential business information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt our operations, require significant management attention and resources to remedy any damages that result, and damage our reputation and customers willingness to transact business with us, any of which could adversely affect our business. +As our activities continue to evolve and expand, we may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact our business either directly or indirectly. Our failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact our business and future business plans. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect Our Business, Financial Condition and Results of Operations. +We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until we are in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm our business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require us to change our business practices or subject our business practices to legal challenges, which could have a material adverse effect on our business, financial condition and results of operations. +We May Experience Fluctuations in Our Financial Results or Fail to Meet Our Financial Projections. +Our operating results can fluctuate from quarter to quarter and year to year, which could cause our growth or financial performance to fall below the expectations of investors and securities analysts. Our financial projections for future periods are based on a number of assumptions, including estimated demand for our products. However, sales to our distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of our financial results. +Customers in certain of the markets we serve often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in our sales from year-to-year. This can make it difficult to accurately forecast whether we will achieve our quarterly sales forecasts and can cause variability in our operating results. +48 +In addition, our products provide different contributions to our gross margin. Accordingly, our operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect our reputation and the price of our Common Stock. +We May Require Future Additional Capital. +Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: +• +The costs, scope and timing of strategic acquisitions; +• +The costs and timing of expansion of sales and marketing activities; +• +The timing and success of the commercial launch of new products or services; +• +The extent to which we gain or expand market acceptance for existing, new or enhanced products and services; +• +The costs and timing of the expansion of our manufacturing and laboratory capacity; +• +The success of our research and product development efforts; +• +The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• +The magnitude of capital expenditures; +• +Changes in existing and potential relationships with distributors and other business partners; +• +The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• +The costs and liability associated with patent infringement or other types of litigation; and +• +Competing technological and market developments. +If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to us on satisfactory terms, or at all. +Terrorist Attacks, Natural Disasters, Public Health Crises, Political Unrest or Other Catastrophic Events Outside of Our Control May Adversely Affect Our Business. +Terrorist attacks, natural disasters, including disasters attributable to climate change impacts, public health crises, political unrest or other catastrophic events outside of our control, including pandemics, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for our products. For example, the COVID-19 outbreak has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, including the United States. This outbreak has resulted in, and until fully resolved is likely to continue to result in, among other things: (i) restrictions on travel, government mandated social distancing measures, and the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories; (ii) significant disruption to the business of many companies, including our customers and suppliers, as well as layoffs of employees; (iii) reduction or termination by public health and other customers of infectious disease testing programs, including for HIV and HCV, and a reallocation of personnel and monetary resources from these programs to programs intended to address COVID-19; (iv) reduction or termination of clinical and research studies by academic and other entities that use our molecular collection products and laboratory services; and (v) rapidly evolving proposals and actions by state and federal governments to address the problems being experienced by markets, businesses and the economy in general, which may have unintended consequences or may not adequately address such problems. These events have disrupted, and threaten to continue to disrupt, our normal operation, the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products. Despite our efforts to manage and mitigate the impact of these events on us, it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty under applicable laws or regulations that impact us. It is clear that these types of events are impacting and will, for at least some time, continue to impact our product development and operation and in many instances the impact may be adverse and may be material. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our business and results of operation. In addition, the impacts of political unrest, +49 +including as a result geopolitical tension, such as a deterioration in the relationship between the United States and China or escalation in conflict between Russia and Ukraine, including any resulting sanctions, export controls or other restrictive actions that may be imposed by the US and/or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability and volatility in the global markets, which may have an adverse impact on our business or ability to access the capital markets. +Various types of disasters, including earthquakes, fires, floods, riots, acts of terrorism and pandemics, may also affect our manufacturing facilities and computer systems, and increase our cybersecurity risks. Although we have business interruption insurance, our facilities, including some pieces of manufacturing equipment and our computer systems, may be difficult to replace and could require substantial replacement lead-time. In the event our existing manufacturing facilities or computer systems are affected by man-made or natural disasters, including pandemics, we may have difficulty operating our business and may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or shut down entirely, it would seriously harm our business. Moreover, we may incur incremental costs following an unforeseen event which could adversely affect our results of operation. +The Ongoing Conflict Between Russia And Ukraine And The Related Implications Could Have A Material Adverse Effect On Our Business And Results Of Operations. +As a result of the ongoing military conflict between Russia and Ukraine, the United States and other countries have imposed significant sanctions on Russia and could impose even wider sanctions. Such sanctions could damage or disrupt international commerce and the global economy. We cannot predict the broader or longer-term consequences of the conflict or of the sanctions imposed to date, which could include embargoes, regional instability, geopolitical shifts, exchange rate fluctuations, financial market disruptions and economic recession. Further, the conflict could exacerbate supply chain challenges, lead to an increase in cyberattacks from Russia, affect the global price and availability of key commodities, reduce our sales and earnings or otherwise have an adverse effect on our business and results of operations. +In addition, the conflict between Russia and Ukraine may have the effect of heightening other risks disclosed in this Annual Report, any of which could materially and adversely affect our business and results of operations. Such risks include but are not limited to interruptions in the transportation channels for the manufacture and global distribution of our products, heightened inflation, depressed levels of consumer and commercial spending, disruptions to our global technology infrastructure, adverse changes in international trade policies and relations, and the inability to implement and execute our business strategy. We are currently unable to predict the extent, nature or duration of any of these occurrences. +Future Sales of Shares of Our Common Stock Could Adversely Affect the Trading Price of Our Common Stock and Our Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of our shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock, and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. +ITEM 1B. Unresolve d Staff Comments. +None +ITEM 2. Pr operties. +We own a 31,700 square foot facility that houses our primary corporate office, our sales and marketing, research and development, human resources, and regulatory and quality offices, a 48,000 square foot facility and a 33,500 square foot facility which are used for manufacturing activities, and we lease an additional 139,000 square foot manufacturing facility, which is primarily dedicated to the production of our InteliSwab ® COVID-19 Rapid Tests. Each of these facilities is located in Bethlehem, Pennsylvania. We also rent additional warehouse and distribution space on an as-needed basis, including a 70,000 square foot warehouse in Bethlehem Township, Northampton County, Pennsylvania. In November 2022, we terminated our lease for a facility in York, Pennsylvania, which was intended for use in manufacturing activities. Given the improvements in manufacturing efficiency we were able to realize at our other facilities, we determined that this additional space was not necessary. We were not required to pay termination fees. Our subsidiary, DNAG, also leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and +50 +marketing, manufacturing, distribution, research and development, and regulatory and quality operations. Our other subsidiaries, Diversigen and Novosanis, also lease facilities for their operations. +We believe that the facilities described above are adequate for our current requirements. +ITEM 3. Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +In March 2021, we filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum has filed an answer to the initial complaint, asserting that its device does not infringe our patent and that our patent is invalid. In August 2021, we amended our complaint to add a second patent to this litigation. Spectrum responded to our amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office. DNAG filed a motion to dismiss Spectrum’s counterclaims in October 2021, which was denied by the Court on March 30, 2022. Expert discovery is ongoing. On November 29, 2022, the district court issued a claim construction order. On January 30, 2023, Spectrum filed a motion for summary judgment of noninfringement. We opposed the motion. Briefing is complete and the motion remains pending. The final pretrial conference is set for September 7, 2023. The Patent and Trademark Office instituted review of the second patent on February 10, 2023, scheduling a hearing for November 14, 2023. +ITEM 4. Mine Safe ty Disclosures. +Not Applicable. +51 +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “OSUR”. On February 17, 2023, there were 290 holders of record and approximately 22,603 holders in street name of our Common Stock, and the closing price of our Common Stock was $5.95 per share. +Dividends +We have never paid any cash dividends and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings to provide funds for the operation and expansion of our business. +Share Repurchases and Retirements +Period +Total number of +shares purchased +Average price +paid per Share +Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar value) +of shares that may yet be +repurchased under the plans +or programs (1, 2) +October 1, 2022 - October 31, 2022 +1,110 +(3) +$ +3.97 +— +11,984,720 +November 1, 2022 - November 30, 2022 +47,823 +(3) +4.81 +— +11,984,720 +December 1, 2022 - December 31, 2022 +1,707 +(3) +4.96 +— +11,984,720 +50,640 +— +(1) +On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) +This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. We have made no commitment to purchase any shares under this plan. +(3) +Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted and performance shares, these shares were retired to satisfy minimum tax withholdings +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the Nasdaq Composite Index, the Nasdaq Biotechnology Index, and the Nasdaq Health Care Index for the period from December 31, 2017 through December 31, 2022. The graph assumes that $100 was invested on December 31, 2017 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +52 +The Nasdaq Composite Index was chosen because it is a broad index of companies whose equity securities are traded on Nasdaq. The Nasdaq Biotechnology Index (old peer group) was historically chosen because it includes a number of our competitors. We have chosen to replace the Nasdaq Biotechnology Index with the Nasdaq Health Care Index (new peer group) because we believe it better reflects companies relevant to our current business, and we utilize the Nasdaq Health Care Index as a benchmark for compensation decisions. Furthermore, many healthcare investors look to the Nasdaq Health Care Index as an appropriate benchmark for stock performance. We will discontinue using the Nasdaq Biotechnology Index after this Annual Report. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +Fiscal year ending December 31, +2017 +2018 +2019 +2020 +2021 +2022 +OraSure Technologies, Inc. +100.00 +61.93 +42.58 +56.12 +46.08 +25.56 +NASDAQ Composite +100.00 +97.16 +132.81 +192.47 +235.15 +158.65 +NASDAQ Biotechnology +100.00 +91.14 +114.02 +144.15 +144.18 +129.59 +NASDAQ Health Care +100.00 +83.86 +92.88 +118.12 +106.27 +79.91 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +Item 6. Reserved +Not Applicable +53 +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2022 (this "Annual Report") generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. +Business Overview +Our primary goal is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Through December 31, 2022 our business consisted of two segments: our “Diagnostics” segment and our “Molecular Solutions" segment. +In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the two segments into one business unit, with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. Beginning with the first quarter of 2023, we will report financial results on a non-segmented basis. +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. In 2022, after obtaining a CE mark, we launched our OraQuick ® HIV Self-Test, an oral swab in-home test for HIV-1 and HIV-2, in Europe, making it available in several European countries. Through our Diagnostics business we are also developing and commercializing diagnostic products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"). In September 2022, we entered into an agreement with the Biomedical Advanced Research Development Authority ("BARDA"), pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick ® testing platform, with the objective of developing increased sensitivity and shelf life, with new chemistry and higher degrees of automation in the test's manufacturing process. +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek Inc. ("DNAG"), Diversigen, Inc. ("Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, nutrition, companion animal and environmental markets. +In 2020, we expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. In 2022, demand for COVID-19 PCR testing declined, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines which negatively impacted the sales of the collection products. We have also developed additional collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. In 2022, we launched the OMNIgene ® • GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx +54 +device. Additionally, our OMNIgene ® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. Through our partnership with Grifols, we received FDA clearance for our ORAcollect ® •Dx saliva collection device for OTC use, which allows our commercial partners to use and market the device with their therapeutics or devices. +Our Molecular Solutions products include the Colli-Pee ® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. In 2022, Novosanis obtained a CE mark for its Colli-Pee ® device containing a prefilled tube with UAS ® chemistry, which is designed to stabilize urinary analytes. Our Diversigen subsidiary, also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +In 2022, Diversigen launched its metatranscriptomics sequencing and analysis services for gut microbiome samples, which generate a microbial community's gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample's microbial functions and expression levels. +Recent Developments +Restructuring +In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the Molecular and Diagnostics segments into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operation synergies. +Impact of COVID-19 +As COVID-19 continues to impact the economy of the United States and other countries around the world, we are committed to being a part of the response to this unprecedented challenge. We have made substantial investments to expand our operations in order to manufacture product used for COVID-19 testing in the United States. +Due to COVID-19, we have experienced volatility, including periods of material decline compared to prior year periods in testing volume of our base business (which excludes COVID-19 testing) and periods of significant demand for our COVID-19 testing product, with demand generally fluctuating in line with changes in prevalence of the virus and related variants. It is difficult for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations. +We expect that, if and when the current COVID-19 pandemic subsides, there could be significantly reduced demand for testing, and thus, for our InteliSwab® COVID-19 Rapid Tests. Further, if the COVID-19 pandemic becomes a seasonal virus or experiences fluctuations in prevalence, we could experience fluctuations in our revenues associated with our InteliSwab ® COVID-19 Rapid Tests For additional information on COVID-19 related risks we face, see the “Risk Factors - Risks Relating to Products, Marketing and Sales - The COVID-19 pandemic continues to cast uncertainty over our consolidated results of operations, financial position and cash flows, while the consequences of COVID-19 and the governmental response to the pandemic and pandemic-related macroeconomic impacts could negatively affect our operations and share price.” section of this Annual Report +Appointment of New CEO +Carrie Eglinton Manner was appointed President and Chief Executive Officer ("CEO"), effective June 4, 2022. Ms. Eglinton Manner also joined the OraSure Board of Directors (the "Board"). She succeeded Dr. Nancy Gagliano, who was appointed Interim CEO in March 2022. Dr. Gagliano continues to serve on the OraSure Board. +Exploration of Strategic Alternatives +During 2022 our Board of Directors explored and evaluated a broad range of strategic alternatives with the goal of maximizing value for stockholders. Ms. Eglinton Manner’s appointment as CEO came in tandem with a decision by the OraSure Board to conclude its +55 +review of the strategic alternatives and for the Company to move forward under her leadership. Market conditions and the Board of Directors' belief in our ability to further build upon recent operational successes with Ms. Eglinton Manner’s leadership were factors in the decision. +BARDA Funding for Ebola Product +In September 2022, we entered into an agreement with BARDA, which is part of the office of the Assistant Secretary for Preparedness and Response, pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform. Our current OraQuick® Ebola Rapid Antigen Test is de novo authorized for use with whole blood or cadaveric oral fluid. The test received de novo authorization from the FDA in 2019, making it the first and only rapid antigen test to receive authorization for the detection of Ebola virus. +New Contract for In-Home HIV Tests +In September 2022, we were selected to provide our OraQuick® In-Home HIV tests in support of the CDC's “Together Take Me Home,” HIV self-test program. Under the program, the CDC will provide $41.5 million over a five-year period to support community testing. Emory University will manage the program and closely collaborate with a number of partner organizations, including OraSure, to supply tests to communities not equitably reached by HIV testing services across the United States. Under the "Together Take Me Home" HIV self-test program, we will provide up to 1 million OraQuick® In-Home HIV tests over a five-year period. A free HIV self-test will be mailed in discreet packages to people who enroll through its website. The program will target populations that are disproportionately affected by HIV and less likely to have access to key prevention services. +U.S. Government Contract Awards +In September 2021, we entered into a contract with the DLA for the procurement of our InteliSwab ® COVID-19 Rapid Test for OTC use, which the DLA estimated to have a value of $205 million. Under the terms of the contract, we are providing our InteliSwab ® COVID-19 Rapid Tests to up to 20,000 sites throughout the United States. The contract period was October 2021 through September 2022, however the DLA has provided delivery orders against which it can continue to issue shipping instructions into 2023. +In November 2022, the DLA awarded us a second procurement contract for our InteliSwab ® COVID-19 Rapid Test for OTC use. Under the terms of this award, the contract estimate is 18 million InteliSwab ® COVID-19 Rapid Tests; with a maximum award of 36 million tests and a guaranteed minimum award of 3.6 million tests. The contract will run from November 2022 through November 2023. +In December 2022, the HHS awarded a third procurement contract for our InteliSwab ® COVID-19 Rapid Test for OTC use. Under the terms of this contract we were awarded a fully funded firm fixed price contract for a total of 3.2 million tests to be delivered in the first quarter of 2023. +DOD Manufacturing Capacity Funding +In September 2021, we entered into an agreement for $109 million in funding from the DOD, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Test as part of the nation's pandemic preparedness plan. Under this agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding is received based on the achievement of milestones for the design, acquisition, installation, housing, qualification and acceptance of the manufacturing equipment as set forth in the agreement. We continue to invest time and money to build the additional manufacturing capacity as required under this agreement. We anticipate that we will complete the requirements of the contract by the end of 2023. Since the inception of the contract, we have received $60.3 million in funding. +Current Consolidated Financial Results +During the year ended December 31, 2022, our consolidated net revenues increased 66% to $387.5 million, compared to $233.7 million for the year ended December 31, 2021. Net product and services revenues during the year ended December 31, 2022 increased 67% when compared to the same period of 2021, largely due to $233.7 million of InteliSwab ® COVID-19 Rapid Test revenue recorded in 2022, compared to $22.7 million in 2021 . We first began selling this product in August of 2021. Also contributing to the increased revenues were higher sales of our hepatitis C ("HCV") and substance abuse testing products. Declines in sales of our molecular sample collection kits for COVID-19 testing, lower genomics product revenue, lower laboratory services revenues and a decline in international sales of our HIV products offset these positive drivers of revenue. Other revenues for the year ended December 31, 2022 were $9.4 million compared to $6.8 million in the same period of 2021. This increase was largely due to increased research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income. +56 +Our consolidated net loss for the year ended December 31, 2022 was $17.9 million, or $0.25 per share on a fully diluted basis, compared to a consolidated net loss of $23.0 million, or $0.32 per share on a fully diluted basis, for the year ended December 31, 2021. Results for the full-year 2022 benefited from the increased revenues in 2022 compared to 2021. The benefit of the higher revenues was offset by the negative impact of $17.1 million of impairment charges taken for idle manufacturing lines and goodwill. There were no similar charges in the 2021. 2022 results also included higher spending in operating expenses across all categories. +Cash used in operating activities during the year ended December 31, 2022 was $47.2 million compared to $35.4 million used in the year ended December 31, 2021. The use of cash in 2022 reflected the significant investment in inventory purchases in anticipation of future demand of our COVID-19 testing products as well the increase in our accounts receivable balances resulting largely from COVID-19 shipments made toward the end of the fourth quarter of 2022. As of December 31, 2022, we had $110.8 million in cash, cash equivalents, and available-for-sale securities, compared to $170.1 million at December 31, 2021. +Results of Operations +YEAR ENDED DECEMBER 31, 2022 COMPARED TO DECEMBER 31, 2021 +CONSOLIDATED NET REVENUES +The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments. +For the Year Ended December 31, +Dollars +Percentage of Total Net Revenues +2022 +2021 +% Change +2022 +2021 +Diagnostics +$ +296,663 +$ +87,030 +241 +% +77 +% +37 +% +Molecular Solutions +81,384 +139,867 +(42 +) +21 +60 +Net product and services revenues +378,047 +226,897 +67 +98 +97 +Other +9,432 +6,777 +39 +2 +3 +Net revenues +$ +387,479 +$ +233,674 +66 +% +100 +% +100 +% +Consolidated net product and services revenues increased 67% to $378.0 million for the year ended December 31, 2022 from $226.9 million for 2021. This increase was largely driven by higher sales of our InteliSwab ® COVID-19 Rapid Tests, and our HCV and substance abuse testing products. The increase was partially offset by declines in revenues of our molecular product use for COVID-19 testing, our molecular product used for genomic testing, and lower laboratory services revenues. Other revenues for the year ended December 31, 2022 were $9.4 million compared to $6.8 million in 2021. This increase was largely due to increased research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income. +Consolidated net revenues derived from products sold to customers outside of the United States were $37.3 million and $45.3 million, or 10% and 19% of total net revenues, during the years ended December 31, 2022 and 2021, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues. +Net Revenues by Segment +Diagnostics Segment +The table below shows the amount of total net revenues (dollars in thousands) generated by our Diagnostics segment. +For years ended December 31, +Dollars +Percentage of Total Net Revenues +Market +2022 +2021 +% Change +2022 +2021 +Infectious disease testing: +COVID-19 +$ +233,666 +$ +22,707 +929 +% +77 +% +25 +% +Other +52,728 +54,645 +(4 +) +17 +61 +Total infectious disease testing +286,394 +77,352 +270 +94 +86 +Substance abuse testing +10,269 +9,678 +6 +4 +11 +Net product revenues +296,663 +87,030 +241 +98 +97 +Other +7,010 +3,010 +133 +2 +3 +Net revenues +$ +303,673 +$ +90,040 +237 +% +100 +% +100 +% +57 +Infectious Disease Testing Market +COVID-19 revenues were $233.7 million and $22.7 million for the years ended December 31, 2022 and 2021, respectively. This growth was driven largely through fulfillment of our government procurement contracts for InteliSwab ® tests. We first began selling this product in August 2021. We are anticipating higher COVID-19 revenues in the first half of 2023 followed by lower revenues in the second half of 2023, as we work down our government InteliSwab ® COVID-19 rapid test contracts. +Sales to other infectious disease testing markets decreased 4% to $52.7 million for the year ended December 31, 2022 from $54.6 million for the year ended December 31, 2021. This decline resulted from lower world-wide sales of our OraQuick® HIV product offset by increased world-wide sales of our OraQuick ® HCV products. +The table below shows a breakdown of our total net OraQuick ® HIV and HCV product revenues (dollars in thousands) during 2022 and 2021. +Years ended December 31, +Market +2022 +2021 +% Change +Domestic HIV +$ +16,241 +$ +16,641 +(2 +) +% +International HIV +22,571 +25,503 +(11 +) +Net HIV revenues +38,812 +42,144 +(8 +) +Domestic HCV +8,353 +6,881 +21 +International HCV +5,016 +4,902 +2 +Net HCV revenues +13,369 +11,783 +13 +Net OraQuick® revenues +$ +52,181 +$ +53,927 +(3 +) +% +Domestic OraQuick ® HIV sales decreased 2% to $16.2 million for the year ended December 31, 2022 from $16.6 million for the year ended December 31, 2021. The decline is primarily a result of a large order fulfilled in the first half of 2021 for our OraQuick ® In-Home HIV tests shipped to the CDC and use in an initiative to drive increased in-home HIV testing, which was not repeated in 2022. This negative impact to sales was partially offset by improved distribution strategy with our distribution partners. +International sales of our OraQuick ® HIV products during 2022 decreased 11% to $22.6 million from $25.5 million in 2021. This decrease was largely due to customer order timing. This was partially offset by Our OraQuick ® HIV Self-Test expansion into Europe. +Domestic OraQuick ® HCV sales increased 21% to $8.4 million in 2022 from $6.9 million in 2021, driven by new funding granted by certain state governments, increased legislation regarding drug testing and a rise in drug use requiring more testing. Furthermore this part of our business also benefited from an improved distribution strategy with our distribution partners. +International OraQuick ® HCV sales remained largely flat at $5.0 million in 2022 compared to $4.9 million in 2021. +Substance Abuse Testing Market +Sales to the substance abuse testing markets increased 6% to $10.3 million for the year ended December 31, 2022 from $9.7 million for the year ended December 31, 2021 due to market share gains. +Other revenues +Other revenues for the year ended December 31, 2022 increased 133% to $7.0 million from $3.0 million for the year ended December 31, 2021 largely due to higher research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab ® COVID-19 rapid test. This was offset by lower royalty income from a licensing agreement related to our proprietary buffer solution used for the preservation and stabilization of oral fluid specimens. +58 +Molecular Solutions Segment +The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Molecular Solutions segment for the year ended December 31, 2022 and 2021. +Years ended December 31, +Market +2022 +2021 +% Change +Genomics +$ +54,335 +$ +63,350 +(14 +) +% +Microbiome +7,503 +7,944 +(6 +) +COVID-19 +9,659 +54,167 +(82 +) +Laboratory services +7,296 +11,840 +(38 +) +Other product and service revenues +2,591 +2,566 +1 +Net molecular product and services revenues +$ +81,384 +139,867 +(42 +) +Other +2,422 +3,767 +(36 +) +Net molecular product and services revenues +$ +83,806 +$ +143,634 +(42 +) +% +Sales of our genomics products decreased 14% to $54.3 million in 2022 compared to $63.4 million in 2021, largely as a result of a shift in market prioritization at our larger commercial customers and a reduction in demand in the animal genetics market. +Microbiome revenues decreased 6% to $7.5 million in 2022 compared to $7.9 million in 2021, due to decreased sales in the commercial microbiome market. This was partially offset by the onboarding of new customers in the academic market. +Sales of our molecular sample collection kits for COVID-19 testing decreased 82% to $9.7 million in 2022 compared to $54.2 million in 2021 due to lower COVID-19 PCR testing sales to our core customers, driven by the availability of antigen tests, the wider availability of vaccines, lower public funding for PCR testing, and high inventory levels held by some of those customers. +Laboratory services revenues decreased 38% to $7.3 million in 2022 compared to $11.8 million in 2021, as a result of a large customer ceasing its operations and the timing of clinical trials activity. +Other revenues decreased 36% to $2.4 million in 2022 compared to $3.8 million in 2021 due to lower royalty income received under a litigation settlement agreement. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit percentage was 38% for the year ended December 31, 2022 compared to 50% for 2021. The decrease in gross margins rates was caused by an unfavorable product mix of higher sales of lower margin products driven by the decline in molecular COVID-19 revenues offset by an increase in InteliSwab® revenues. In addition, 2021 margins benefited from lower payroll taxes as result of applying for an Employee Retention Credit under the Coronavirus Aid, Relief and Economic Security Act, which increased gross profit by $2.5 million. +Consolidated operating loss in 2022 was $23.0 million, which was a $12.8 million increase from the $10.2 million of operating loss reported in 2021. Results in 2022 were negatively impacted by the decline in gross margin described above coupled with impairment charges of $17.1 million and the increased operating expenses described below. +OPERATING INCOME BY SEGMENT +Diagnostic Segment +The gross profit percentage of the Diagnostics business was 36% in 2022 compared to 29% in 2021. This increase was driven by an improved product mix associated with the higher sales of InteliSwab ® COVID-19 Rapid Tests. This was partially offset by lower payroll taxes in 2021 as result of applying for the Employee Retention Credit which increased gross profit by $2.5 million in that year. +Research and development expenses increased 8% to $26.0 million in 2022 from $24.1 million in 2021, due to higher staffing costs associated with increased head count, cost incurred under our DOD expansion contract which did not occur in 2021, and increased clinical study activities related to obtaining CE mark for our InteliSwab® rapid test, partially offset by lower product development activities related to our InteliSwab® rapid test as we received EUA authorization in June 2021. Also contributing to the higher spend are consulting fees required under our DOD expansion contract. Similar fees did not occur in 2021. +59 +Sales and marketing expenses increased 18% to $33.5 million in 2022 from $28.5 million in 2021, due to increased staffing costs associated with higher head count, increased severance costs, and the inclusion of the Employee Retention Credit in 2021 results, which did not repeat in 2022. Furthermore, travel and annual meeting expenses increased as travel and in person events have resumed as COVID-19 restrictions have been lifted. In addition, we also recorded an increase in our reserve for uncollectible accounts. These higher spend items were partially offset by a decrease in consulting fees. +General and administrative expenses increased 31% to $42.8 million in 2022 from $32.6 million in 2021 largely due to higher stock compensation expense associated with accelerated vesting of shares under our former CEO's and general counsel's employment agreements, higher staffing costs associated with increased head count and severance costs, increased legal costs, and increased consulting and accounting fees. +Operating expenses for the Diagnostic segment also include an impairment charge of $4.9 million associated with an idle manufacturing line for which it has no projected cash flows and minimal resale or salvage value. Diagnostic operating expenses also included a goodwill impairment charge of $3.6 million. The decline in the Company's stock price was identified as a triggering event which required the Company to perform a quantitative goodwill impairment analysis. The results of this analysis indicated the Diagnostic segment's goodwill was impaired and was written down to $0. +All of the above contributed to the Diagnostics segment’s operating loss of $0.6 million for the year ended December 31, 2022, which included non-cash charges of $8.1 million for depreciation and amortization, impairment charges of $8.5 million, and $9.3 million for stock-based compensation. +Molecular Solutions Segment +The gross profit percentage of the Molecular Solutions segment was 46% in 2022 compared to 63% in 2021. This decrease was due to a less favorable product mix and an increase in reserves for excess inventory as result of a forecasted decline in demand. +Research and development expenses remained relatively flat at $10.3 million in 2022 compared to $10.1 million in 2021. +Sales and marketing expenses decreased 4% to $15.7 million in 2022 compared to $16.3 million in 2021 largely due to lower amortization expense associated with an intangible asset that was fully amortized at the end of 2021, lower commission expense associated with the decline in sales, lower consulting costs, and a decrease in expense related to the cancellation of a marketing loyalty program. These decreases in spend were partially offset by higher staffing costs related to increased head count. +General and administrative expenses increased 44% to $25.4 million in 2022 compared to $17.7 million in 2021, due primarily to higher legal fees. +Operating expenses for the Molecular Solutions segment also includes impairment charges of $8.6 million in 2022 associated with several idle manufacturing lines for which there are no projected cash flows and minimal resale or salvage value. +All of the above contributed to an operating loss of $22.4 million for 2022, which included non-cash charges of $7.2 million for depreciation and amortization, the impairment charges of $8.6 million, and $2.3 million for stock-based compensation. +CONSOLIDATED INCOME TAXES +We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2022 and 2021, we recorded income tax expense of $1.5 million and $13.7 million, respectively. 2022 income tax expense is comprised of $1.7 million of Canadian withholding taxes paid on the repatriation of Canadian earnings which occurred in the first quarter of 2022, $0.9 million of U.S. state income taxes, and a foreign income tax benefit of $1.2 million associated with our Canadian subsidiary. Our 2021 expense is comprised of U.S. state income taxes of $0.2 million and foreign tax expense associated with our Canadian subsidiary of $13.5 million. +Liquidity and Capital Resources +December 31, +December 31, +2022 +2021 +(In thousands) +Cash and cash equivalents +$ +83,980 +$ +116,762 +Available for sale securities +26,867 +53,288 +Working capital +255,326 +231,242 +60 +Our cash and cash equivalents and available-for-sale securities decreased to $110.8 million at December 31, 2022 from $170.0 million at December 31, 2021. Our working capital increased to $255.3 million at December 31, 2022 from $231.2 million at December 31, 2021. +During the year ended December 31, 2022, net cash used in operating activities was $47.2 million. Our net loss of $17.9 million included non-cash charges of $17.1 million associated with impairment charges taken for idle manufacturing lines and goodwill, depreciation and amortization expense of $15.3 million, stock-based compensation expense of $11.6 million, deferred income tax benefit of $1.7 million, a decrease in reserve for uncollectible accounts of $1.0 million, and a decrease in inventory reserves of $0.8 million. Cash used to fund our working capital accounts included an increase in inventory of $43.0 million to meet anticipated demand to support COVID-19 testing programs, an increase in accounts receivable of $25.2 million due to orders placed in the fourth quarter, an increase in prepaid expenses and other assets of $7.1 million associated with tax installments made to the Canadian Revenue Agency and a decrease in deferred revenue of $0.6 million due to the recognition of revenue from customer prepayments. Offsetting these uses of cash was a $4.0 million increase in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $1.4 million. +Net cash provided by investing activities was $21.1 million for the year ended December 31, 2022, which reflects proceeds from the maturities and redemptions of investments of $47.4 million, offset by $22.9 million used to purchase investments. Investing activities also included $6.8 million to acquire property and equipment and $57.1 million used to build additional manufacturing capacity as required by the $109 million agreement with the DOD. This is offset by $60.3 million received from the DOD as reimbursement under that contract. +Net cash used in financing activities was $3.8 million for the year ended December 31, 2022, which reflects $2.3 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares and performance stock units awarded to our employees, payments of lease liabilities of $1.4 and payment of our contingent consideration obligation of $0.2 million. +We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current and foreseeable operating and capital needs. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under our $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $71.0 million, or 64%, of our $110.8 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In 2022, we repatriated $65 million of such cash into the United States and incurred approximately $1.7 million of Canadian withholding tax. Further repatriation of cash from Canada into the United States could have additional adverse tax consequences. It is still our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition, and cash flows. +61 +Revenue Recognition . +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. +We generally do not grant product return rights to our customers, except for warranty returns and return rights on sales of our OraQuick ® In-Home HIV test to the retail trade, and InteliSwab ® products to the retail trade and certain customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. +Service Revenues +Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligation for services rendered. +Arrangements with multiple-performance obligations +In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Inventories +Our inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for net realizable value adjustments, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results. +62 +Goodwill +Goodwill is not amortized, but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit. +ITEM 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +The information with respect to forward-looking statements within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report is incorporated herein by reference. +We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item. +As of December 31, 2022, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 2.0% of our total revenues for the year ended December 31, 2022. We do have foreign currency exchange risk related to our operating subsidiaries in Canada and in Belgium. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. Our foreign subsidiaries had net assets, subject to translation, of $120.3 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of December 31, 2022. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have increased our comprehensive loss by approximately $12.0 million in the year ended December 31, 2022. +ITEM 8. Financial St atements and Supplementary Data. +Information with respect to this Item is contained in our Consolidated Financial Statements included under Item 15 of this Annual Report. +ITEM 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2022. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2022 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated +63 +Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2022. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +During the quarter ended December 31, 2022, management identified and remediated a material weakness in internal control over financial reporting related to user access controls to adequately restrict access over our information technology system that supports our financial reporting processes. No misstatement arose as a result of this deficiency. +Except for the foregoing, there was no change in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a or 15d of the Exchange Act that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 3, 2023 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the +64 +company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 3, 2023 +ITEM 9B. Other Information. +Not applicable. +ITEM 9C. Disclo sure regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +65 +PART III +We have omitted from Part III the information that will appear in our Definitive Proxy Statement for our 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”), which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A. +ITEM 10. Directors, Executive Off icers and Corporate Governance. +The information required by this Item 10 will be included in our 2023 Proxy Statement and is incorporated herein by reference. Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, as well as to the members of our Board of Directors and our other officers and employees. This Code of Business Conduct and Ethics is available on our website at www.orasure.com . We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on our website. +ITEM 11. Executiv e Compensation. +The information required by this Item 11 will be included in our 2023 Proxy Statement and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this Item 12 will be included in our 2023 Proxy Statement and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in our 2023 Proxy Statement and is incorporated herein by reference. +ITEM 14. Principal Accoun tant Fees and Services. +The information required by this Item 14 will be included in our 2023 Proxy Statement and is incorporated herein by reference. +66 +PART IV +ITEM 15. Exhibits and Consolidate d Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number +Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Bylaws of OraSure Technologies, Inc., as amended and restated as of February 19, 2018, are incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. +4.1 +Description of Securities is incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 . +10.1 +Employment Agreement dated as of January 3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Transition Agreement dated as of January 2, 2022, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D. is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-k filed January 6, 2022* +10.3 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.* +10.4 +Amendment No. 1 to Employment Agreement, dated as of December 20, 2021, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to exhibit 10.10 to the Company's Annual Report on form 10-K for the year ended December 31, 2021* +10.5 + +Amendment No. 2 to Employment Agreement, dated as of November 7, 2022, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc.* +10.6 +Employment Agreement, dated as of May 11, 2020, between OraSure Technologies, Inc. and Lisa Nibauer is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on form 10-Q for the quarter ended June 30, 2020.* +10.7 +Employment Agreement, dated as of November 29, 2021, between OraSure Technologies, Inc. and Agnieszka M. Gallagher. is incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.8 +Employment Agreement dated as of March 21, 2022, between OraSure Technologies, Inc. and Nancy J. Gagliano, M.D., M.B.A. is incorporated by reference to item 10.1 to the Company's Current Report on Form 8-K filed on March 23, 2022* +7 +10.9 +Employment Agreement, dated as of May 20, 2022, between OraSure Technologies, Inc. and Carrie Eglinton-Manner is incorporated by reference to exhibit 10.1 to the company's Current Report on Form 8-K filed on May 26, 2022. +10.10 +Employment Agreement dated August 8, 2022, between OraSure Technologies, Inc. and Kenneth J. McGrath is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 12, 2022.* +10.11 +Severance Letter Agreement, dated August 25, 2021, between OraSure Technologies, Inc. and Michele M. Miller is incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.12 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on form 8-K filed August 14, 2019.* +10.13 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +67 +10.14 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.15 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective April 4, 2020, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 9, 2020, for the 2020 Annual Meeting of Stockholders.* +10.16 +Amended and Restated OraSure Technologies, Inc. 2000 Stock Award Plan, Effective April 1, 2022, is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 18, 2022.* +10.17 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.18 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.19 +Form of Restricted Unit Award Agreement (Executive Officers-Employment Agreements) for 2021 awards is incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.20 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.21 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.22 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.23 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.24 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.25 +Amended and Restated Code of Business Conduct and Ethics of OraSure Technologies, Inc. is incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed November 10, 2021. +10.26 +$109 Million Capital Funding Agreement with the U.S. Department of Defense, in coordination with the Department of Health and Human Services is incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the period ended September 30, 2021, filed November 4, 2021. +10.27 +Industrial Lease between Core5 at Laughman Farms Phase 1, LLC as Landlord and OraSure Technologies, Inc. as Tenant, dated January 3, 2022 is incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021. +21 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23 + +Consent of KPMG LLP. +24 + +Powers of Attorney. +31.1 + +Certification of Carrie Eglinton Manner. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 + +Certification of Kenneth J. McGrath required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1 + +Certification of Carrie Eglinton Manner. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 + +Certification of Kenneth J. McGrath required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS Inline XBRL Instance Document +101.SCH Inline XBRL Taxonomy Extension Schema Document +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +68 +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase document +104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL. ++ Filed herewith. +* Management contract or compensatory plan or arrangement. +ITEM 16. Form 1 0-K Summary. +None +69 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 3, 2023. +ORASURE TECHNOLOGIES, INC. +By: +/s/ Carrie Eglinton Manner +Carrie Eglinton Manner +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 3, 2023, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE +TITLE +/s/ Carrie Eglinton Manner +President, Chief Executive Officer and Director +(Principal Executive Officer) +Carrie Eglinton Manner +/s/ Kenneth J. McGrath +Chief Financial Officer +(Principal Financial Officer) +Kenneth J. McGrath +/s/ Michele Anthony +Senior Vice President, Controller & Chief Accounting Officer +(Principal Accounting Officer) +Michele Anthony +*MARA ASPINALL +Mara Aspinall +Director +*JAMES A. DATIN +James A. Datin +Director +*NANCY J. GAGLIANO +Nancy J. Gagliano +Director +*LELIO MARMORA +Lelio Marmora +Director +*DAVID J. SHULKIN, M.D. +David J. Shulkin, M.D. +Director +*ANNE C. WHITAKER +Anne C. Whitaker +Director +*By: +/s/Stefano Taucer +Stefano Taucer +(Attorney-in-Fact) +70 +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Philadelphia, PA , Auditor Firm ID: 185 ) +F- 2 +Consolidated Balance Sheets +F- 4 +Consolidated Statements of Operations +F- 5 +Consolidated Statements of Comprehensive Income (Loss) +F- 6 +Consolidated Statements of Stockholders’ Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to the Consolidated Financial Statements +F- 9 +F- 1 +Report of Indepe ndent Registered Public Accounting Firm +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 3, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Evaluation of net realizable value adjustments to inventories for excess or obsolescence +As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has inventories with a carrying value of $96,232 thousand as of December 31, 2022. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The majority of the inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the reserve. +We identified the evaluation of net realizable value adjustments to inventories for excess or obsolescence as a critical audit matter. Evaluating the Company’s specific identification procedures, which included reviewing historical inventory consumption as compared to inventory balances as of year-end and the resulting inventory consumption and ability to extend inventory expiration dates, required a high degree of auditor judgment. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for determining net realizable value adjustments for inventory excess or obsolescence, which included controls related to the review of the specific identification +F- 2 +procedures. For a selection of inventory items, we compared the Company’s historic estimates of net realizable value adjustments for excess and obsolescence to the actual physical inventory disposals to evaluate the Company’s ability to accurately estimate the net realizable value adjustments. In addition, we selected inventory items from the underlying data used in the Company’s analysis and evaluated the Company’s determination of net realizable value adjustments for those items by: (1) testing historical inventory consumption by independently recalculating the historical consumption and comparing it to the company determined consumption, (2) comparing that consumption to inventory balances as of year-end, and (3) evaluating changes in the business that could impact future inventory consumption, as applicable. We also selected inventory items from the underlying data used in the Company’s analysis and evaluated the ability to extend the expiration dates by inspecting relevant supporting documentation. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +March 3, 2023 +F- 3 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BA LANCE SHEETS +(in thousands, except per share amounts) +December 31, 2022 +December 31, 2021 +ASSETS +Current Assets: +Cash and cash equivalents +$ +83,980 +$ +116,762 +Short-term investments +26,867 +36,279 +Accounts receivable, net of allowance for doubtful accounts of $ 2,365 and $ 3,418 +70,797 +45,323 +Inventories +96,232 +53,138 +Prepaid expenses +6,273 +7,939 +Other current assets +41,569 +39,865 +Total current assets +325,718 +299,306 +Noncurrent Assets: +Property, plant and equipment, net +59,413 +73,435 +Operating right-of-use assets, net +10,399 +9,056 +Finance right-of-use assets, net +1,293 +2,493 +Intangible assets, net +11,694 +14,343 +Goodwill +35,104 +40,279 +Long-term investments +— +17,009 +Other noncurrent assets +1,087 +5,069 +Total noncurrent assets +118,990 +161,684 +TOTAL ASSETS +$ +444,708 +$ +460,990 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current Liabilities: +Accounts payable +$ +39,349 +$ +28,024 +Deferred revenue +2,273 +2,936 +Accrued expenses and other current liabilities +25,762 +33,778 +Finance lease liability +1,179 +939 +Operating lease liability +1,764 +2,181 +Acquisition-related contingent consideration obligation +65 +206 +Total current liabilities +70,392 +68,064 +Noncurrent Liabilities: +Finance lease liability +503 +1,952 +Operating lease liability +9,101 +7,202 +Acquisition-related contingent consideration obligation +99 +354 +Other noncurrent liabilities +581 +651 +Deferred income taxes +408 +2,234 +Total noncurrent liabilities +10,692 +12,393 +TOTAL LIABILITIES +81,084 +80,457 +Commitments and contingencies (Note 14) +STOCKHOLDERS' EQUITY +Preferred stock, par value $ .000001 , 25,000 shares authorized, none issued +— +— +Common stock, par value $ .000001 , 120,000 shares authorized, 72,734 and 72,069 shares issued and outstanding +— +— +Additional paid-in capital +520,446 +511,063 +Accumulated other comprehensive loss +( 18,435 +) +( 10,077 +) +Accumulated deficit +( 138,387 +) +( 120,453 +) +Total stockholders' equity +363,624 +380,533 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY +$ +444,708 +$ +460,990 +See accompanying notes to the consolidated financial statements. +F- 4 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STAT EMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the years ended December 31, +2022 +2021 +2020 +NET REVENUES: +Products and services +$ +378,047 +$ +226,897 +$ +166,381 +Other +9,432 +6,777 +5,340 +387,479 +233,674 +171,721 +COST OF PRODUCTS AND SERVICES SOLD +239,842 +116,074 +69,853 +Gross profit +147,637 +117,600 +101,868 +OPERATING EXPENSES: +Research and development +36,237 +34,170 +31,032 +Sales and marketing +49,238 +44,751 +34,459 +General and administrative +68,206 +50,328 +42,653 +Loss on impairments +17,101 +— +— +Change in the estimated fair value of acquisition-related contingent consideration +( 188 +) +( 1,485 +) +( 1,099 +) +170,594 +127,764 +107,045 +Operating loss +( 22,957 +) +( 10,164 +) +( 5,177 +) +OTHER INCOME +6,481 +872 +1,653 +Loss before income taxes +( 16,476 +) +( 9,292 +) +( 3,524 +) +INCOME TAX EXPENSE +1,458 +13,706 +11,398 +NET LOSS +$ +( 17,934 +) +$ +( 22,998 +) +$ +( 14,922 +) +LOSS PER SHARE: +BASIC +$ +( 0.25 +) +$ +( 0.32 +) +$ +( 0.22 +) +DILUTED +$ +( 0.25 +) +$ +( 0.32 +) +$ +( 0.22 +) +SHARES USED IN COMPUTING LOSS PER SHARE: +BASIC +72,505 +71,981 +67,505 +DILUTED +72,505 +71,981 +67,505 +See accompanying notes to the consolidated financial statements. +F- 5 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS O F COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the years ended December 31, +2022 +2021 +2020 +NET LOSS +$ +( 17,934 +) +$ +( 22,998 +) +$ +( 14,922 +) +OTHER COMPREHENSIVE LOSS +Currency translation adjustments +( 8,572 +) +( 894 +) +3,273 +Unrealized gain (loss) on marketable securities +214 +( 86 +) +( 234 +) +COMPREHENSIVE LOSS +$ +( 26,292 +) +$ +( 23,978 +) +$ +( 11,883 +) +See accompanying notes to the consolidated financial statements. +F- 6 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS O F STOCKHOLDERS’ EQUITY +For the years ended December 31, 2022, 2021 and 2020 +(in thousands) +Common Stock +Additional +Paid-in +Accumulated +Other +Comprehensive +Accumulated +Shares +Amount +Capital +Loss +Deficit +Total +Balance at January 1, 2020 +61,731 +$ +— +$ +401,814 +$ +( 12,136 +) +$ +( 82,533 +) +$ +307,145 +Common stock issued upon exercise +of options +402 +— +3,222 +— +— +3,222 +Vesting of restricted stock and performance stock units +653 +— +— +— +— +— +Purchase and retirement of common shares +( 248 +) +— +( 2,088 +) +— +— +( 2,088 +) +Issuance of common stock in connection with public offering, net of commissions and expenses of $ 6,200 +9,200 +— +95,036 +— +— +95,036 +Stock-based compensation +— +— +7,139 +— +— +7,139 +Net loss +— +— +— +— +( 14,922 +) +( 14,922 +) +Currency translation adjustments +— +— +— +3,273 +— +3,273 +Unrealized loss on marketable securities +— +— +— +( 234 +) +— +( 234 +) +Balance at December 31, 2020 +71,738 +$ +— +$ +505,123 +$ +( 9,097 +) +$ +( 97,455 +) +$ +398,571 +Common stock issued upon exercise +of options +33 +— +246 +— +— +246 +Vesting of restricted stock and performance stock units +451 +— +— +— +— +— +Purchase and retirement of common shares +( 153 +) +— +( 2,113 +) +— +— +( 2,113 +) +Stock-based compensation +— +— +7,807 +— +— +7,807 +Net loss +— +— +— +— +( 22,998 +) +( 22,998 +) +Currency translation adjustments +— +— +— +( 894 +) +— +( 894 +) +Unrealized loss on marketable securities +— +— +— +( 86 +) +— +( 86 +) +Balance at December 31, 2021 +72,069 +$ +— +$ +511,063 +$ +( 10,077 +) +$ +( 120,453 +) +$ +380,533 +Common stock issued upon exercise +of options +2 +— +15 +— +— +15 +Vesting of restricted stock and performance stock units +992 +— +— +— +— +— +Purchase and retirement of common shares +( 329 +) +— +( 2,254 +) +— +— +( 2,254 +) +Stock-based compensation +— +— +11,622 +— +— +11,622 +Net loss +— +— +— +— +( 17,934 +) +( 17,934 +) +Currency translation adjustments +— +— +— +( 8,572 +) +— +( 8,572 +) +Unrealized gain on marketable securities +— +— +— +214 +— +214 +Balance at December 31, 2022 +72,734 +$ +— +$ +520,446 +$ +( 18,435 +) +$ +( 138,387 +) +$ +363,624 +See accompanying notes to the consolidated financial statements. +F- 7 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEM ENTS OF CASH FLOWS +(in thousands) +For the years ended December 31, +2022 +2021 +2020 +OPERATING ACTIVITIES: +Net loss +$ +( 17,934 +) +$ +( 22,998 +) +$ +( 14,922 +) +Adjustments to reconcile net loss to net cash (used in) provided by operating activities: +Stock-based compensation +11,622 +7,807 +7,139 +Depreciation and amortization +15,308 +11,658 +9,387 +Loss on impairments +17,101 +— +— +Other non-cash amortization +228 +837 +327 +Provision for doubtful accounts +( 1,032 +) +( 253 +) +941 +Inventory reserve +( 754 +) +6,731 +736 +Unrealized foreign currency (gain) loss +( 161 +) +( 210 +) +269 +Interest expense on finance leases +94 +82 +72 +Deferred income taxes +( 1,651 +) +1,026 +( 392 +) +Loss on sale of fixed assets +729 +— +114 +Gain on sale of product line +— +— +( 225 +) +Change in the estimated fair value of acquisition-related contingent consideration +( 188 +) +( 1,485 +) +( 1,099 +) +Payment of acquisition-related contingent consideration +— +( 142 +) +( 496 +) +Changes in assets and liabilities +Accounts receivable +( 25,162 +) +( 6,451 +) +( 2,324 +) +Inventories +( 43,048 +) +( 27,941 +) +( 9,343 +) +Prepaid expenses and other assets +( 7,091 +) +( 8,674 +) +( 104 +) +Accounts payable +3,963 +3,234 +7,379 +Deferred revenue +( 596 +) +( 1,891 +) +1,051 +Accrued expenses and other liabilities +1,370 +3,288 +7,297 +Net cash (used in) provided by operating activities +( 47,202 +) +( 35,382 +) +5,807 +INVESTING ACTIVITIES: +Purchases of investments +( 22,873 +) +( 25,822 +) +( 90,137 +) +Proceeds from maturities and redemptions of investments +47,415 +67,925 +107,718 +Proceeds from sale of assets +121 +— +— +Purchases of property and equipment +( 6,774 +) +( 21,893 +) +( 26,674 +) +Purchase of property and equipment under government contracts +( 57,135 +) +( 26,224 +) +— +Proceeds from funding under government contract +60,331 +531 +— +Purchase of patent and product rights +— +— +( 2,250 +) +Acquisition of businesses, net of cash acquired +— +— +( 3,037 +) +Other investing activities +— +( 18 +) +351 +Net cash (used in) provided by investing activities +21,085 +( 5,501 +) +( 14,029 +) +FINANCING ACTIVITIES: +Cash payments for lease liabilities +( 1,381 +) +( 686 +) +( 687 +) +Issuance of common stock in connection with public offering, net +— +— +95,036 +Proceeds from exercise of stock options +15 +246 +3,222 +Payment of acquisition-related contingent consideration +( 208 +) +( 264 +) +( 3,004 +) +Repurchase of common stock +( 2,254 +) +( 2,113 +) +( 2,088 +) +Net cash (used in) provided by financing activities +( 3,828 +) +( 2,817 +) +92,479 +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH +( 2,837 +) +( 340 +) +830 +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS +( 32,782 +) +( 44,040 +) +85,087 +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD +116,762 +160,802 +75,715 +CASH AND CASH EQUIVALENTS, END OF PERIOD +$ +83,980 +$ +116,762 +$ +160,802 +See accompanying notes to the consolidated financial statements. +F- 8 +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATE D FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +The primary goal of OraSure Technologies, Inc. (“OraSure” or “the Company”) is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. OraSure's business consists of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +The Company's Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. In 2022, after obtaining a CE mark, the Company launched the OraQuick ® HIV Self-Test, an oral swab in-home test for HIV-1 and HIV-2, in Europe, making it available in several European countries. Through the Company’s Diagnostics business the Company is also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"). +The Company's Molecular Solutions business is operated by its wholly-owned subsidiaries, DNA Genotek Inc. ("DNAG"), Diversigen, Inc. ("Diversigen"), and Novosanis NV ("Novosanis"). The Company's Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. The Company's products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of the Company's Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of the Company's total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNAG, Diversigen, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we”, “us”, “our”, or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the fair value of assets acquired and liabilities assumed for business combinations, the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as estimates related to taxes, contingent consideration, and performance-based compensation expense. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Employee Retention Credit +In December 2021, the Company applied for the Employee Retention Credit for payroll taxes paid in the first and second quarters of 2021 as provided by the Coronavirus Aid, Relief and Economic Security Act . The amount due from the Internal Revenue Service of $ 5,728 is recorded in other current assets in the Company's consolidated balance sheet as of December 31, 2022 and 2021. The amount +F- 9 +was received in 2023. The credit is reported in the Company's consolidated statement of operations, for the year ended December 31, 2021, within cost of products and services sold, research and development, sales and marketing and general and administrative costs in the amounts of $ 2,536 , $ 1,134 , $ 924 , and $ 1,134 , respectively. +Supplemental Cash Flow Information +In 2022, 2021 and 2020 , the Company paid income taxes of $ 9,446 , $ 13,727 and $ 9,263 , respectively. +The Company had account receivable write-offs of $ 2,296 , $ 115 , and $ 501 in 2022, 2021, and 2020, respectively. +As of December 31, 2022, 2021 and 2020 , the Company had accruals for purchases of property and equipment of $ 227 , $ 8,166 and $ 802 , respectively. +Investments +The Company considers all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +The Company records an allowance for credit loss for the Company's available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value, and the probability that the scheduled cash payments will continue to be made. +The following is a summary of the Company's available-for-sale securities as of December 31, 2022 and 2021: +Amortized +Cost +Gross +Unrealized +Gains +Gross +Unrealized +Losses +Fair Value +December 31, 2022 +Guaranteed investment certificates +$ +22,109 +$ +— +$ +— +$ +22,109 +Corporate bonds +4,978 +— +( 220 +) +4,758 +Total available-for-sale securities +$ +27,087 +$ +— +$ +( 220 +) +$ +26,867 +December 31, 2021 +Guaranteed investment certificates +$ +33,249 +$ +— +$ +— +$ +33,249 +Corporate bonds +20,473 +— +( 434 +) +20,039 +Total available-for-sale securities +$ +53,722 +$ +— +$ +( 434 +) +$ +53,288 +At December 31, 2022, maturities of the Company's available-for-sale securities were as follows: +Less than one year +$ +27,087 +$ +— +$ +( 220 +) +$ +26,867 +Greater than one year +$ +— +$ +— +$ +— +$ +— +Fair Value of Financial Instruments +As of December 31, 2022 and 2021, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +F- 10 +Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and un-observable (i.e., supported by little or no market activity). +All of the Company's available-for-sale debt securities are measured as Level 2 instruments as of December 31, 2022 and 2021. The Company's guaranteed investment certificates are measured as Level 1 instruments as of December 31, 2022 and 2021. +Included in cash and cash equivalents at December 31, 2022 and 2021, was $ 1,730 and $ 1,160 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. +The Company offers a nonqualified deferred compensation plan for certain eligible employees and members of the Company's Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds. The fair value of the plan assets as of December 31, 2022 and 2021 was $ 747 and $ 1,763 , respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other non-current assets with the same amounts included in accrued expenses and other non-current liabilities in the accompanying consolidated balance sheets. +As further discussed in Note 3, Business Combinations, the Company has identified the Company's contingent consideration obligations as Level 3 liabilities due to significant inputs that are required to measure the fair value of these obligations. +Accounts Receivable +Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of the Company's customers and the Company's historical experience related to write-offs. +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of the Company's inventories to determine the need for net realizable value adjustments, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the Company's reserve. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results +Property, Plant and Equipment +Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are typically depreciated over twenty years , while computer equipment and software, machinery and equipment, and furniture and fixtures are depreciated over two to ten years . Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. +Intangible Assets +Intangible assets consist of customer relationships, patents and product rights, acquired technology and trade names. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years . +F- 11 +Impairment of Long-Lived Assets +Long-lived assets, which include property and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company assesses the recoverability of the Company's long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect the Company's assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. See Note 6 for discussion of impairments recorded in 2022. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment. If the Company concludes that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then the Company would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The Company performs an annual goodwill impairment assessment as of July 31 each year. Historically this involved a qualitative analysis that resulted in a conclusion that it was more likely than not that the fair value of the Company's reporting units is greater than their carrying value. +A more frequent evaluation is performed if an event occurs or circumstances change between annual tests that could more likely than not reduce the fair value of a reporting unit below its carrying amount. +Revenue +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates. +The Company generally does not grant product return rights to the Company's customers, except for warranty returns and return rights on sales of the Company's OraQuick ® In-Home HIV test to the retail trade, and InteliSwab ® products to the retail trade and certain customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred. +The Company records shipping and handling charges billed to the Company's customers as product revenue and the related expense as cost of products sold. +Service revenues. Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when the Company satisfies its performance obligations for services rendered. +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues . Other revenues consist primarily of royalty income and funding from grants of research and development efforts. For the year ended December 31, 2021, other revenue also included cost reimbursements under a charitable support agreement which ended in June 2021. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Research and development grant revenue is recognized pursuant to International Accounting Standard 20, +F- 12 +Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20") . The expenses are recorded in research and development expense and the reimbursements are recorded in other revenue. Funding of research and development efforts and charitable support reimbursements are recorded as the activities are performed in accordance with the respective agreements. +Deferred Revenue. The Company records deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2022 and 2021 included customer prepayments of $ 1,533 and $ 1,843 , respectively. Deferred revenue as of December 31, 2022 and 2021 also included $ 740 and $ 1,093 , respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined based on expected revenues and revenue is recognized at that rate when the product is delivered to the customer. +Financing and Payment . The Company's payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, the Company may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, the Company defers the cost of the commission and expenses it over the life of the related sales contract. +Revenues by product . The following table represents total net revenues by product line: +Years ended December 31, +2022 +2021 +2020 +COVID-19 +$ +243,325 +$ +76,874 +$ +50,927 +Genomics +54,335 +63,350 +36,878 +HIV +38,812 +42,144 +44,224 +HCV +13,369 +11,783 +8,448 +Risk assessment testing +10,269 +9,678 +9,194 +Microbiome +7,503 +7,944 +5,474 +Laboratory services +7,296 +11,840 +8,746 +Other product and service revenues +3,138 +3,284 +2,490 +Net product and services revenues +$ +378,047 +$ +226,897 +$ +166,381 +Royalty income +2,683 +4,420 +3,432 +Other non-product revenues +6,749 +2,357 +1,908 +Other revenues +9,432 +6,777 +5,340 +Net revenues +$ +387,479 +$ +233,674 +$ +171,721 +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +Years ended December 31, +2022 +2021 +2020 +United States +$ +350,206 +$ +188,383 +$ +130,835 +Europe +11,536 +13,799 +12,068 +Other regions +25,737 +31,492 +28,818 +$ +387,479 +$ +233,674 +$ +171,721 +Customer and Vendor Concentrations. The Company had one customer that accounted for more than 57 % of the Company's consolidated accounts receivable as of December 31, 2022 and no ne as of December 31, 2021. The same customer accounted for approximately 58 % of the Company's consolidated revenues for the year ended December 31, 2022. The Company had no customers that accounted for more than 10% of the Company's consolidated net revenues for the years ended December 31, 2021 and 2020. +F- 13 +The Company currently purchases certain products and critical components of the Company's products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, the Company could be subject to increased costs and substantial delays in the delivery of the Company's products to the Company's customers. Third-party suppliers also manufacture certain products. The Company's inability to have a timely supply of any of these components and products could have a material adverse effect on the Company's business, as well as the Company's financial condition and results of operations. +The Company’s Intercept i2 ® he collection device is manufactured and supplied under a long-term agreement with Thermo Fisher, the sole-source supplier for these products. DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. The Company is actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. +Business Combinations and Contingent Consideration +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires the Company to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although the Company believes the assumptions and estimates it has made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +The Company accounts for contingent consideration in accordance with applicable guidance provided within the business combination accounting standard. As part of the Company's consideration for the recent acquisitions, the Company is contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, the Company is required to update the Company's underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in the Company's consolidated statements of operations. The Company's estimates of fair value are based on assumptions the Company believes to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on the Company's results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing certain intangible assets and contingent consideration include: +• +future expected cash flows from sales and acquired developed technologies; +• +the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio; +• +the probability of meeting the future events; and +• +discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that the Company has made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur the Company may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities . +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +F- 14 +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2022, 2021, and 2020, the Company incurred $ 4,849 , $ 5,103 , and $ 1,126 , respectively, in advertising expenses. +Stock-Based Compensation +The Company accounts for stock-based compensation to employees and directors using the fair value method. The Company recognizes compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. The Company recognizes compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, the Company issues new shares rather than purchase shares in the open market. +Income Taxes +The Company follows the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +The Company assesses the realizability of the Company's net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, the Company reduces its net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the Company's net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in the Company's consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income in the Company's consolidated statements of operations were $ 1,553 , $( 667 ) , and $( 337 ) for the years ended December 31, 2022, 2021, and 2020 , respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is anti-dilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive. +For the years ended December 31, 2022, 2021, and 2020 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 436 , 769 , and 984 shares, respectively, were excluded from the computation of diluted loss per share. +F- 15 +Accumulated Other Comprehensive Loss +The Company classifies items of other comprehensive income (loss) by their nature and discloses the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of the Company's consolidated balance sheets. +The Company has defined the Canadian dollar as the functional currency of the Company's Canadian subsidiary, DNAG, and the Company has defined the Euro as the functional currency of the Company's Belgian subsidiary, Novosanis. The results of operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2022 consists of $ 18,215 of currency translation adjustments and $ 220 of net unrealized losses on marketable securities. Accumulated other comprehensive loss at December 31, 2021 consists of $ 9,643 of currency translation adjustments and $ 434 of net unrealized losses on marketable securities, which represents the fair market value adjustment for the Company's investments portfolio. +Recent Accounting Pronouncements +In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The purpose of this update is to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU were effective upon issuance and could be applied prospectively through December 31, 2022. The FASB issued an amendment, ASU 2022-06, Deferral of the Sunset Date of Topic 848, in December 2022, which, extends the date for prospective application to December 31, 2024. Management has evaluated this ASU and concluded that it will not have a material impact on the Company's Consolidated Financial Statements . +Reclassifications +Certain prior period amounts have been reclassified to conform to current year presentation. See Note 4 for discussion of the reclassification related to the U.S. Department of Defense contract. +3. BUSINESS COMBINATIONS +UrSure +On July 22, 2020, the Company acquired all of the outstanding stock of UrSure, Inc. (“UrSure”), pursuant to the terms of a merger agreement. The initial aggregate purchase price of this transaction was $ 3,000 , adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement. +During the year ended December 31, 2020, the Company incurred a total of $ 393 of acquisition related costs, including accounting, legal, and other professional fees, all of which were expensed and reported as a component of general and administrative expense in the consolidated statement of operations for the year ended December 31, 2020. +Pursuant to the Company's acquisition agreement, the Company was to pay up to an additional $ 28,000 of contingent consideration over the three years following the acquisition date based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue dollars, and the achievement of certain clinical milestones associated with the development of certain new technology. The Company, with the assistance of an independent valuation specialist, determined the estimated acquisition-date fair value of the acquisition-related contingent consideration of $ 3,440 . The fair value was determined using a probability-weighted model based on the Company's assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including the likelihood of the achievement of clinical milestones and revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. As of December 31, 2022, it is not likely the Company will be required to make a material payment. +The following table represents the change in contingent consideration: +F- 16 +Estimated fair value of contingent consideration as of acquisition date +$ +3,440 +Change in fair value during the period +( 989 +) +Balance as of December 31, 2020 +2,451 +Payments made during the period +( 406 +) +Change in fair value during the period +( 1,485 +) +Balance as of December 31, 2021 +560 +Payments made during the period +( 208 +) +Change in fair value during the period +( 188 +) +Balance as of December 31, 2022 +$ +164 +The change in fair value during the years ended December 31, 2022, 2021 and 2020 is a result of delays in achieving certain product development milestones and a decrease in associated revenue forecasts as result of these delays. +Revenues from UrSure primarily consist of grant money received to fund the development of certain new technology. Effective as of July 22, 2020, the financial results of UrSure are included in the Company's Diagnostics segment. +The Company finalized its valuation of the assets acquired and liabilities assumed. The total consideration of $ 3,037 was allocated to assets acquired and liabilities assumed as of the acquisition date as follows: +Assets Acquired +Accounts receivable +$ +285 +Other current assets +24 +Other assets +6 +Intangibles +3,600 +Goodwill +3,586 +Total assets acquired +7,501 +Liabilities Assumed +Current liabilities +335 +Deferred tax liability +689 +Total liabilities assumed +1,024 +Net Assets Acquired +6,477 +Fair value of contingent consideration +( 3,440 +) +Net Cash Paid (net of cash acquired of $ 111 ) +$ +3,037 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, which is subject to amortization on a straight-line basis and is being amortized over a ten year estimated useful life. +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of UrSure. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. +The amortization of intangible assets is not deductible for income tax purposes. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that the Company expects to achieve as a result of the acquisition. The Company believes the goodwill related to the acquisition was a result of gaining a complementary product offering that will enable the Company to leverage those products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to the Company's Diagnostics segment. +4. GOVERNMENT CAPITAL CONTRACTS: +F- 17 +In September 2021, the Company entered into an agreement for $ 109,000 in funding from the U.S. Department of Defense (the “DOD”), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for the Company's InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Funding will be paid to the Company based on achievement of milestones expected to occur through December 2023 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement. In accordance with the milestone payment schedule, 15 % of the total will not be funded until the completion of the final validation testing, which is scheduled to occur in late 2023. The Company began making payments to vendors for the capital project during the fourth quarter of 2021. The Company began receiving funds from the DOD in January 2022 and has received $ 60,331 as of the date of this report. The remaining $ 48,669 is expected to be collected within the next year. +Activity for these capital contracts is accounted for pursuant to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance . Funding received in relation to capital-related costs incurred for government contracts is recorded as a reduction to the cost of property, plant and equipment and reflected within investing activities in the consolidated statements of cash flows; and associated unpaid liabilities and government proceeds receivable are considered non-cash changes in such balances within the operating section of the consolidated statements of cash flows. Property, plant and equipment in the amount of $ 14,729 that was recorded on the Company's consolidated balance sheet as of December 31, 2021 was reclassified in 2022 as the assets were allocated to the DOD build out. The consolidated balance sheet as of December 31, 2021 has been updated to reflect a reduction of $ 14,729 in property, plant and equipment and an increase in other current assets of $ 10,875 and other noncurrent assets of $ 3,854 for amounts due from DOD. The respective investing activities on the consolidated cash flows for the year ended December 31, 2021 have also been reclassified. +The DOD also reimburses the Company for certain engineering consulting costs. These expenses are reflected in research and development expenses as incurred with the corresponding amount presented in other income. For the year ended December 31, 2022, $ 1,422 was recorded in research and development expenses and other income. Amounts earned in excess of the Company's expected costs for the project for project management are recognized straight-line in other income over the term of the government contract. The Company recognized $ 2,246 and $ 561 of such income, which is reported as other income in the Company's consolidated statement of operations for the year ended December 31, 2022 and 2021, respectively. +Additionally, during 2021, the Company received $ 531 in funding from the Commonwealth of Pennsylvania, acting through the Department of Community and Economic Development, for the purchase of machinery and equipment as part of an expansion of manufacturing operations in Pennsylvania. All related purchases were completed in 2021. +The balances corresponding to government contracts included in the Company's consolidated balance sheet are as follows: +December 31, +2022 +December 31, +2021 +Other current assets: +Billed receivables +$ +— +$ +9,913 +Unbilled receivables +27,013 +20,591 +Total other current assets +27,013 +30,504 +Other non-current assets +— +3,854 +Accrued expenses and other current liabilities +$ +( 318 +) +$ +( 8,103 +) +The activity corresponding to the government contracts included in the Company's consolidated statements of cashflows is as follows: +December 31, +2022 +December 31, +2021 +Cost of assets, cumulative +$ +83,359 +$ +26,224 +Reduction for funding earned to date, not yet received +( 22,497 +) +( 25,693 +) +Reduction for funding received to date +( 60,862 +) +( 531 +) +Total property, plant and equipment, net +$ +— +$ +— +F- 18 +5. INVENTORIES: +December 31, +2022 +2021 +Raw materials +$ +42,445 +$ +33,168 +Work in process +2,335 +2,252 +Finished goods +51,452 +17,718 +$ +96,232 +$ +53,138 +During 2022, 2021, and 2020, the Company recorded adjustments to inventory which had a cost of $ 15,618 , $ 13,400 , and $ 2,564 , respectively. The adjustments in 2021 included a write-off of $ 3,008 of COVID-19 antibody inventory, which the Company does not believe the Company can sell as a result of the decision to no longer pursue an EUA for the ELISA antibody test. Additionally, a significant portion of the Company's 2022 and 2021 adjustments were related to production and tech-transfer issues associated with the Company's COVID-19 rapid test. +6. PROPERTY, PLANT AND EQUIPMENT: +December 31, +2022 +2021 +Land +$ +1,118 +$ +1,118 +Buildings and improvements +35,582 +35,420 +Machinery and equipment +60,725 +57,919 +Computer equipment and software +16,681 +14,700 +Furniture and fixtures +4,064 +4,228 +Construction in progress +11,124 +21,207 +129,294 +134,592 +Less accumulated depreciation +( 69,881 +) +( 61,157 +) +$ +59,413 +$ +73,435 +During the year ended December 31, 2022, management determined several manufacturing lines and associated supporting assets will not be utilized due to changes in forecasted demand for the products the lines are intended to produce. As a result of this decision, the Company determined that the carrying values of the equipment are not recoverable and recorded aggregate pre-tax asset impairment charges of $ 8,585 and $ 4,912 to the Molecular Solutions and Diagnostics segments, respectively, to write the assets down to their estimated fair values. This resulted in the assets being fully impaired. This charge is reported within loss on impairments in the consolidated statement of operations. +The Company estimated the fair value of the impaired long-lived assets using a market approach, which required the Company to estimate the value that would be received for the equipment in the most advantageous market for that equipment in an orderly transaction between market participants. Due to the extremely specialized nature of the manufacturing equipment and various market data points, the estimated fair value was not significant. The Company's fair value estimates were representative of Level 3 measurements within the fair value hierarchy due to the significant level of estimation involved and the lack of transparency as to the inputs used. +Depreciation expense was $ 11,740 , $ 7,498 , and $ 5,514 for 2022, 2021, and 2020 , respectively. See Note 4 for discussion of prior year reclassification. +7. GOODWILL AND OTHER INTANGIBLE ASSETS: +The following table represents total goodwill by operating segment: +F- 19 +December 31, +2022 +2021 +Diagnostics +$ +— +$ +3,604 +Molecular Solutions +35,104 +36,675 +$ +35,104 +$ +40,279 +The changes in goodwill are as follows: +December 31, +2022 +2021 +Balance as of January 1 +$ +40,279 +$ +40,351 +Impairment +( 3,604 +) +— +Purchase price adjustment +— +18 +Change related to foreign currency translation +( 1,571 +) +( 90 +) +Balance as of December 31 +$ +35,104 +$ +40,279 +During the second quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding decline in the Company's market capitalization. As a result, the Company performed an interim quantitative goodwill impairment test and concluded that the carrying value of the Company's Diagnostics reporting unit exceeded its estimated fair value and the goodwill balance for that segment was fully impaired. The Company recognized a pre-tax impairment charge of $ 3,604 during the year ended December 31, 2022, which is reported in loss on impairments in the Company's consolidated statement of operations. The Company's quantitative goodwill impairment test concluded that the carrying value of the Company's Molecular Solutions reporting unit exceeded its estimated fair value and no impairment of the related goodwill exists. +Intangible assets consist of the following: +December 31, 2022 +Amortization +Period (Years) +Gross +Accumulated Amortization +Net +Customer relationships +10 +$ +14,286 +$ +( 11,011 +) +$ +3,275 +Patents and product rights +5 +7,620 +( 6,615 +) +1,005 +Developed technology +7 - 10 +15,478 +( 9,940 +) +5,538 +Tradename +5 - 15 +5,387 +( 3,511 +) +1,876 +$ +42,771 +$ +( 31,077 +) +$ +11,694 +December 31, 2021 +Amortization +Period (Years) +Gross +Accumulated +Amortization +Net +Customer relationships +10 +$ +15,016 +$ +( 11,205 +) +$ +3,811 +Patents and product rights +5 +7,785 +( 6,241 +) +1,544 +Developed technology +7 - 10 +16,293 +( 9,725 +) +6,568 +Tradename +5 - 15 +5,661 +( 3,241 +) +2,420 +$ +44,755 +$ +( 30,412 +) +$ +14,343 +Amortization expense for 2022, 2021, and 2020 was $ 2,269 , $ 3,260 , and $ 3,246 , respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2023 +$ +2,221 +2024 +2,183 +2025 +1,947 +2026 +1,591 +2027 +1,520 +Beyond +2,232 +$ +11,694 +F- 20 +8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: +December 31, +2022 +2021 +Payroll and related benefits +$ +14,103 +$ +15,570 +Commitment to purchase under government contract +— +8,103 +Professional fees +4,685 +3,335 +Sales tax payable +1,519 +2,227 +Other +5,455 +4,543 +$ +25,762 +$ +33,778 +9. LEASES: +The Company determines whether an arrangement is a lease at inception. The Company has operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of December 31, 2022, the Company is the lessee in all agreements. The Company's leases have remaining lease terms of 1 to 10 years , some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year. The Company presents the operating right-of-use asset amortization and the change in operating lease liabilities on the same line item, other non-cash amortization on the statement of cash flows. +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. +The Company has lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, the Company accounts for lease components separately from non-lease components. During 2021, the Company entered into various purchase agreements for the Company's Molecular Solutions business which include a finance lease component for the use of specialized molds made and used by the vendor for purposes of manufacturing the goods to be purchased. The Company recorded an aggregate ROU asset and offsetting lease liability of $ 2,074 upon commencement of these contracts. The consideration to be paid under the agreements is variable based on the amounts purchased with a fixed amount charged if specified purchase minimums are not met. Only the fixed amount has been included in the measurement of the finance right-of-use asset and lease liability, and the variable costs are recognized as purchases are made within cost of products and services sold in the Company's consolidated statements of operations. The consideration for the contract has been allocated between the lease and non-lease components based on their relative estimated stand-alone selling prices. +The components of lease expense are as follows: +Years ended December 31, +2022 +2021 +2020 +Operating lease cost +$ +2,910 +$ +2,226 +$ +1,291 +Variable and short-term lease cost +521 +201 +— +Finance lease cost: +Amortization of right-of use assets +1,299 +900 +627 +Interest on lease liabilities +94 +82 +72 +Total finance lease cost +1,393 +982 +699 +Total lease cost +$ +4,824 +$ +3,409 +$ +1,990 +Supplemental cash flow information related to leases is as follows: +F- 21 +Years ended December 31, +2022 +2021 +2020 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases +$ +2,209 +$ +3,733 +$ +1,280 +Operating cash flows from financing leases +94 +82 +72 +Financing cash flows from financing leases +1,381 +686 +687 +Non-cash activity: +Right-of-use assets obtained in exchange for operating lease obligations +3,963 +6,480 +498 +Right-of-use assets obtained in exchange for finance lease obligations +117 +2,074 +46 +Supplemental balance sheet information related to leases is as follows: +December 31, +2022 +2021 +Operating Leases +Right-of-use assets +$ +10,399 +$ +9,056 +Lease liabilities: +Current lease liabilities +1,764 +2,181 +Non-current lease liabilities +9,101 +7,202 +Total operating lease liabilities +$ +10,865 +$ +9,383 +Finance Leases +Right-of-use assets +$ +1,293 +$ +2,493 +Lease liabilities: +Current lease liabilities +1,179 +939 +Non-current lease liabilities +503 +1,952 +Total finance lease liabilities +$ +1,682 +$ +2,891 +Weighted Average Remaining Lease Term +Weighted-average remaining lease term—operating leases +6.24 years +5.26 years +Weighted-average remaining lease term—finance leases +1.33 years +2.21 years +Weighted Average Discount Rate +Weighted-average discount rate—operating leases +4.06 +% +3.90 +% +Weighted-average discount rate—finance leases +3.44 +% +3.57 +% +As of December 31, 2022, minimum lease payments by period are expected to be as follows: +Finance +Operating +2023 +$ +1,216 +$ +1,898 +2024 +505 +2,311 +2025 +20 +1,928 +2026 +12 +1,710 +2027 +— +1,544 +Thereafter +— +3,083 +Total minimum lease payments +1,753 +12,474 +Less: imputed interest +( 71 +) +( 1,609 +) +Present value of lease liabilities +$ +1,682 +$ +10,865 +F- 22 +10. INCOME TAXES: +Income (loss) before income tax expense consists of the following: +Years Ended December 31, +2022 +2021 +2020 +United States +$ +( 7,912 +) +$ +( 60,500 +) +$ +( 47,995 +) +Foreign +( 8,564 +) +51,208 +44,471 +$ +( 16,476 +) +$ +( 9,292 +) +$ +( 3,524 +) +The components of income tax expense (benefit) are as follows: +Years Ended December 31, +2022 +2021 +2020 +Current +Federal +$ +— +$ +— +$ +— +State +955 +163 +( 106 +) +Foreign +2,154 +12,517 +11,896 +3,109 +12,680 +11,790 +Deferred +Federal +( 2,250 +) +( 10,318 +) +( 20,946 +) +State +( 633 +) +( 965 +) +( 1,053 +) +Foreign +( 2,617 +) +( 151 +) +( 410 +) +( 5,500 +) +( 11,434 +) +( 22,409 +) +Increase (decrease) in valuation allowance +3,849 +12,460 +22,017 +( 1,651 +) +1,026 +( 392 +) +Total income tax expense +$ +1,458 +$ +13,706 +$ +11,398 +For the years ended December 31, 2022, 2021, and 2020 the Company recorded foreign income tax expense of $ 503 , $ 13,543 , and $ 12,185 , respectively. The Company's 2022 income tax expense is comprised of $ 1,703 of Canadian withholding taxes paid on the repatriation of Canadian earnings which occurred in the first quarter of 2022, $ 955 of U.S. state income taxes, and a foreign income tax benefit of $ 1,200 associated with the Company's Canadian subsidiary. The Company's 2021 income tax expense is comprised of U.S. state income taxes of $ 163 and foreign tax expense associated with the Company's Canadian subsidiary of $ 13,543 . The Company's 2020 income tax expense is comprised of a U.S. state income tax benefit of a $ 794 and foreign tax expense associated with the Company's Canadian subsidiary of $ 12,192 . +A reconciliation of the statutory United States federal income tax rate to the Company's effective tax rate for each of the years ended December 31, 2022, 2021, and 2020 is as follows: +2022 +2021 +2020 +Statutory U.S. federal income tax rate +21.0 +% +21.0 +% +21.0 +% +Nondeductible executive compensation +( 5.5 +) +( 6.1 +) +( 0.9 +) +Impact of share-based payment awards +( 4.8 +) +( 3.3 +) +( 12.4 +) +Tax effect of foreign items +( 5.7 +) +( 30.8 +) +( 70.7 +) +State income taxes, net of federal benefit +( 0.8 +) +6.8 +26.0 +U.S. and foreign tax credits +3.6 +2.5 +34.9 +Nondeductible transaction costs +— +— +( 2.8 +) +Nondeductible expenses and other +7.0 +( 4.0 +) +( 2.6 +) +NOL adjustment due to change in GILTI regulations +— +— +308.9 +Change in valuation allowance, federal and state +( 23.7 +) +( 133.6 +) +( 624.8 +) +Effective tax rate +( 8.9 +) +% +( 147.5 +) +% +( 323.4 +) +% +F- 23 +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of the Company's deferred tax assets (liabilities) as of December 31, 2022 and 2021 are as follows: +2022 +2021 +Deferred tax assets (liabilities): +Net operating loss carryforwards +$ +39,783 +$ +44,191 +Inventories +4,504 +4,642 +Capitalized research and development costs +6,505 +453 +Accruals and reserves currently not deductible +2,799 +3,245 +Acquired intangible assets +( 2,641 +) +( 3,117 +) +Depreciation and amortization +( 6,227 +) +( 8,536 +) +Right-of-use assets +( 2,775 +) +( 2,777 +) +Lease liabilities +2,990 +2,957 +Stock-based compensation +3,032 +1,891 +Tax credit carryforwards +4,509 +3,855 +Net deferred tax asset +52,479 +46,804 +Valuation allowance +( 52,887 +) +( 49,038 +) +Net deferred tax liability +$ +( 408 +) +$ +( 2,234 +) +In assessing the realizability of the Company's deferred tax asset, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income prior to the expiration of the NOL carryforwards. In 2008, the Company established a full valuation allowance against the Company's U.S. deferred tax asset, and management believes the full valuation allowance is still appropriate as of December 31, 2022 and 2021 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2022, 2021, and 2020. +The Company's Federal NOL carryforwards expire as follows: +Year of Expiration +NOLs +2030 - 2033 +$ +36,107 +2034 - 2037 +12,055 +Non-Expiring +117,885 +$ +166,047 +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. The Company does not believe that there is a Section 382 limitation that will impair the Company's future ability to utilize NOLs to offset the Company's future taxable income. The Company continues to review ownership changes on an annual basis and the Company does not believe it has had a subsequent ownership change that would impact the NOLs. +In January 2022, approximately $ 65,000 was repatriated from the Company's Canadian subsidiary as a one-time event. Associated with this repatriation the Company paid $ 1.7 million in Canadian withholding tax which is included in the Company's foreign income tax expense within the table further above. It is still the Company's intention to continue to permanently reinvest the historical undistributed earnings of the Company's foreign subsidiary to the extent that the Company will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2022. +F- 24 +As of December 31, 2022 , the Company's gross unrecognized tax benefits totaled $ 373 , and based upon the valuation allowance for the Company's U.S. operations, the recognition of any tax benefit would not impact the Company's effective tax rate. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2022, 2021, and 2020. As a result of the Company's net operating loss carryforward position, the Company is subject to audit by the Internal Revenue Service since the Company's inception, as well as by several state jurisdictions for the years ended September 30, 1998 through December 31, 2022. +A reconciliation of the Company's unrecognized tax benefits is as follows: +2022 +2021 +2020 +Balance as of January 1 +$ +805 +$ +1,172 +$ +1,308 +Additions for tax positions of prior periods +1 +1 +1 +Reductions for tax positions of prior periods +( 433 +) +( 368 +) +( 137 +) +Balance as of December 31 +$ +373 +$ +805 +$ +1,172 +11. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +The Company grants stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2022 , 3,921 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including the Company's officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years , with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +Years Ended December 31, +Black-Scholes Option Valuation Assumptions +2022 +2021 +2020 +Risk-free interest rate (1) +1.65 +% +0.47 +% +1.33 +% +Expected dividend yield +— +— +— +Expected stock price volatility (2) +50 +% +50 +% +42 +% +Expected life of stock options (in years) (2) +5 +5 +5 +(1) +Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of the Company's stock options. +(2) +Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2022, 2021, and 2020 was $ 4.15 , $ 6.14 and $ 2.79 , respectively. +Compensation expense recognized in the financial statements related to stock options was $ 1,515 , 1,063 , and $ 892 for the years ended December 31, 2022, 2021, and 2020, respectively. +The aggregate intrinsic value of options exercised during the years ended December 31, 2022, 2021, and 2020 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $ 4 , $ 130 , and $ 3,117 , respectively. +F- 25 +The following table summarizes the stock option activity under the Stock Plan: +Options +Weighted- +Average +Exercise Price +Per Share +Weighted- +Average +Remaining +Contractual +Term +(in years) +Aggregate Intrinsic Value +Outstanding on January 1, 2022 +1,410 +$ +10.73 +Granted +589 +8.86 +Exercised +( 2 +) +7.17 +Expired +( 28 +) +10.01 +Forfeited +( 211 +) +9.63 +Outstanding on December 31, 2022 +1,758 +$ +10.25 +6.54 +$ +— +Vested or expected to vest as of December 31, 2022 +1,633 +$ +10.29 +7.03 +$ +— +Exercisable on December 31, 2022 +1,045 +$ +10.67 +5.11 +$ +— +As of December 31, 2022 , there was $ 2,583 of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 2.6 years. +Net cash proceeds from the exercise of stock options were $ 15 , $ 246 and $ 3,222 for the years ended December 31, 2022, 2021, and 2020 , respectively. As a result of the Company's net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2022: +Options outstanding +Options exercisable +Range of exercise prices +Number +Outstanding +Weighted- +Average +Remaining +Contractual +Term +(in years) +Weighted- +Average +Exercise +Price Per +Share +Number +Exercisable +Weighted- +Average +Exercise +Price Per +Share +$ 5.37 -$ 8.86 +1,036 +7.2 +$ +7.83 +435 +$ +6.83 +$ 8.87 -$ 13.31 +362 +4.8 +10.67 +357 +10.64 +$ 14.95 -$ 22.43 +360 +6.5 +16.79 +253 +17.30 +1,758 +6.5 +$ +10.25 +1,045 +$ +10.67 +The Stock Plan also permits the Company to grant restricted shares and restricted units of the Company's common stock to eligible employees, including officers, and the Company's outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by the Company's Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the vesting restrictions lapse. Compensation cost of $ 9,169 , $ 4,094 and $ 4,094 related to restricted shares was recognized during the years ended December 31, 2022, 2021, and 2020, respectively. +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2022 +701 +$ +11.53 +Granted +2,995 +6.45 +Vested +( 750 +) +9.50 +Forfeited +( 373 +) +9.47 +Issued and unvested, December 31, 2022 +2,573 +$ +6.51 +Issued and expected to vest, December 31, 2022 +2,538 +$ +6.53 +F- 26 +As of December 31, 2022 , there was $ 11,185 of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 1.8 years. +In connection with the vesting of restricted shares during the years ended December 31, 2022, 2021, and 2020, the Company purchased and immediately retired 241 , 107 and 127 shares with aggregate values of $ 1,621 , $ 1,417 and $ 1,219 , respectively, in satisfaction of minimum tax withholding and exercise obligations. +The Company grants performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of certain performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in the Company's service for three years from the grant date. Prior to 2021, performance during the one-year period was based on a one-year income before tax target. Performance during the three-year period was based on achievement of a three-year compound annual growth rate for consolidated revenues. In 2021 and 2022, performance shares were granted based on the achievement of three-year cumulative revenue metrics with a market-based condition, or a total shareholder return modifier. PSUs are converted into shares of the Company's common stock once vested and the number of shares actually earned at the end of the performance period will vary, based on actual performance, from 0 % to 200 % of the target number of performance share units granted. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $ 938 , $ 2,650 and $ 2,153 related to the PSUs was recognized during the years ended December 31, 2022, 2021, and 2020, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units +Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2022 +622 +$ +9.88 +Granted (1) +532 +8.86 +Performance adjustment (2) +36 +N/A +Vested +( 241 +) +11.09 +Forfeited +( 234 +) +10.50 +Issued and unvested, December 31, 2022 +715 +$ +6.86 +Issued and expected to vest, December 31, 2022 +698 +$ +6.82 +(1) Grant activity for all PSUs disclosed at target. +(2) Reflects the performance adjustment based on actual performance measured at the end of the performance period. +As of December 31, 2022 , there was $ 316 of unrecognized compensation expense related to unvested performance stock units that is expected to be recognized over a weighted average period of 1.6 years. +In connection with the vesting of performance stock units during the year ended December 31, 2022, 2021 and 2020, we purchased and immediately retired 88 , 46 , and 121 shares with aggregate values of $ 633 , $ 696 and $ 869 , respectively. +Public Offering +On June 1, 2020, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Evercore Group LLC, as representatives of several underwriters, relating to the issuance and sale of 8,000 shares of the Company's common stock. The price to the public in the offering was $ 11.00 per share. Under the terms of the underwriting agreement, the Company also granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,200 shares of common stock. On June 3, 2020, the Company announced the full exercise by the underwriters of their option to purchase these additional shares. +The offering was made pursuant to an effective registration statement on Form S-3 (File No. 333-228877) the Company had previously filed with the SEC, and a prospectus supplement thereunder. The net proceeds from the offering were approximately $ 95,000 after deducting underwriting discounts and offering expenses paid by the Company. +F- 27 +Share Repurchase Program +On August 5, 2008, the Company's Board of Directors approved a share repurchase program pursuant to which the Company is permitted to acquire up to $ 25,000 of the Company's outstanding common shares. No shares were purchased and retired in 2022, 2021, and 2020 . +12. TRANSITION COSTS +On December 31, 2021, the Company's Board of Directors approved the termination of Stephen S. Tang, the Company’s President and Chief Executive Officer, without cause under his existing employment agreement with the Company, with such termination effective as of March 31, 2022. On January 2, 2022, Dr. Tang and the Company entered into a Transition Agreement providing for the terms of the cessation of Dr. Tang’s employment with the Company, including the cessation of his service as President and Chief Executive Officer of the Company and as a member of the Board. Under the Transition Agreement, Dr. Tang’s service to the Company in all capacities ended on March 31, 2022. +Pursuant to the Transition Agreement, Dr. Tang received severance of $ 1,569 , which was accrued in the consolidated financial statements at December 31, 2021 and paid in April 2022. Additionally, in accordance with his Transition Agreement, certain of his unvested time-vesting restricted stock awards and unvested PSUs that were outstanding at March 31, 2022 vested on April 8, 2022. His remaining unvested time-vesting restricted stock awards and PSUs were forfeited on March 31, 2022. These payments, rights and benefits are substantially similar to the severance benefits contemplated by his previous employment agreement in respect to a termination without cause thereunder. In aggregate, the Company recognized $ 1,508 of expense in relation to Dr. Tang's stock compensation for the year ended December 31, 2022. +13. BUSINESS SEGMENT INFORMATION: +The Company's business consists of two segments, which are described in Note 1: the Company's “Diagnostics” segment and the Company's “Molecular Solutions” segment. +The Company organized its operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance of its operating segments based on revenue and operating income. The Company does not allocate interest income, interest expense, other income, other expenses or income taxes to its operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated. +The following table summarizes operating segment information for the years ended December 31, 2022, 2021, and 2020, and asset information as of December 31, 2022 and 2021: +Years ended December 31, +2022 +2021 +2020 +Net revenues: +Diagnostics +$ +303,673 +$ +90,040 +$ +65,240 +Molecular Solutions +83,806 +143,634 +106,481 +Total +$ +387,479 +$ +233,674 +$ +171,721 +Operating income (loss): +Diagnostics +$ +( 598 +) +$ +( 57,177 +) +$ +( 43,156 +) +Molecular Solutions +( 22,359 +) +47,013 +37,979 +Total +$ +( 22,957 +) +$ +( 10,164 +) +$ +( 5,177 +) +Depreciation and amortization: +Diagnostics +$ +8,099 +$ +4,325 +$ +3,345 +Molecular Solutions +7,209 +7,333 +6,042 +Total +$ +15,308 +$ +11,658 +$ +9,387 +Capital expenditures: +Diagnostics (1) +$ +3,644 +$ +12,265 +$ +17,860 +Molecular Solutions +3,130 +9,628 +8,814 +Total +$ +6,774 +$ +21,893 +$ +26,674 +F- 28 +(1) Excludes $ 57,135 and $ 26,224 for purchases of property and equipment under government contracts for the years ended December 31, 2022 and 2021 respectively. No purchases of property and equipment under government contracts were made in 2020. +December 31, +2022 +2021 +Total assets: +Diagnostics +$ +279,994 +$ +209,674 +Molecular Solutions +164,714 +251,316 +Total +$ +444,708 +$ +460,990 +The following table represents total long-lived assets by geographic area: +December 31, +2022 +2021 +United States +$ +60,751 +$ +72,376 +Canada +8,526 +11,488 +Other regions +1,828 +1,120 +$ +71,105 +$ +84,984 +14. COMMITMENTS AND CONTINGENCIES: +Purchase Commitments +As of December 31, 2022 , the Company had manufacturing agreements with certain third party vendors, in which minimum purchase commitments are required. If the minimum commitments are not achieved, the Company will be required to make annual penalty payments over the next three years. Based on current forecasts, these penalties aggregate to approximately $ 1,143 and are accrued for in the consolidated balance sheet. These estimated penalties can fluctuate based on changes in forecasted demand. The table below represents an estimate of future purchases under those agreements. +2023 +$ +21,710 +2024 +9,695 +2025 +6,928 +2026 +— +2027 +— +$ +38,333 +Litigation +From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, based upon the advice of counsel, the outcomes of such actions are not expected, individually or in the aggregate, to have a material adverse effect on the Company's future financial position or results of operations. +Spectrum Patent Litigation +In March 2021, DNAG filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum has filed an answer to the initial complaint, asserting that its device does not infringe DNAG's patent and that DNAG's patent is invalid. In August 2021, DNAG amended its complaint to add a second patent to this litigation. Spectrum responded to DNAG's amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office. DNAG filed a motion to dismiss Spectrum’s counterclaims in October 2021, which was denied by the Court on March 30, 2022. Expert discovery is ongoing. On November 29, 2022, the district court issued a claim construction order. On January 30, 2023, Spectrum filed +F- 29 +a motion for summary judgment of noninfringement. DNAG oppossed the motion. Briefing is complete and the motion remains pendng. The final pretrial conference is set for September 7, 2023. The Patent and Trademark Office instituted review of the second patent on February 10, 2023, scheduling a hearing for November 14, 2023. +15. RETIREMENT PLANS: +Substantially all of the Company's U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for the Company to match employee contributions up to $ 4 per year. The Company contributed $ 1,763 , $ 1,295 and $ 994 to the 401(k) Plan, net of forfeitures, in 2022, 2021, and 2020, respectively. +In addition to the Company's 401(k) plan, the Company offers a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. The Company also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2022 and 2021, the value of the assets associated with this plan was $ 747 and $ 1,763 , respectively, and is included in current assets and other assets in the Company's consolidated balance sheets. The Company's obligation related to the deferred compensation plan is included in accrued expenses and other liabilities in the Company's consolidated balance sheets. As of December 31, 2022 and 2021, the Company's total obligation under this plan was $ 747 and $ 1,763 , respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Canada Revenue Agency. The RRSP also provides for DNAG to match employee contributions up to $ 4 CAD per year. The Company contributed $ 453 , $ 448 and $ 366 to the RRSP in 2022, 2021, and 2020 , respectively. +16. SUBSEQUENT EVENTS: +On February 14, 2023, the Company announced a 11 % reduction in its non-production workforce. This will be accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations , and the expense will primarily be recorded in the first quarter of 2023. +F- 30 \ No newline at end of file diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/filing_metadata.csv b/raw/filings/0001116463/2022/0000950170-23-006037/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1338305c6bf4162cf2f95273581a5ab4c24a2756 --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2023-03-03,2022-12-31,2023-03-03T22:16:01.000Z,0000950170-23-006037,osur-20221231.htm,10-K,19242675,1,1,https://www.sec.gov/Archives/edgar/data/1116463/000095017023006037/osur-20221231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000095017023006037/,2022,2022,1 diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/item1.txt b/raw/filings/0001116463/2022/0000950170-23-006037/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6d8bbf111ab50fbfe4ad616d3fb53022f13d9da1 --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/item1.txt @@ -0,0 +1,293 @@ +ITEM 1. Bu siness. +Our primary goal is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Our business previously consisted of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. +In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the two segments into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. +Diagnostics +Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. In 2022, after obtaining a CE mark, we launched our OraQuick® HIV Self-Test, an oral swab in-home test for HIV-1 and HIV-2, in Europe, making it available in several European countries. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"). +In September 2022, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), pursuant to which BARDA will provide $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform, with the objective of developing increased sensitivity and shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. +Molecular Solutions +Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek, Diversigen, and Novosanis. Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, and also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, nutrition, companion animal and environmental markets. +In 2020, we expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. In 2022, demand for COVID-19 PCR testing declined, which was primarily driven by the availability of antigen tests, the reduction in the numer of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. We have also developed additional collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. In 2022, we launched the OMNIgene ® • GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. Additionally, our OMNIgene ® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. Through our partnership with Grifols, we received FDA clearance for our ORAcollect®•Dx saliva collection device for OTC use, which allows our commercial partners to use and market the device with their therapeutics or devices. +Our Molecular Solutions products include the Colli-Pee ® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and +1 +collaborations in the liquid biopsy and sexually transmitted disease markets. In 2022, Novosanis obtained a CE mark for its Colli-Pee ® device containing a prefilled tube with UAS ® chemistry, which is designed to stabilize urinary analytes. Our Diversigen subsidiary also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +In 2022, Diversigen launched its metatranscriptomics sequencing and analysis services for gut microbiome samples, which generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, we received three Emergency Use Authorizations ("EUA") from the FDA for our InteliSwab ® COVID-19 Rapid Tests (“InteliSwab ® ”) for non-prescription OTC, professional point-of-care use and prescription home use. We began recording revenues on the sales of our InteliSwab ® tests during the third quarter of 2021. In January 2022, InteliSwab ® received FDA authorization for pediatric use in children ages 2 to 14. In September 2021, the Defense Logistics Agency (“DLA”) awarded the Company a procurement contract for the InteliSwab® tests for OTC use, which the DLA estimated to have a value of $205 million and which will provide InteliSwab ® tests to up to 20,000 sites throughout the United States. In 2022, the Company began to deliver tests to sites throughout the United States under this contract, and DLA has provided delivery orders against which it can continue to issue shipping instructions into 2023. On November 22, 2022, the DLA awarded us a second procurement contract for the InteliSwab ® tests for OTC use. Under the terms of the award, the contract estimate is 18 million tests, with a maximum award of 36 million tests and a guaranteed minimum award of 3.6 million tests. The contract will run from November 2022 through November 2023. In December 2022, the U.S. Department of Health and Human Services ("HHS") awarded the Company a fully funded firm fixed price contract for a total of 3.2 million InteliSwab ® tests which were delivered in February 2023. In September 2021, we entered into an agreement with BARDA, which is part of the office of the Assistant Secretary for Preparedness and Response at HHS, pursuant to which BARDA would provide the Company with up to $13.6 million in funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) waiver of the InteliSwab ® tests. In May, 2022, InteliSwab ® was selected by HHS to be distributed across the United States for nationwide school testing. +Through 2022, we have scaled up our operations to meet the increased demand for the InteliSwab ® tests. We significantly expanded our United States production capacity for InteliSwab ® tests to achieve capacity targets, set out in our 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the HHS), of more than 100 million tests annually. +Conclusion of Exploration of Strategic Alternatives +In 2021, our Board of Directors announced that it would explore and evaluate a broad range of strategic alternatives with the goal of maximizing value for stockholders. In May, 2022, our Board of Directors concluded its review of strategic alternatives without a transaction. +Diagnostics Products +The following is a summary of our principal Diagnostics products for the infectious disease and risk management markets: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is our rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received EUA from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +In 2022, the InteliSwab ® test became available for purchase on Amazon’s online store to customers in the United States. The tests are sold and orders fulfilled by Amazon. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test +2 +has received EUA from the FDA for use by laboratories located in the United States certified under CLIA. We have also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +The OraQuick ® Rapid HIV Test is our rapid point-of-care test product designed to test oral fluid, whole blood (i.e., both finger-stick and venous), plasma and serum samples for the presence of various antibodies. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood, plasma or serum is to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and allowed to develop. In all cases, the specimen and developer solution then flow through the testing device where test results are observable in approximately 20 minutes. The OraQuick ® device is a screening test and requires a confirmation test where an initial positive result is obtained. This product is sold under the OraQuick ADVANCE ® name in North America, Europe and certain other countries and under the OraQuick ® name in other developing countries. The test has received approval of a premarket approval (“PMA”) application from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. We have also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +On the international front, we have obtained a CE mark for our OraQuick ADVANCE ® test so that we can sell this product in Europe and other countries accepting the CE mark for commercialization and this product is registered for sale in other countries. We have distributors in place for several countries and are seeking to increase awareness and expand our distribution network for this product throughout the world. We have also received World Health Organization (“WHO”) pre-qualification for our export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of our OraQuick ADVANCE ® HIV 1/2 Antibody Test. We received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, we have established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +We have received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +3 +OraQuick ® Ebola Rapid Antigen Test +We have received 510(k) clearance from the FDA for our rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, we entered into an agreement with BARDA, pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick ® testing platform. +OraSure ® Collection Device +Our OraSure ® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies. The generic version of this product can be used for other analytes. This device consists of a small, treated cotton-fiber pad on a handle that is placed in a person’s mouth for two to five minutes. The device collects oral mucosal transudate, a serum-derived fluid that contains higher concentrations of certain antibodies and analytes than saliva. As a result, oral mucosal transudate testing is a highly accurate method for detecting HIV-1 infection and other analytes. +The OraSure ® collection device is FDA approved for use in the detection of HIV-1 antibodies. The generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. HIV-1 antibody detection using the OraSure ® collection device involves three steps: +• +Collection of an oral fluid specimen using the OraSure ® device; +• +Screening of the specimen for HIV-1 antibodies at a laboratory with an enzyme immunoassay (“EIA”) screening test approved by the FDA for use with the OraSure ® device; and +• +Laboratory confirmation of any positive screening test results with a blood-based nucleic acid test. +A trained health care professional then conveys test results and provides appropriate counseling to the individual who was tested. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. We have received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. Our Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +We believe that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow our customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +We have also developed a next-generation collection device, which we are marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over our original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a NIDA-5 panel of fully-automated high-throughput oral fluid drug assays that we distribute under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +We develop and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of our customers. We also sell fully-automated high-throughput oral fluid drug assays developed under our agreement with Thermo Fisher. +4 +Our MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and we are selling a NIDA-5 panel of microplate assays supplied by Thermo Fisher to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Q.E.D. ® Saliva Alcohol Test +Our Q.E.D. ® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +Each Q.E.D. ® test kit contains a collection stick that is used to collect a sample of saliva and a disposable detection device that displays results in a format similar to a thermometer. The Q.E.D. ® device is easy to operate and instrumentation is not required to read the result. The product has a testing range of 0 to 0.145% blood alcohol and produces results in approximately two minutes. +Molecular Solutions Products +Genomic Products +We sell many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. Our lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. In 2022, we received FDA clearance for our ORAcollect ® •Dx saliva collection device for OTC use through our partnership with Grifols, which allows our commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +Our genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +We believe these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• +Reliable high-quality and stable genetic samples. +• +Simple, non-invasive collection methods. +• +The ability to store and transport collected samples for extended periods at ambient temperatures. +• +Compatibility with fully automated laboratory testing systems. +We also sell the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. +COVID Collection Products +Since 2020, we have actively engaged with several laboratories and researchers to demonstrate the effectiveness of our existing collection products for use with COVID-19 molecular testing. We believe that oral samples collected using devices from our product lines for liquid saliva or oral swab samples are a suitable alternative to more commonly used samples collected with a nasopharyngeal or oropharyngeal swab. As a result, since 2020, we have sold our ORAcollect ® • RNA and OMNIgene ® • ORAL collection devices for use in connection with COVID-19 molecular testing. Due in part to the reduction in the number of COVID-19 cases and the shift toward +5 +the use of antigen testing, the demand for COVID-19 PCR testing declined in 2022, which negatively impacted the sales of our collection products . +Microbiome Products +We also market several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. Our microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +Our OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. In 2022, our OMNIgene® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. We believe our product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. Recently, we have applied these principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +We also launched the OMNIgene ® •GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device . +Laboratory and Data Analytical Services +Our Molecular Solutions business also offers our customers microbiome laboratory testing and analytical services. Our services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. Our goal is to help customers unleash the translational potential of the microbiome by providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. We also offer comprehensive microbiome and metagenomics services to improve human, animal, and environmental health and, in 2022, we launched our metatranscriptomics sequencing and analysis services for gut microbiome samples. These services generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. Diversigen has extensive experience with highly diverse microbiome sample types and provides complete project life cycle consulting services, including pre-project consulting, study design, extraction, and sequencing to complete bioinformatics analysis. Diversigen is at the forefront of setting quality standards for this industry and has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. +Products Under Development +Diagnostic Products +Our research and development efforts include programs targeted at expanding and enhancing our diagnostics business. These programs typically focus on products related to drug adherence and rapid tests for various diseases. +We are working to develop a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under our contract with BARDA. +Molecular Solutions +In order to intersect evolving customer needs within the academic and commercial markets, our molecular business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, we continue to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. Our development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to our customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +6 +Sales and Marketing +We market our products in the United States and internationally. We attempt to reach our major target markets through a combination of direct sales, strategic arrangements and independent distributors. Our marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. Our revenues by geographic area are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +Our InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +We market the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. We sell our OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, we distribute our OraQuick ® HIV test in certain foreign countries through distributors. +Our OraQuick ® HCV test is sold primarily to the same markets where our OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. We also sell this test in other countries through distributors. +Diagnostics - OTC and Self-Test +We sell our InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by US customers on Walmart and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the US military. +We sell our OraQuick ® In-Home HIV test in the U.S. retail or consumer market. The product is also available for purchase on-line through certain retailers and from our website, www.oraquick.com. The primary target population for our HIV-OTC test comprises young, sexually active adults, with greater purchase intent found in high-risk sub-groups, such as men who have sex with men, African Americans and Latino Americans. We also sell our OraQuick ® HIV Self-Test in certain international markets. +Our OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase our test. +Substance Abuse Testing +Our substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +We have entered into agreements for the distribution of our Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. We also market the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve our workplace customers, we have contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for our substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +7 +We also sell our next generation Intercept i2 ® he collection device with a NIDA-5 panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher for the detection of PCP, THC, opiates, cocaine, methamphetamines and amphetamines. These products are currently sold into the criminal justice and drug treatment markets. +We distribute our Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +Molecular Solutions +Our Molecular Solutions business sells its products directly to its customers, primarily through its own internal sales force in U.S. domestic markets. However, in many international markets, distributors are used. +Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. Our commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. Molecular Solutions also has customers in the livestock, companion animal and pharmaceutical markets. +We have expanded the market focus of our Molecular Solutions business by selling certain existing collection products for use in infectious disease testing, including COVID-19 tests, and by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. Our primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). We are leveraging our existing sales force and global research connections to engage microbiome customers around the world and establish ourselves as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +Our Molecular Solutions products include the Colli-Pee ® device, a product developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. +We also offer laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of its customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. During 2019, we substantially expanded our ability to offer microbiome laboratory and bioinformatics services with the acquisition of CoreBiome and Diversigen. The laboratory operations of CoreBiome and Diversigen were combined during 2020 under the Diversigen brand. +Significant Products and Customers +Several different product lines have contributed significantly to our financial performance, accounting for 10% or more of our total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands). +For the years ended December 31, +2022 +2021 +2020 +InteliSwab® +$ +233,666 +$ +22,405 +$ +— +Genomics +54,335 +63,350 +36,878 +OraQuick® HIV +38,812 +42,144 +44,224 +COVID-19 collection kits +9,659 +54,167 +50,927 +One of our customers accounted for approximately 58% of our net consolidated revenues in 2022. We had no customers that accounted for more than 10% of our net consolidated revenues for the years ended December 31, 2021 and 2020. +Supply and Manufacturing +We manufacture all of our OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in our Bethlehem, Pennsylvania facilities. We expect to continue to manufacture these products at this location for the foreseeable future. +8 +We have contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV In-Home Test in order to supply certain international markets. We believe that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. We have long-term agreements in place for the contract manufacturing in Thailand and one of our suppliers has been manufacturing for us for the past 20 years. +We can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in our OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply our antigen or nitrocellulose needs, we believe that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in our products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase our costs and disrupt our ability to manufacture and sell the affected products. +We manufacture all of the proprietary chemistry and assay cards for our InteliSwab ® COVID-19 Rapid Tests in our Bethlehem, Pennsylvania facilities. We significantly scaled up manufacturing capacity in the United States for our InteliSwab ® COVID-19 Rapid Tests and have achieved manufacturing capacity targets under our 2021 contract with the US DOD, in coordination with HHS. Funding under the contract has been, and will be, paid to us based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment. An existing Company location in Bethlehem, PA has been retrofitted to accommodate increased manufacturing capacity. +Our MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the antigen of interest. Substantially all our antibody requirements are provided by contract suppliers. We believe that we have adequate reserves of antibody supplies and that we have access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with our new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher. There is no other supply source for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. We are actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products in our Molecular Solutions business are produced in Canada. +Our Colli-Pee ® device is currently manufactured at our Belgian assembly facility with components supplied by third party vendors. +Our genomic, microbiome and metatranscriptomics laboratory testing and analytical services are provided by our subsidiary, Diversigen. +Human Capital Resources +In order to achieve the goals and expectations of our Company, it is crucial that we continue to attract and retain top talent. To facilitate talent attraction and retention, we strive to make OraSure a safe and rewarding workplace with opportunities for our employees to grow and develop in their careers. +As of December 31, 2022, we had 840 full-time employees, which compares to 785 employees as of December 31, 2021. The increase in employees during 2022 was primarily the result of the need to add manufacturing capacity for our InteliSwab ® COVID-19 Rapid Test. In February 2023, we announced an 11% reduction in our non-production workforce. Our employees are not currently represented by a U.S. collective bargaining agreement. +We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention to attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +9 +As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefits programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering a diverse, equitable, and inclusive workplace that reflects and contributes to the global communities in which we do business and the customers and partners we serve. This includes all communities impacted by our corporate presence. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a Code of Conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. We strive to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. We have an active Diversity, Equity and Inclusion Council that strives to drive diversity, equity and inclusion within the workplace. At OraSure, we believe a variety of perspectives are critical to achieving success, and that diversity, equity and inclusion are key drivers to growth-based innovation and profitability. We aim to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgment. We believe that when all voices are heard, we honor and exemplify our core values and best serve our communities. +2022 Developments +On March 31, 2022, the termination of Dr. Tang as President and Chief Executive Officer (the "CEO") of the Company became effective. Dr. Nancy Gagliano served as interim CEO for a period commencing on April 1, 2022 and ending on June 4, 2022, at which time Carrie Eglinton Manner was appointed as President and CEO. +On June 9, 2022, we announced the termination of Agnieszka Gallagher's employment with the Company as Executive Vice President, General Counsel and Chief Compliance Officer. +On August 8, 2022 our Board of Directors appointed Ken McGrath as the Company’s Chief Financial Officer. Mr. McGrath replaced Interim Chief Financial Officer, Scott Gleason. +On November 7, 2022 our Board of Directors promoted Kathleen Weber from President, Molecular Solutions to Chief Product Officer. +Competition +Diagnostics +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of our competitors are substantially larger than we are, and have greater financial, research, manufacturing and marketing resources than we do. We have many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, we differentiate based on our tests’ ease of use, which has enabled us to expand our self-testing offering. +The primary competitive factors for our products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• +Scientific and technological capability; +• +Proprietary know-how; +• +The ability to develop and market products and processes; +• +The ability to obtain FDA or other regulatory approvals; +• +The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• +Commercial execution and strength of distribution; +• +Access to adequate capital; +• +The ability to attract and retain qualified personnel; and +• +The availability of patent protection. +10 +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables us to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. Our principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. Our OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. Our OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +Our OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the US OTC market. +Outside the U.S., our rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below our HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the US with WHO Prequalification status and the CE mark. The majority of our sales outside the US are in Africa due to the greater incidence of HIV in that region. Our OraQuick ® HIV Self-Test is CE marked, which enables us to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. Our InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, our Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. We expect competition for our products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +Our MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and our OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by our laboratory customers. Our oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +Our MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. We compete with both homogeneous and heterogeneous tests manufactured by many companies. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, we believe that these tests are qualitative tests that we believe are lower in quality and provide fewer benefits than our Q.E.D. ® test. +Molecular Solutions +Our Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although we believe the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. Our +11 +Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. With the receipt of authorizations for use in connection with COVID-19 molecular tests, our Oragene ® and ORAcollect ® products now compete against COVID-19 testing systems and the collection methods used in those systems. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, we are one of the few vendors to offer a solution that fully meets these requirements. +Our genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +We seek patents and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to accelerate new product introductions. We regularly search for third-party patents in fields related to our business to shape our own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +We have patents throughout our product and service lines. Our patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools, and services and analysis. Our portfolio protects our innovative sampling tools, services and diagnostics that provide access to accurate, essential information that advances global health and well-being. +Diagnostics and testing products include the OraSure ® and Intercept ® collection devices that are covered by one utility and one design patent in each of the U.S., Canada, Japan, and throughout Europe. We have numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. The utility patents will expire in January 2028, and the design patents will expire in 2025. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications will enter their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications will expire in March 2041. +We have a U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application and will enter its national phase in countries throughout the world, beginning in May 2023 and patents issuing from these applications will expire in December 2041. Related design patent applications are pending in the U.S., Canada, and Europe. +We have additional pending applications directed to new direct sample collection pads for our InteliSwab ® COVID-19 Rapid Test. These applications will enter their national phase in countries throughout the world, beginning in October 2023, and patents issuing from these applications will expire in December 2042. A related design patent issued in 2022 in the U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2035. +We have registered design patents for a collection funnel and corresponding plunger device in Europe, China, and India and a corresponding U.S. design patent application is pending. +We have pending patent applications throughout our product and service lines directed to assays, methods, devices, and reagents for monitoring adherence to HIV medications, such as nucleoside reverse transcriptase inhibitors used in PrEP regimens. +We have two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +We hold, through our subsidiary, DNAG, thirty granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. These patents expire from June 2023 through October 2037. +12 +We hold through our subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. We have also applied for additional patents, in both the United States and certain foreign countries, in novel urine collection devices. +Our subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological sample containing polynucleotide molecules. These patents will expire in May 2036. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +We require our employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with us or the performance by the consultant of services for us will be our exclusive property. +We own rights to trademarks and service marks that we believe are necessary to conduct our business as currently operated. In the United States, we own a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he , OraQuick ® , OraQuick ADVANCE ® , OraSure QuickFlu ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet TM , ORAcollect ® , OMNIgene ® , goDNA TM , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene TM , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , AUTO-LYTE ® , prepIT ® , and Hemagene ® trademarks. We also own many of these marks and others in several foreign countries and we are pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of our products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. We believe that our products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of our products may be unclear and are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition or results of operations. +Many of our FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, we must continue to comply with other FDA requirements applicable to marketed products and are subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export our products if the agency determines that we are not in compliance. +Domestic Regulation +Most of our products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +13 +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, de novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for de novo classification before marketing can begin. A de novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a de novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made following a determination by the Secretary of Health and Human Services that there is a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to our marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +14 +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a de novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of our products are used for research only or for other nonclinical or non-diagnostic purposes. Our molecular collection products are sold to many academic and research institutions for research purposes and our drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations and other post-market requirements, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. We consider the applicability of CLIA requirements in the design and development of our products. We have obtained a waiver of the CLIA requirements for our OraQuick ADVANCE ® rapid HIV-1/2 antibody test, our OraQuick ® HCV rapid antibody test and our Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has +15 +obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by our subsidiary, Diversigen, consist of microbiome, metatranscriptomics and metagenomics sequencing, bioinformatics and analysis. Diversigen has elected to obtain a license from CLIA and has received a certificate of accreditation from the College of American Pathologists (CAP). +Certain of our products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, we may not promote our products for such “off-label” uses and can only market our products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, our reputation could be damaged and sales of our products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that our facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until we resolve the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit our ability to export our products to countries that require such certificates. +International +We are also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. We generally pursue approval only in those countries that we believe have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that our quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The European Union (“EU”) adopted the EU Medical Devices Regulation (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (the “EU IVDR”), which repealed and replaced the Medical Devices Directive (“MDD”) and the In Vitro Diagnostic Medical Devices Directive (“IVDD”), respectively. The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became applicable on May 26, 2022. There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be +16 +placed on the EU market for a certain period before requiring certification under the IVDR; however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022. +In the EU, products that fall under the scope of the MDR and the IVDR are not subject to the prior approval of a regulatory authority, but, depending on the class of product, may require prior review by a notified body. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. Such products must comply with certain essential requirements listed in those directives. ISO certification creates a rebuttable presumption that the product satisfies the applicable requirements. Compliance with these requirements allows us to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to our products, without which they may not be placed on the market in the EU. We also note that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to our international strategy. +We must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. We have completed this process for several of our current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). We received this certification for our Diagnostics segment (previously named "OSUR") in January 2019 as well as for our Molecular Business Unit in February 2020. +We have obtained WHO pre-qualification for our OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• +The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• +The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +Our products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on our ability to operate in these jurisdictions and significant damage to our reputation. +We are also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require us to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are +17 +wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, we have implemented necessary systems to accurately track gifts and other payments. +We have implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While we believe that our practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which we are subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. Our present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to us as a result of our international sales. We also are subject to the FCPA’s accounting provisions, which require us to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which we are subject as a result of our international sales also include the U.K. Bribery Act (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of our current and proposed research, development, and manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that we sell in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require us to alter our manufacturing processes, thereby increasing our manufacturing costs, or may impose other additional obligations on us or our products. We believe that our products and manufacturing processes at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of our business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +18 +Information Available on the Internet +Our filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on our website (www.orasure.com) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on our website is not a part of this Annual Report. +19 \ No newline at end of file diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/item13.txt b/raw/filings/0001116463/2022/0000950170-23-006037/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..6cfeb2ee96bf62f7006ba0aa69e1fa831401a9ff --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in our 2023 Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/item9a.txt b/raw/filings/0001116463/2022/0000950170-23-006037/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9f63045ce5c323810feb753fd307205d467c7d22 --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/item9a.txt @@ -0,0 +1,29 @@ +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2022. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2022 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated +63 +Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2022. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +During the quarter ended December 31, 2022, management identified and remediated a material weakness in internal control over financial reporting related to user access controls to adequately restrict access over our information technology system that supports our financial reporting processes. No misstatement arose as a result of this deficiency. +Except for the foregoing, there was no change in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a or 15d of the Exchange Act that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 3, 2023 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the +64 +company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 3, 2023 \ No newline at end of file diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/rp_note.txt b/raw/filings/0001116463/2022/0000950170-23-006037/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2022/0000950170-23-006037/rpt_disclosure.txt b/raw/filings/0001116463/2022/0000950170-23-006037/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..a4ee8e0cada09da6a968b60ff0e3492225717bf0 --- /dev/null +++ b/raw/filings/0001116463/2022/0000950170-23-006037/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2022 there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. +26 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/filing.txt b/raw/filings/0001116463/2023/0001116463-24-000012/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5583740e0977a959ba1e70e6d5ac05a6e7a8fcb1 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/filing.txt @@ -0,0 +1,2084 @@ +osur-20231231 +0001116463 2023 FY false P2Y P2Y P2Y P5Y http://fasb.org/us-gaap/2023#AssetImpairmentCharges 25 75 0001116463 2023-01-01 2023-12-31 0001116463 2023-06-30 iso4217:USD 0001116463 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0001116463 osur:PerformanceBasedRestrictedStockUnitMember 2022-12-31 0001116463 osur:PerformanceBasedRestrictedStockUnitMember 2023-12-31 0001116463 2008-08-05 0001116463 osur:StockRepurchaseProgramMember 2021-01-01 2021-12-31 0001116463 osur:StockRepurchaseProgramMember 2023-01-01 2023-12-31 0001116463 osur:StockRepurchaseProgramMember 2022-01-01 2022-12-31 0001116463 osur:TrancheOneMember 2023-01-01 2023-12-31 0001116463 osur:TrancheTwoMember 2023-01-01 2023-12-31 0001116463 osur:TransitionCostsMember 2023-01-01 2023-12-31 0001116463 country:US 2023-12-31 0001116463 country:US 2022-12-31 0001116463 country:CA 2023-12-31 0001116463 country:CA 2022-12-31 0001116463 osur:OtherForeignCountriesMember 2023-12-31 0001116463 osur:OtherForeignCountriesMember 2022-12-31 0001116463 osur:DNAGenotekMember osur:RegisteredRetirementSavingsPlanMember 2023-01-01 2023-12-31 iso4217:CAD 0001116463 osur:DNAGenotekMember osur:RegisteredRetirementSavingsPlanMember 2022-01-01 2022-12-31 0001116463 osur:DNAGenotekMember osur:RegisteredRetirementSavingsPlanMember 2021-01-01 2021-12-31 0001116463 osur:SapphirosMember us-gaap:SubsequentEventMember 2024-01-02 2024-01-02 0001116463 osur:SapphirosMember us-gaap:SubsequentEventMember 2024-02-13 2024-02-13 0001116463 osur:SapphirosMember us-gaap:SubsequentEventMember 2024-03-05 2024-06-30 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +__________________________________________________________ +FORM 10-K +__________________________________________________________ +(Mark One) +x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2023 +or +o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _________ to +Commission File No. 001-16537 +__________________________________________________________ +ORASURE TECHNOLOGIES, INC . +(Exact name of registrant as specified in its charter) +__________________________________________________________ +Delaware 36-4370966 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem , Pennsylvania +18015 +(Address of principal executive offices) (Zip Code) +(Registrant’s telephone number, including area code): ( 610 ) 882-1820 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class Trading Symbol Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share OSUR The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +__________________________________________________________ +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No o +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer o Accelerated filer x +Non-accelerated filer o Smaller reporting company o +Emerging Growth Company o +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. x +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. x +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). o +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x +State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2023) : $ 368,293,672 . +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 23, 2024: 73,796,268 shares. +Documents Incorporated by Reference: +Part III of this Annual Report on Form 10-K will be incorporated by reference from certain portions of the Registrant's Definitive Proxy Statement for its 2024 Annual Meeting of Shareholders, or will be included in an amendment hereto, to be filed not later than 120 days after the close of the fiscal year ended December 31, 2023. Except with respect to information specifically incorporated by reference in the Annual Report on Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part hereof. +Table of Contents +Table of Contents +PART I +Page +ITEM 1. +Business +2 +ITEM 1A. +Risk Factors +22 +ITEM 1B. +Unresolved Staff Comments +56 +ITEM IC. +Cybersecurity +56 +ITEM 2. +Properties +57 +ITEM 3. +Legal Proceedings +58 +ITEM 4. +Mine Safety Disclosures +58 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +59 +ITEM 6. +Reserved +60 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +60 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +66 +ITEM 8. +Financial Statements and Supplementary Data +67 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +67 +ITEM 9A. +Controls and Procedures +67 +ITEM 9B. +Other Information +69 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions That Prevent Inspections +69 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +70 +ITEM 11. +Executive Compensation +70 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +70 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +70 +ITEM 14. +Principal Accountant Fees and Services +70 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +71 +ITEM 16. +Form 10-K Summary +73 +Signatures +74 +Table of Contents +Use of Names +References in this Annual Report on Form 10-K for the fiscal year ended December 31, 2023, (the "Annual Report") to "OraSure" mean OraSure Technologies, Inc. References in this Annual Report to “DNAG” mean DNA Genotek, Inc., references to “Diversigen” mean Diversigen, Inc., and references to “Novosanis” mean Novosanis NV. References in this Annual Report to "we", "us", "our", or the "Company" mean OraSure and its consolidated subsidiaries, DNAG, Diversigen, and Novosanis, unless otherwise indicated. +Disclosure Regarding Forward Looking Statements +This Annual Report contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about the Company's expected revenues, earnings/losses per share, net income (loss), expenses, cash flow or other financial performance, or developments, clinical trial or development activities, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect the Company's future operations, results of operations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: +• Market acceptance of, and the Company's ability to market and sell, its products and services, whether through its internal, direct sales force or third parties; +• The Company's ability to fulfill its commitments under its contracts with the U.S. government for InteliSwab ® COVID-19 Rapid Tests; +• Failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for the Company's products; +• Significant customer concentrations that exist or may develop in the future; +• The Company's ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; +• The Company's ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; +• The Company's ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (or the "FDA”), or other regulators; +• Changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; +• The Company's ability to meet increased demand for its products; +• The impact of replacing distributors on the Company's business; +• Inventory levels at distributors and other customers; +• The Company's ability to achieve its financial and strategic objectives and continue to increase its revenues, including the ability to expand international sales; +• The impact of competitors, competing products and technology changes on the Company's business; +• Reduction or deferral of public funding available to customers; +• Competition from new or better technology or lower cost products; +• The Company's ability to develop, commercialize and market new products; +Table of Contents +• Changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention, (the “CDC”) or other agencies; ability to fund research and development and other products and operations; +• The Company's ability to obtain and maintain new or existing product distribution channels; +• Reliance on sole supply sources for critical products and components; +• Availability of related products produced by third parties or products required for use of the Company's products; +• The impact of contracting with the U.S. government on the Company's business; +• The impact of negative economic conditions on the Company's business; +• The Company's ability to maintain sustained profitability; +• The Company's ability to increase its gross margins; +• The ability to utilize net operating loss carry forwards or other deferred tax assets; +• Volatility of the Company's stock price; +• Uncertainty relating to patent protection and potential patent infringement claims; +• Uncertainty and costs of litigation relating to patents and other intellectual property; +• Availability of licenses to patents or other technology; +• Ability to enter into international manufacturing agreements; +• Obstacles to international marketing and manufacturing of products; +• The impact of changes in international funding sources and testing algorithms on international sales; +• Adverse movements in foreign currency exchange rates; +• Loss or impairment of sources of capital; +• The Company's ability to attract and retain qualified personnel; +• The Company's exposure to product liability and other types of litigation; +• Changes in international, federal or state laws and regulations; +• Customer consolidations and inventory practices; +• Equipment failures and ability to obtain needed raw materials and components; +• The impact of terrorist attacks and civil unrest; and +• General political, business and economic conditions, including inflationary pressures. +These and other factors that could affect the Company's results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements and Risk Factors are made as of the date of this Annual Report and the Company undertakes no duty to update these statements, unless it is required to do so by law. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make updates with respect to other forward-looking statements or that it will make any further updates to those forward-looking statements at any future time. +Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +Table of Contents +Trademarks, Trade Names and Service Marks +This Annual Report contains certain trademarks, which are protected under applicable intellectual property laws and are the Company's property. Solely for convenience, the Company's trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also owns many of these marks and others in several foreign countries and it is pursuing registration of several other trademarks. +Table of Contents +PART I +1 +Table of Contents +ITEM 1. Business. +OraSure Technologies transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. +In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the "Diagnostics" segment and the "Molecular Solutions" segment, into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. The Company's product portfolio is broadly divided into diagnostics products and sample management solutions. +Products and Services +The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using its proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes molecular sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental market segments. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Additionally, the Company offers laboratory and bioinformatics services for both genomics and microbiome customers. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +In 2020, the Company expanded its market focus by selling existing collection products for use with COVID-19 tests. Beginning in 2022 and continuing through 2023, demand for COVID-19 PCR testing declined significantly, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, the Company received three Emergency Use Authorizations ("EUA") from the FDA for its InteliSwab ® COVID-19 Rapid Tests (“InteliSwab ® ”) for non-prescription OTC, professional point-of-care use and prescription home use. The Company began recording revenues on the sales of its InteliSwab ® tests during the third quarter of 2021. In January 2022, the Company received FDA authorization for pediatric use of InteliSwab® tests for children ages 2 to 14. In September 2023, the Company received FDA approval for extension of InteliSwab® test shelf-life from 18 months to 24 months. In September 2021, the Defense Logistics Agency (“DLA”) awarded the Company a procurement contract for the InteliSwab® tests for OTC use, which the DLA estimated to have a value of $205 million and which would provide InteliSwab ® tests to up to 20,000 sites throughout the United States. On November 22, 2022, the DLA awarded the Company a second procurement contract for the InteliSwab ® tests for OTC use. In 2023, the Company delivered 18 million tests under the contract, which ran from November 2022 through November 2023. In December 2022, the U.S. Department of Health and Human Services ("HHS") awarded the Company a fully funded firm fixed price contract for a total of 3.2 million InteliSwab ® tests which were delivered in February 2023. +In September 2021, the Company entered into an agreement with Biomedical Advanced Research Development Authority ("BARDA"), which is part of the office of the Assistant Secretary for Preparedness and Response at HHS, pursuant to +2 +Table of Contents +which BARDA would provide up to $13.6 million in funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) waiver of the InteliSwab ® tests. The Company continued development work and analytical testing on this test throughout 2023. However, in early 2024, the Company has communicated to BARDA that it does not intend to pursue further development of this product. +Through 2023, the Company maintained its expanded United States production capacity for InteliSwab ® tests to meet capacity targets, set out in its 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the HHS), of more than 100 million tests annually. +In 2023, the Company announced that the FDA provided approval for a new packaging and labeling configuration for InteliSwab® tests. The Company completed the transition to this new configuration in March 2023, which resulted in lower shipping costs, less packaging and reduced truckloads. +Products +The following is a summary of the Company's principal products for the infectious disease and risk management markets as well as its sample management products: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is the Company's rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received EUA from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the FDA for use by laboratories located in the United States certified under CLIA. The Company has also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +The OraQuick® Rapid HIV Test is the Company's rapid point-of-care test product designed to test for the presence of HIV-1 and HIV-2 antibodies. This product is sold under the OraQuick ADVANCE® name in North America, Europe and certain other countries, and under the OraQuick® name in other developing countries. The OraQuick ADVANCE® test has received premarket approval (“PMA”) from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. The OraQuick® test has received World Health Organization ("WHO") pre-qualification and registration in other countries for the detection of HIV-1 and HIV-2 antibodies in oral fluid, whole blood (fingerstick and venous), serum and plasma. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood-based specimens are to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and the test is allowed to develop. The specimen and developer solution then flow through the testing device +3 +Table of Contents +where test results are observable between 20 and 40 minutes. The OraQuick® device is a screening test and requires a confirmation test where an initial positive result is obtained. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. The Company has also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +The OraQuick ADVANCE ® test is also CE marked for sale in Europe and other countries accepting the CE mark for commercialization. This product is also registered for sale in other countries. The Company has distributors in place for several countries and is seeking to increase awareness and expand its distribution network for this product throughout the world. The Company has also received WHO pre-qualification for its export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of the Company's OraQuick ADVANCE ® HIV 1/2 Antibody Test. The Company received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, the Company has established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +The Company has received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +The Company has received De Novo authorization from the FDA for its rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, the Company entered into an agreement with BARDA, pursuant to which BARDA will provide up to $8.6 million in funding to the Company to develop a 2nd generation Ebola test on the OraQuick ® testing platform with the objective of developing increased sensitivity, utilizing sustainable raw materials and increasing shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. In September 2023, the agreement was modified to add an additional $6.8 million in funding to be used to obtain the appropriate regulatory approvals for the product. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. The Company has received FDA 510(k) clearance to use +4 +Table of Contents +the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. The Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +The Company believes that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow the Company's customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +The Company has also developed a next-generation collection device, which it is marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over the original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a panel of fully-automated high-throughput oral fluid drug assays that the Company distributes under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +The Company develops and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of its customers. The Company also sell fully-automated high-throughput oral fluid drug assays developed under its agreement with Thermo Fisher Scientific. +The Company's MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in oral fluid, urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and the Company is selling a panel of high-throughput assays supplied by Thermo Fisher Scientific to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Genomic Products +The Company sells many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. The Company's lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. The Company has obtained FDA clearance for its ORAcollect ® and its Oragene ® saliva collection device for general use, including professional and OTC clearances, which allows the Company's commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +The Company's genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +The Company believes these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +5 +Table of Contents +Benefits include: +• Reliable high-quality and stable genetic samples. +• Simple, non-invasive collection methods. +• The ability to store and transport collected samples for extended periods at ambient temperatures. +• Compatibility with fully automated laboratory testing systems. +The Company also sells the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. The Colli-Pee ® collection device is is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Microbiome Products +The Company also markets several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. The Company's microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +The Company's OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. The Company's OMNIgene ® • GUT DNA and RNA collection device is available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. The Company believes its product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. In 2023, the Company's OMNIgene ® • SALIVA DNA and RNA collection device became available to researchers for self-collection of saliva with stabilization of total nucleic acids. The Company's microbiome products also include devices that apply the principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +The Company's OMNIgene ® •GUT Dx collection device received de novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. +Laboratory and Data Analytical Services +The Company also offers its customers microbiome laboratory testing and analytical services. Its services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. The Company's goal is to help customers unleash the translational potential of the microbiome by providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. The Company also offers comprehensive microbiome and metagenomics services to improve human, animal, and environmental health including its metatranscriptomics sequencing and analysis services for gut microbiome samples. These services generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. Diversigen has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. +Other Products +In addition to the products described above, the Company offers the following products: +OraSure ® Collection Device +6 +Table of Contents +The Company's OraSure® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies and is FDA approved for use in the detection of HIV-1 antibodies. The Company also sells a generic version, which can be used for other analytes. This generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. +Q.E.D. ® Saliva Alcohol Test +The Company's Q.E.D.® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +COVID Collection Products +Since 2020, the Company has sold its ORAcollect® • RNA and OMNIgene® • ORAL collection devices for use in connection with COVID-19 molecular testing. The Company has actively engaged with several laboratories and researchers to demonstrate the effectiveness of its existing collection products for use with COVID-19 molecular testing. +Products Under Development +Diagnostic Products +The Company's research and development efforts include programs targeted at expanding and enhancing its diagnostics business. These programs typically focus on products related rapid tests for various diseases. +The Company is working to develop a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under its contract with BARDA. +Sample Management Solutions +In order to intersect evolving customer needs within the academic and commercial markets, the Company's molecular sample management solutions business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, the Company continues to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. The Company's development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to its customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +Sales and Marketing +The Company markets its products in the United States and internationally. It attempts to reach major target markets through a combination of direct sales, strategic arrangements and independent distributors. The Company's marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. The Company's revenues by geographic area are described in Note 2 of the notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +The Company's InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +The Company markets the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other +7 +Table of Contents +governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. The Company sells its OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, the Company distributes its OraQuick ® HIV test in certain foreign countries through distributors. +The OraQuick ® HCV test is sold primarily to the same markets where the OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. The Company also sells this test in other countries through distributors. +Diagnostics - OTC and Self-Test +The Company sells its InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by U.S. customers on Walmart's and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the U.S. military. +The Company sells its OraQuick ® In-Home HIV test in the U.S. retail or consumer market as well as to the same markets as the OraQuick ADVANCE ® test for use in public health-oriented programs. The product is also available for purchase online through certain retailers and from the Company's website, www.oraquick.com. The Company also sells its OraQuick ® HIV Self-Test in certain international markets. +The Company's OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase the Company's test. +Substance Abuse Testing +The Company's substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +The Company has entered into agreements for the distribution of its Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. The Company also markets the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve its workplace customers, the Company has contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for the Company's substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +The Company also sells its next generation Intercept i2 ® he collection device with a panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher Scientific for the detection of PCP, THC, opiates, cocaine, methamphetamines, amphetamines, barbiturates, benzodiazepines, methadone and oxycodone. These products are currently sold as forensic use only into the criminal justice and drug treatment markets. +The Company distributes its Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +8 +Table of Contents +Molecular Sample Management Solutions and Molecular Services +The Company's sample management products are sold directly to customers, primarily through its internal sales force in U.S. markets. However, in many international markets, distributors are used. +Most of the Company's revenues from sample management products are derived from sales to commercial customers and sales into the academic and research markets. The Company's commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. The Company also has customers in the livestock, companion animal and pharmaceutical markets. +The Company has expanded the market focus of its sample management products by selling certain existing collection products for use in infectious disease testing, including by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. The Company's primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). The Company is leveraging its existing sales force and global research connections to engage microbiome customers around the world and establish itself as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +The Company's products include the Colli-Pee ® device, a product developed and sold by its Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. The Colli-Pee ® collection device is is registered as a class 1 urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +The Company also offers laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. +Significant Products and Customers +Several different product lines have contributed significantly to the Company's financial performance, accounting for 10% or more of its total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands): +For the Years Ended December 31, +2023 2022 2021 +InteliSwab® $ 257,493 $ 233,666 $ 22,405 +Genomics 47,005 54,335 63,350 +OraQuick® HIV 60,823 38,812 42,144 +COVID-19 collection kits 286 9,659 54,167 +One customer accounted for approximately 63% of the Company's consolidated net revenues for the year ended December 31, 2023 and 58% for the year ended December 31, 2022. No other individual customers accounted for more than 10% of the Company's consolidated net revenues for the years ended December 31, 2023 and 2022. The Company had no customers that accounted for more than 10% of consolidated net revenues for the year ended December 31, 2021. +Supply and Manufacturing +The Company manufactures its OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in its Bethlehem, Pennsylvania facilities. The Company expects to continue to manufacture these products at this location for the foreseeable future. +The Company has contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV Self-Test in order to supply certain international markets. The Company believes that other firms would be +9 +Table of Contents +able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. The Company has long-term agreements in place for the contract manufacturing in Thailand and one of its suppliers, which has been pre-qualified by the WHO, has been manufacturing for the Company for the past 20 years. +The Company can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in its OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply the Company's antigen or nitrocellulose needs, the Company believes that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in the Company's products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase costs and disrupt the Company's ability to manufacture and sell the affected products. +The Company manufactures all of the proprietary chemistry and assay cards for its InteliSwab ® COVID-19 Rapid Tests in its Bethlehem, Pennsylvania facilities. The Company significantly scaled up manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests and has achieved manufacturing capacity targets under its 2021 contract with the U.S. DOD, in coordination with HHS. All milestones under this contract have been achieved and the Company received corresponding milestone payments in 2023. The Company's Opus Way facility was customized to accommodate increased manufacturing capacity. Throughout 2023, the Company made progress on consolidating its manufacturing footprint by using the Opus Way facility for a more significant portion of its manufacturing and distribution needs, including re-shoring of capacity to the United States. One Pennsylvania facility was eliminated from the Company's sites. +The Company's MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the analyte of interest. Substantially all the Company's antibody raw materials are provided by contract suppliers. The Company believes that it has adequate reserves of antibody supplies and that it has access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with the Company's new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher Scientific. There is no other supply source for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. The Company is actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products are produced in Canada. +The Company's Colli-Pee ® device is currently being manufactured in Canada by its existing contract manufacturers with components supplied by third party vendors. +The Company's genomic, microbiome and metatranscriptomics laboratory testing and analytical services are provided by its subsidiary, Diversigen. +Human Capital Resources +In order to achieve the Company's goals and expectations, it is crucial that it continues to attract and retain top talent. To facilitate talent attraction and retention, the Company strives to be a safe and rewarding workplace with opportunities for its employees to grow and develop in their careers. +As of December 31, 2023, the Company had 638 full-time employees, which compares to 840 employees as of December 31, 2022. The decrease in employees during 2023 was primarily the result of the need to reduce manufacturing capacity for the Company's InteliSwab ® COVID-19 Rapid Test. In February 2023, the Company announced an 11% reduction in its non-production workforce. The Company's employees are not currently represented by a U.S. collective bargaining agreement. +The Company believes its employees are among its most important resources and are critical to its continued success. The Company focuses significant attention on attracting and retaining talented and experienced individuals to manage and support its operations, and its management team routinely reviews employee turnover rates at various levels of the +10 +Table of Contents +organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of the Company's workforce is fundamental to the success of its business. The Company safeguards its people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering its work responsibly and sustainably. The Company provides its employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive compensation and benefits programs for its employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering an inclusive workplace that reflects and contributes to the global communities in which it does business and the customers and partners it serves. This includes all communities impacted by its corporate presence. The Company's management team and all of its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of the Company's employees must adhere to a Code of Business Conduct and Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. The Company strives to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is Company policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. The Company has an active "All Means You" council that strives to drive inclusion and belonging within the workplace. OraSure believes a variety of perspectives are critical to achieving success, and that inclusion and belonging are key drivers to growth-based innovation and profitability. The Company aims to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgment. The Company believes that when all voices are heard, it honors and exemplifies its core values and best serves its communities. +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of the Company's competitors are substantially larger than the Company, and have greater financial, research, manufacturing and marketing resources. The Company has many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, the Company differentiates based on its tests’ ease of use, which has enabled it to expand its self-testing offering. +The primary competitive factors for the Company's products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• Scientific and technological capability; +• Proprietary know-how; +• The ability to develop and market products and processes; +• The ability to obtain FDA or other regulatory approvals; +• The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• Commercial execution and strength of distribution; +• Access to adequate capital; +• The ability to attract and retain qualified personnel; and +• The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables the Company to serve specific segments where the products provide a unique benefit. +11 +Table of Contents +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +The Company expects competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render the Company's products impractical, uneconomical or obsolete. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective than those it develops or that would render its technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before the Company can do so. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. The Company's principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. The Company's OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. The Company's OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +The Company's OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. +Outside the U.S., the Company's rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below OraSure's HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the U.S. with WHO Prequalification status and the CE mark. The majority of the Company's sales outside the U.S. are in Africa due to the greater incidence of HIV in that region. The Company's OraQuick ® HIV Self-Test is CE marked, which enables it to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. The Company's InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, the Company's Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. The Company expects competition for its products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +The Company's MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and the OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by the Company's laboratory customers. The Company's oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +The Company's MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. The Company competes with both homogeneous and heterogeneous tests manufactured by many companies. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, the Company believes that these tests are qualitative tests that are lower in quality and provide fewer benefits than OraSure's Q.E.D. ® test. +The Company's Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although the Company believes the Oragene ® and ORAcollect ® +12 +Table of Contents +devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. The Company's Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, the Company is one of the few vendors to offer a solution that fully meets these requirements. +The Company's genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +The Company seeks patents and other intellectual property rights to protect and preserve its proprietary technology and its right to capitalize on the results of its research and development activities. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for its products in its markets and to accelerate new product introductions. The Company regularly searches for third-party patents in fields related to its business to shape its own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +The Company has patents throughout its product and service lines. Its patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools, and services and analysis. The Company's portfolio protects its innovative sampling tools, services and diagnostics that provide access to accurate, essential information that advances global health and well-being. +Diagnostics and testing products include the OraSure ® and Intercept ® collection devices that are covered by one utility and one design patent in each of the U.S., Canada, Japan, and throughout Europe. The Company has numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. The utility patents will expire in January 2028, and the design patents will expire in 2025. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications entered their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications will expire in March 2041. +The Company has U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application entered its national phase in countries throughout the world in May 2023 and patents issuing from these applications will expire in December 2041. Related design patent applications are pending in the U.S., Canada, and Europe. +The Company has additional pending applications directed to new direct sample collection pads for its InteliSwab ® COVID-19 Rapid Test. These applications entered their national phase in countries throughout the world in October 2023, and patents issuing from these applications will expire in December 2042. A related design patent issued in 2022 in the U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2035. +The Company has registered design patents for a collection funnel and corresponding plunger device in Europe, China, and India and a corresponding U.S. design patent application is pending. +The Company has pending patent applications throughout its product and service lines directed to assays, methods, devices, and reagents for monitoring adherence to HIV medications, such as nucleoside reverse transcriptase inhibitors used in PrEP regimens. +13 +Table of Contents +The Company has two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +The Company holds, through its subsidiary, DNAG, thirty granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. Certain patents expired in June 2023, and others will expire through October 2037. +The Company holds through its subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. The Company has also applied for additional patents, in both the United States and certain foreign countries, in novel urine collection devices. +The Company's subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological sample containing polynucleotide molecules. These patents will expire in May 2036. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +The Company requires its employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with the Company or the performance by the consultant of services for the Company will be OraSure's exclusive property. +The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also owns many of these marks and others in several foreign countries and it is pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of the Company's business. Competitors may be able to produce products competing with the Company's patented products without infringing its patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of the Company's products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. The Company believes that its products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of its products may be unclear and are subject to change. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +14 +Table of Contents +Many of the Company's FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, the Company must continue to comply with other FDA requirements applicable to marketed products and is subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt the Company's ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export the Company's products if the agency determines that it is not in compliance. +Domestic Regulation +Most of the Company's products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, De Novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for De Novo classification before marketing can begin. A De Novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a De Novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” +15 +Table of Contents +letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. The FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made, amongst other reasons, following a determination by the Secretary of Health and Human Services that there is a public health emergency or a significant potential for a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to the Company's marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a De Novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of the Company's products are used for research only or for other nonclinical or non-diagnostic purposes. The Company's molecular sample management solutions are sold to many academic and research institutions for research purposes and the Company's drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +16 +Table of Contents +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +In February 2024, the FDA issued the Quality Management System Regulation (“QMSR”) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the International Organization for Standardization (“ISO”), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. The Company believes that its facilities and procedures are in material compliance with the FDA’s OSR regulations, the European Union's Quality Management Systems requirements, ISO 13485:2016, and other post-market requirements, but the regulations are subject to change or may be unclear, and the Company cannot be sure that FDA investigators will agree with the Company's compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. The Company considers the applicability of CLIA requirements in the design and development of its products. The Company has obtained a waiver of the CLIA requirements for its OraQuick ADVANCE ® rapid HIV-1/2 antibody test, its OraQuick ® HCV rapid antibody test and its Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by the Company's subsidiary, Diversigen, consist of microbiome, metatranscriptomics and metagenomics sequencing, bioinformatics and analysis. Diversigen has elected to obtain a license from CLIA and has received a certificate of accreditation from the College of American Pathologists (CAP). +Certain of the Company's products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, the Company may not promote its products for such “off-label” uses and can only market its products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection +17 +Table of Contents +statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that the Company's promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that the Company modify its training or promotional materials or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, the Company's reputation could be damaged and sales of its products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that the Company's facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until the Company resolves the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit the Company's ability to export its products to countries that require such certificates. +International +The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. The Company generally pursues approval only in those countries that the Company believes have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that the Company's quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The EU Medical Devices Regulation (EU) 2017/745 (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (EU) 2017/74 (the “EU IVDR”), which repealed and replaced the Medical Devices Directive 93/42/EEC (“MDD”) and the In Vitro Diagnostic Medical Devices Directive 98/79/EC (“IVDD”) respectively, govern the regulation of medical devices and in vitro diagnostic devices in the European Union (“EU”). The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices than the previous Directives, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became fully applicable on May 26, 2022. There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the IVDR (subject to compliance with certain requirements under the IVDR, including in respect of post-market surveillance); however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022, class D devices benefit from such transitional provisions until May 26, 2025. On January 23, 2024, the European Commission introduced a legislative proposal to extend such transitional provisions for certain devices. The European Commission has provided the legislative proposal to the European Parliament and the European Council for their review and approval. Once the European Commission’s legislative proposal is approved (with or without amendment), it will be adopted into EU law. +In the EU, products that fall under the scope of the MDR and the IVDR may not be placed on the EU market without a valid CE mark. Approval of a regulatory authority is not required to obtain CE certification, but, depending on the class of product, conformity assessment by a notified body may be required. Notified bodies are accredited and supervised by +18 +Table of Contents +national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. The conformity assessment procedure for medical devices and in vitro diagnostic devices is to assess whether the device is compliant with the general safety and performance requirements set forth in the EU MDR or EU IVDR (as applicable), and includes an examination of the product’s technical dossier and the manufacturer’s quality system. ISO certification of the quality system in accordance with the relevant standard for medical devices or in vitro diagnostic devices creates a rebuttable presumption that the product satisfies the applicable requirements of the EU MDR or EU IVDR (as applicable) with respect to the quality management system. Compliance with these general safety and performance requirements allows the Company to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to its products, without which they may not be placed on the market in the EU. The Company also notes that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to the Company's international strategy. +The Company must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. The Company has completed this process for several of its current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). +The Company has obtained WHO pre-qualification for its OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +The Company's products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on the Company's ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on the Company's business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on the Company's ability to operate in these jurisdictions and significant damage to its reputation. +The Company is also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require the Company to adopt a compliance program. Taken +19 +Table of Contents +together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, the Company has implemented necessary systems to accurately track gifts and other payments. +The Company has implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While the Company believes that its practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which the Company is subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. The Company's present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to the Company as a result of its international sales. The Company is also subject to the FCPA’s accounting provisions, which require it to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the Company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which the Company is subject as a result of its international sales also includes the U.K. Bribery Act 2010 (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of the Company's current and proposed research, development, and manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that the Company sells in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing +20 +Table of Contents +medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require the Company to alter its manufacturing processes, thereby increasing its manufacturing costs, or may impose other additional obligations on the Company or its products. The Company believes that its products and manufacturing processes at its facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of the Company's business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +Information Available on the Internet +The Company's filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on the Company's website (www.orasure.com) free of charge as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on the Company's website is not a part of this Annual Report. +21 +Table of Contents +ITEM 1A. Risk Factors +Summary of Risk Factors +Investing in the Company's securities involves risk. Below is a summary of the principal factors that could adversely affect OraSure's business, operations and financial results. You should carefully consider the following risks and uncertainties, together with all other information in this Annual Report, including the Company's consolidated financial statements and related notes and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, before investing in the Company. This summary does not address all of the risks that the Company faces. Additional discussion of the summarized risks can be found below following this summary. +Risks Relating to Products, Marketing and Sales +• Changes in the genomics market may adversely affect the Company's business. +• The Company's future success depends upon market acceptance of its existing and future products and service offerings. +• The Company may not realize revenue levels from its InteliSwab® COVID-19 Rapid Test consistent with prior years. +• The COVID-19 pandemic continues to cast uncertainty over the Company's consolidated results of operations, financial position and cash flows, while the consequences of COVID-19 and the governmental response to contain the pandemic and pandemic-related macroeconomic impacts could negatively affect the Company's operations and share price. +• Marketing of the Company's COVID-19 tests and collection kits under EUAs from the FDA is subject to certain limitations and it is required to maintain compliance with the terms of the EUA, among other things, and the continuance of the EUAs is subject to government discretion. +• If acceptance and adoption of oral fluid testing and collection products does not continue, the Company's future results may suffer. +• The Company expects to face increasing competition from other providers of diagnostic tests, sample collection products and molecular laboratory services. +• The Company's inability to expand international sales could adversely affect its business and results of operations. +• The Company's international presence may increase its risks and expose its business to regulatory, cultural or other restraints. +• The Company's U.S. government contracts require compliance with numerous laws and increase its risk and liability. +• The Company's inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect its business. +• The Company's business will suffer if it does not effectively manage challenges to its manufacturing processes and it may be unable to successfully scale-up manufacturing of its products in sufficient quality and quantity to meet demand, which would negatively impact revenue expectations. +Risks Relating to the Company's Industry, Business and Strategy +• Consolidation in the healthcare industry could adversely affect the Company's future revenues and operating results. +• The Company's research, development and commercialization efforts may not succeed and its competitors may develop and commercialize more effective or successful offerings. +• Customer concentration creates risk for the Company's business. +• Acquisitions or investments may not generate the expected benefits and could disrupt the Company's ongoing business, distract its management, increase its expenses and adversely affect its business. +22 +Table of Contents +Risks Relating to the Company's Reliance on Third Parties +• The use of third party supply sources for critical components of the Company's products could adversely affect its business. +• The Company's failure to maintain existing distribution channels, or develop new distribution channels, may result in lower revenues. +Risks Relating to Intellectual Property +• The Company's success depends on its ability to protect its proprietary technology. +• The Company may become involved in intellectual property disputes, which could increase its costs and limit or eliminate its ability to sell products, provide services or use certain technologies. +Regulatory Risks +• The need to obtain regulatory approvals, clearances, authorizations or certifications could increase the Company's costs and adversely affect its financial performance. +• Failure to comply with FDA or other regulatory requirements may require the Company to suspend production or sale of its products or institute a recall which could result in higher costs and loss of revenues. +• The Company is subject to numerous government regulations in addition to FDA requirements, which could increase its costs and affect its operations. +• Failure to comply with privacy, security and breach notification regulations may increase our costs. +• Failure to comply with data protection requirements or privacy laws could increase our costs. +Risks Relating to the Economy, Company Financial Results, Investments, Credit Facilities and Need for Financing +• The Company has experienced losses in the past and may not be able to again achieve and maintain profitable operations. +Risks Relating to the Company's Common Stock +• The Company's stock price could continue to be volatile. +General Risk Factors +• Cybersecurity incidents and other disruptions could compromise the company's information, expose it to liability and harm its reputation and business. +Risk Factors +You should carefully consider the risks and uncertainties described below. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not disclosed or not presently known to the Company or that it currently deems immaterial may also impair its business operations. The occurrence of any of the following risks could harm the Company's business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Changes in the Genomics Market May Adversely Affect the Company's Business . +The genomics market has been the largest component of the Company's overall molecular sample management solutions business for some time and the major drivers of this market have been the consumer genomics segment, which offers products and services to consumers to provide them with personalized health and genealogical information, and the disease risk management segment which offers genetic testing through physicians for a variety of applications including prenatal testing, risk screening and pharmacogenomics. The ancestry portion of the consumer genomics market may be maturing and the Company's sales to customers with offerings in this market have been volatile. The Company's genomics revenues have also been volatile due to changes in promotional strategies and purchasing patterns by certain customers which serve +23 +Table of Contents +the consumer ancestry and genetic testing market and cost cutting and de-stocking efforts at some of the Company's disease risk management customers. These trends in the ancestry testing market may continue and revenues in this market may continue to be volatile. +In an effort to increase the Company's molecular revenues, it has devoted increasing time and attention to expanding sales of its genomics products both domestically and internationally, with both new and existing accounts, including co-clearances and co-promotions with strategic partners. While the Company believes these new markets represent large growth opportunities, there is no assurance that it will be successful in capitalizing on these opportunities or that it will be able to increase the Company's product sales consistent with the Company's expectations. Factors include, but are not limited to, the market acceptance of the Company's products, available funding, cost containment strategies implemented by customers, increasing competition and regulatory constraints could limit sales of the Company's genomics products. To the extent that the Company is unsuccessful or limited in expanding the its business into new markets, the Company's revenues and results of operations could be negatively affected. +Despite these challenges, the Company believes there is significant growth opportunity for its genomics products in the area of research by biotechnology companies, animal genetics, and disease risk management, which includes genetic risk testing, prenatal testing, carrier screening, pharmacogenomics testing and population heath studies. +The Company's Future Success Depends Upon Market Acceptance of its Existing and Future Products and Service Offerings. +The Company's future success will depend, in part, on the market acceptance, and the timing of such acceptance, of products such as InteliSwab ® , OraQuick ® HIV Self-Test, OraQuick ® Ebola test and OMNIgene ® • GUT product offerings, and other new products or technologies that may be developed or acquired. In addition, the Company's future revenues will depend on market acceptance of new uses for the Company's saliva collection products, including for COVID-19 testing, and the Company's new service offerings, such as the microbiome laboratory testing and analytical services it provides through Diversigen. To commercially market new uses of the Company's products and to achieve market acceptance, it will likely be required to undertake clinical studies to validate the new uses for its products and spend significant funds to complete product development and clinical studies and then undertake substantial marketing efforts to inform potential customers and the public of the existence and perceived benefits of these products and services. In addition, governmental funding may be needed to help complete development, obtain required regulatory approvals, clearances or EUAs and create market acceptance and expand the use of these products and services. +There may be limited evidence on which to evaluate the market reaction to products and services that may be developed and the Company's marketing efforts for new products and services or products with new uses may not be successful. The market for microbiome products and services is in its early stages and its future development and acceptance by the Company's customers is uncertain. Also, the Company continues to develop and seek 510(k) regulatory clearance for the InteliSwab® tests, and it is uncertain whether it will be successful in the development and validation efforts or whether these products will prove effective, receive applicable regulatory approvals and gain widespread acceptance in the marketplace. As such, there can be no assurance that any products or services will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. It is possible that the Company's expenses to develop and market any such products, including, without limitation the Company's InteliSwab ® tests, will exceed any benefit in revenues, which may be short-lived. In addition, other products that compete with the Company's may achieve 510(k) clearance earlier than the Company's do, providing market advantages. +The Company May Not Realize Revenue Levels From its InteliSwab® COVID-19 Rapid Test Consistent With Prior Years . +The Company has experienced significant demand for its InteliSwab ® COVID-19 Rapid Test; however, the Company expects a significant decline in revenues from InteliSwab ® COVID-19 Rapid Test sales in 2024. +While there are still periods of increased COVID-19 prevalence, the public health emergency declarations related to COVID-19 ended on May 11, 2023. The Company has seen a reduction in the prevalence of COVID-19 since the height of the pandemic, and the Company's revenues relating to the Company's COVID-19 testing products have declined, and it expects they will continue to decline in the future if the prevalence of COVID-19 remains low. Further, if the COVID-19 pandemic becomes a seasonal virus or experiences fluctuations in prevalence, the Company could experience fluctuations in its revenues associated with its InteliSwab® COVID-19 Rapid Tests. While there is still demand for COVID-19 testing products, there is no guarantee that current or anticipated demand will continue, or if demand does continue, that the +24 +Table of Contents +Company will be able to produce its InteliSwab® COVID-19 Rapid Test in quantities to meet the demand. A significant decline in demand for the InteliSwab ® COVID-19 Rapid Test without a corresponding increase in the Company's other businesses could have a material, adverse effect on the Company's results of operations, cash flow and financial position. +The COVID-19 Pandemic Continues to Cast Uncertainty Over the Company's Consolidated Results of Operations, Financial Position and Cash Flows, While the Consequences of COVID-19 and the Governmental Response to Contain the Pandemic and Pandemic-Related Macroeconomic Impacts Could Negatively Affect the Company's Operations and Share Price . +Although the Company has experienced heavy demand for its InteliSwab ® tests and certain specimen collection devices for use in COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on the Company's performance, the duration and level of the demand for COVID-19 testing is highly uncertain. The Company believes the COVID-19 pandemic's continued impact on its consolidated results of operations, financial position and cash flows will be primarily driven by; (i) the severity and duration of the COVID-19 pandemic; (ii) the COVID-19 pandemic's impact on the U.S. healthcare system and the U.S. economy; (iii) the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic, including the development and deployment of vaccine, and (iv) the COVID-19 pandemic's impact on global clinics, research markets and global logistics. Each of these factors are difficult to predict and the nature, length and severity of any adverse consequences as a result of any given factor are uncertain. +Management has closely monitored the impact of the COVID-19 pandemic, with a focus on the health and safety of the Company's employees and business continuity. In response to, or as a result of, the COVID-19 pandemic and emergence of variants, the Company the Company may experience, among other things, voluntary or mandated temporary closures of one or more of its facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on its supply chain and distribution channels; the potential of increased network vulnerability and risk of data loss resulting from increased use of remote access and removal of data from its facilities; and required reallocation or adjustment of resources, which may impact the its business plans and product offerings. In addition, the direct or indirect impacts of COVID-19 may extend to disrupt the Company's suppliers, partners, manufacturers, customers and other stakeholders, which in turn could materially adversely affect the Company's business, results of operations or financial condition. Any change or disruption in operations could impact and have a material adverse effect on the Company's operations and/or results from operations. In addition, the re-introduction of voluntary or mandated efforts to slow the spread of COVID-19 could impact the Company's operations and sales. If portions or all of the Company's, its partners’, or its customer’s operations are disrupted or suspended as a result of preventative or reactionary measures in response to the ongoing spread of COVID-19, it could have a material adverse impact on the Company's profitability, results of operations, financial condition and share price. Further, there continue to be significant economic and social impacts of the COVID-19 pandemic, including rising inflation rates, continued levels of higher unemployment, and market volatility, among other impacts; any of which may have an impact on consumer behavior, including use of the Company's products. +Given the uncertainties associated with the COVID-19 pandemic, including the uncertainty surrounding the remaining duration and outcome, COVID-19 variants and vaccine efficacy, the Company is unable to estimate the full impact of the COVID-19 pandemic on its business, financial condition, results of operations, and/or cash flows; however, the impact could be material. +Marketing of the Company's COVID-19 Tests and Collection Kits Under EUAs from the FDA Is Subject To Certain Limitations and the Company Is Required To Maintain Compliance with the Terms of the EUA, Among Other Things, and the Continuance of the EUAs Is Subject To Government Discretion. +On February 4, 2020, the HHS issued a declaration that the threat to public health posed by COVID-19 justifies the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of SARS-CoV-2. Under Section 564 of the FDCA, because HHS has issued this declaration, the FDA Commissioner is authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA reflects an FDA conclusion that based on the totality of scientific evidence available to the FDA, it is reasonable to believe that the product may be effective in diagnosing COVID-19, the known potential benefits of the product outweigh the known and potential risks, and there is no adequate, approved, and available alternative to the emergency use of the product. +25 +Table of Contents +During 2020, the Company's ORAcollect ® ·RNA and OMNIgene ® ·ORAL collection devices were included in EUAs granted by the FDA to certain third parties for use in the detection of SARS-CoV-2, and the Company has separately obtained EUAs for these products. In addition, the Company obtained three EUAs for its new InteliSwab® COVID-19 Rapid Test. Although there are certain regulatory requirements the FDA has waived for the duration of the EUAs, the Company remains subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events. As part of the conditions of authorization, OraSure was required to conduct a clinical study in a pediatric population ages 2-14 and an asymptomatic population in addition to launching an app for consumers to report their test results to public health jurisdictions. OraSure has completed the required conditions of authorization with respect to the pediatric claim and launched the InteliSwab® Connect application for reporting test results to public health jurisdictions. As a result of the National Institutes of Health study (Performance of Screening for SARS-CoV-2 using Rapid Antigen Tests to Detect Incidence of Symptomatic and Asymptomatic SARS-CoV-2 Infection: findings from the Test Us at Home prospective cohort study), the FDA has requested modifications to labeling to include serial testing and has removed the requirement for the Company to conduct a study in an asymptomatic population. Labeling has been modified as required for inclusion of serial testing and authorized by FDA. +As with other FDA-regulated products, issues could emerge during the course of the marketing and use of the Company's products under an EUA that could impact the Company's ability to continue the sale and distribution of these products (for example, compliance or product performance issues). The applicable EUAs remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety. If that were to occur, then in order to market the Company's diagnostic products or collection kits for the purpose of detecting COVID-19 the Company would be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations for device manufacturers, including the QSR under 21 CFR Part 820. It is possible that the Company may not be able to obtain those clearances or approvals in a timely manner, or at all, and that one or more of OraSure's competitors may obtain the necessary clearances or approvals for their products before it does. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, the Company's Future Results May Suffer. +The Company has made significant progress in gaining acceptance of oral fluid testing products, particularly for (i) HIV testing in the public health, hospital, insurance and other markets, and (ii) drugs-of-abuse testing in the workplace and criminal justice markets. Its subsidiary, DNAG, has also made significant progress in gaining acceptance of oral fluid collection products that are used with molecular testing applications including testing for SARS-CoV-2. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that the Company will be able to expand the use of its oral fluid testing products in these or other markets. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. The Company's future sales will depend, in part, on the Company's ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. Even if the Company can demonstrate that its products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. The Company's failure to achieve and expand market acceptance of its rapid point-of-care diagnostic tests with customers would have a negative effect on its future sales growth. +The Company Expects to Face Increasing Competition From Other Providers of Diagnostic Tests, Sample Collection Products and Molecular Laboratory Services. +The Company's rapid point-of-care tests compete with other point-of-care products made by the Company's competitors. This competition is particularly evident with respect to the Company's OraQuick ADVANCE ® HIV-1/2 test and the Company's HIV Self-Test outside of the United States. The Oragene ® product line sold by the Company's subsidiary, DNAG, competes against other molecular sample management solutions, such as blood collection kits and buccal swabs and will likely face additional competition from collection devices similar in design and operation to the Company's Oragene ® and ORAcollect ® products. There are a number of products currently in or expected to enter the market for the +26 +Table of Contents +detection of antigen to SARS-CoV-2 that currently or will compete with the Company's InteliSwab ® COVID-19 diagnostic test. +The Company's genetic and microbiome laboratory services business is expected to face increasing competition, primarily from large commercial reference laboratories, hospital-based laboratories and specialty laboratories. The Company believes there is significant opportunity in the markets for these services, particularly the microbiome market which is still in the early stages. As these markets evolve and expand, the Company expects competition for genomic and microbiome laboratory services to intensify. +There is significant competition, including from other companies and governmental organizations, who make and distribute rapid tests for COVID-19. Many of these entities have substantially greater resources (including capital and personnel) than OraSure does. Even if the Company is successful in marketing its InteliSwab® tests, there is no guarantee that competitors will not take market share from the Company's offerings through more effective marketing or competitive pricing, higher quality or technological superiority. +A number of the Company's competitors are making investments in competing technologies, products and services, and several may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and service offerings, aggressively discount prices for their products and services and may have greater name recognition than the Company does. The Company also faces competition from certain of its distributors or former customers that have created, or may decide to create, their own products to compete with the Company's. If the Company's competitors take market share from its offerings through more effective marketing or competitive pricing, higher quality or technological superiority, the Company's revenues, margins and operating results could be adversely affected. In addition, the Company's revenues and operating results could be negatively impacted if some of its customers use internally developed or acquired sample collection devices or services in order to reduce costs. +The Company's Product Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in the Company's Operating Results. +The sales cycles for certain of the Company's products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of the Company's products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years the Company's OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. The Company's OraQuick ® HCV test has been purchased by customers who receive government funding, and the Company believes increased funding from the CDC and other agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue. As a result, the Company may expend considerable resources on unsuccessful sales efforts or it may not be able to complete transactions at all or on a schedule and in an amount consistent with its objectives. +The Company's Inability To Expand International Sales Could Adversely Affect its Business and Results of Operations. +One of the Company's strategic priorities is to substantially expand its product sales internationally. An opportunity to accomplish this objective is with the sale of the Company's OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. The Company's OraQuick ® HIV Self-Test is also currently available in six European countries: United Kingdom, Germany, France, Italy, Spain and Portugal. The Company is also working to expand international sales of its professional HIV and HCV products and its molecular sample management solutions. The Company also believes there is a significant opportunity for international sales of its InteliSwab ® COVID-19 Rapid Test once the necessary studies and registrations are complete. +While the Company believes international sales of these and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will materialize, continue or increase. Among other factors, competition from competitive lower priced products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not occur or increase or if the Company is otherwise unable to expand international sales of its products, the Company's revenues and results of operations could be negatively impacted. +27 +Table of Contents +In addition, market conditions in many countries often require that the Company's sell its products at a price below the typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to the Company's business. To the extent these international sales comprise a large or increasing part of the Company's business, the Company's gross margins will be negatively affected. In addition, the Company may have difficulty selling its products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If the Company is unable to obtain or continue this funding support at sufficient levels, or at all, its revenues and results of operations could be negatively affected. +The Company's International Presence May Increase Its Risks and Expose Its Business to Regulatory, Cultural or Other Restraints. +The Company seeks to increase revenue derived from international sales of its products. Its international sales accounted for $43.8 million, or 11% of consolidated revenues in 2023, $37.3 million, or 10% of consolidated net revenues in 2022, $45.3 million, or 19%, of consolidated net revenues in 2021. In addition, the Company's subsidiary DNAG, which accounted for $56.2 million or 14% of consolidated net revenues in 2023, is operated in Canada. The Company has previously acquired foreign companies and it may acquire other foreign companies as part of its business development efforts. +A number of factors could adversely affect the performance of the Company's business and/or cause it to incur substantially increased costs because of its international presence and sales, including, but not limited to those set forth below: +• Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• The potential for inconsistent imposition of legal and regulatory requirements; +• Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of the Company's products; +• Cultural and language differences that make international operations and business management more difficult; +• Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• Regulatory requirements, including compliance with applicable customs regulations and the need to obtain or maintain regulatory approvals, registrations or reimbursement approvals for the Company's products; +• Trade protection measures, additional trade sanctions and import/export licensing requirements; +• The inability to obtain or maintain ISO certification for the Company's or the Company's suppliers’ manufacturing facilities; +• The Company's inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• Diversion to the U.S. of the Company's products that are sold at lower prices into international markets; +• The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• Differing tax laws across jurisdictions, as well as changes in those laws; +• An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +28 +Table of Contents +• Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• Difficulty collecting amounts owed by foreign governments or other customers; +• Economic conditions, inflation, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• Exposure to infectious disease and epidemics, including the effects of the COVID-19 outbreak on the Company's business operations in geographic locations impacted by the outbreak and on the business operations of the Company's customers and suppliers; +• Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• The sale of competing products by foreign competitors at prices at or below the prices offered for the Company's products; +• Restrictions on the Company's ability to repatriate investments and earnings from foreign operations; +• Changes in shipping costs; +• The unavailability of licenses to certain patents in force in a foreign country which cover the Company's products; and +• Reduced protection for, or enforcement of, the Company's patents and other intellectual property rights in foreign countries. +In addition, the Company has contracted with a third party in Thailand for the manufacture of a portion of the Company's OraQuick ® HIV tests and all of DNAG’s products are produced in Canada. The Company may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of the Company's products in countries other than the United States. Interruption of the supply of the Company's products could reduce revenues or cause it to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing the Company's products in foreign countries. In addition, the COVID-19 pandemic previously resulted in, and may in the future result in, increased government-imposed travel restrictions and extended shutdowns of certain businesses in the affected locations as well as logistics delays due to the global logistical crisis from the pandemic. These or any further political or governmental responses to pandemic diseases could result in social, economic and labor instability of foreign countries, which could have a material adverse effect on the Company's business, results of operations and financial condition. +The Company's U.S. Government Contracts Require Compliance With Numerous Laws and Increases Its Risk and Liability. +From time to time, the Company receives funding from the U.S. government and sells some of its products to the federal government. Historically, the Company has sold a number of its products to the government under contracts with the General Services Administration and the Veterans Administration. +In September 2022 the Company entered into an $8.6 million contract with BARDA to develop a second generation Ebola test on the OraQuick ® testing platform and the Company was selected to provide its OraQuick ® In-Home HIV tests in support of the CDC "Together Take me Home," HIV self-test program. Under the program, the CDC is expected to provide $41.5 million over a five-year period to support community testing. During the third quarter of 2022, the Company entered into a contract with the DLA for the second procurement of the Company's InteliSwab ® COVID-19 Rapid Test for OTC use. During the same quarter, the Company entered into a contract with the BARDA to provide it with up to $13.6 million in funding to obtain an FDA 510(k) clearance and CLIA waiver for the Company's InteliSwab® test. The Company continued development work and analytical testing on this test throughout 2023. However, in early 2024, the Company has communicated to BARDA that it does not intend to pursue further development of this product. In September 2021, the Company entered into a contract with the U.S. DOD in coordination with the HHS for $109 million in funding to build additional manufacturing capacity in the United States for the Company's InteliSwab ® test. +As a result of the Company's U.S. government funding and product sales to the U.S. government, it must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government +29 +Table of Contents +contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to the Company as compared to competitors that do not rely on government contracts. For example, the government has the right to terminate one or more of these contracts at its convenience even if the Company has not defaulted in any of its obligations. +As a U.S. government contractor, the Company is subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact the Company's business and have an adverse effect on its consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of the Company's contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to the Company's entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect the Company's ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect the Company's business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, the Company could suffer serious reputational harm and the value of its common stock could be negatively affected if allegations of impropriety related to such contracts are made against it. +The Company's Inability to Manufacture Products in Accordance with Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Its Business. +The materials and processes used to manufacture the Company's products must meet detailed specifications, performance standards and quality requirements to ensure its products will perform in accordance with their label claims, customers’ expectations and applicable regulatory requirements. As a result, the Company's products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause the Company's products or the materials used to produce or assemble its products to fail inspections and quality testing or otherwise not perform in accordance with their label claims or the expectations of the Company's customers. +In February 2024, the FDA issued the Quality Management System Regulation (QMSR) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the International Organization for Standardization (ISO), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. We believe that our facilities and procedures are in material compliance with the FDA’s OSR regulations, the European Union’s Quality Management Systems requirements, ISO 13485:2016, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +Any failure or delay in the Company's ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect its ability to manufacture and sell its products or comply with regulatory requirements. These events could, in turn, adversely affect the Company's revenues and results of operations. +The Company's Business Will Suffer if It Does Not Effectively Manage Challenges to Its Manufacturing Processes and It May be Unable to Successfully Scale-Up Manufacturing of Its Products in Sufficient Quality and Quantity to Meet Demand, Which Would Negatively Impact Revenue Expectations. +In the event of a sudden and significant increase in demand for the Company's products, challenges in the manufacture of products could adversely affect, the Company's operating efficiency and results of operations. Although the Company has expanded its manufacturing capacity, the Company faces risks, including with respect to expanding its overall production capacity, that could increase costs, divert management attention and reduce the Company's operating results, with no guarantee of success. +As the Company increases its manufacturing capacity to meet market demand or begin to manufacture new products at scale, it may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. In addition, the Company could experience delays in +30 +Table of Contents +production as it increases manufacturing capacity or begins to manufacture new products that may result in its inability to meet product demand as the products ordered by its customers being on back-order as initial production issues are addressed. If it experiences production delays or inefficiencies, a deterioration in the quality of the Company's products or other complications in managing changes to its manufacturing processes, including those that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, the Company may not achieve the benefits that it anticipates from these actions when expected, or at all, and the Company's operations could experience disruptions, the Company's manufacturing efficiency could suffer and the Company's business, financial condition and results of operations could be materially and adversely affected. Any such delays could allow the Company's competitors to seize market advantage, which could have a material, adverse effect on the Company's reputation, revenues, results of operations, cash flow and financial position. +The Company's Business Results Depend on Its Ability to Manage Disruptions in Its Domestic and Global Supply Chains and Distribution Channels. +The Company's ability to meet its customers' needs and achieve its financial objectives depends on its ability to maintain key manufacturing, supply and distribution arrangements. The loss or disruption of such manufacturing and supply arrangements could, in the future, interrupt the Company's ability to obtain necessary raw materials and manufacture its products. Such disruptions could result from labor disputes, financial liquidity, natural disasters, extreme weather conditions, public health emergencies and pandemics, supply constraints and general economic and political conditions that could limit the ability of the Company's suppliers to timely provide it with raw materials and components and distribute its products in a timely manner in accordance with applicable quality requirements. Disruptions in the global supply chain could also delay or preclude the ability of the Company's distributors to sell and deliver its products to customers. +The availability and price of these materials, parts, products and services are affected by a variety of factors beyond the Company's control, including the willingness of suppliers to sell into the medical device industry, changes in supply and demand, general economic conditions, labor costs, fuel-related transportation costs, liability concerns, climate change (including new and existing laws and regulations to address climate change), competition, import duties, tariffs, currency exchange rates, inflationary pressures and political uncertainty around the world. The Company's suppliers often pass some of their cost increases on to it, and if such increased costs are sustained or increase further, its suppliers may pass further cost increases on to it. In addition, transportation costs have generally increased and may further increase if crude oil prices increase. The Company's transportation and service providers are typically able to pass any significant increases in oil prices on to it. The Company's costs may also be impacted by laws to increase minimum wages, including the potential increase to the federal minimum wage in the United States that has been recently proposed by the current administration. +The Company's ability to recover such increased costs may depend upon its ability to raise prices on its products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of the Company's customers and third-party payers, the Company may be unable to pass along cost increases through higher prices. If the Company is unable to fully recover these costs through price increases or offset these increases through cost reductions, or it experiences terminations or interruption of its relationships with its suppliers, it could experience lower margins and profitability, and the Company's results of operations, financial condition and cash flows could be materially harmed. +Recently, the global supply chain has experienced significant disruptions, resulting in shortages of labor and equipment. These conditions, if not mitigated or remedied in a timely manner, could delay or preclude delivery of raw materials needed to manufacture the Company's products or delivery of the Company's products to customers, particularly in international markets. This in turn could have an adverse impact on the Company's business, financial condition, results of operations or cash flows. +Certain of the Company's Products Depend on Components From a Sole-Source Supplier, the Loss of Which Would Cause the Company to be Unable to Deliver Such Products. +The Company currently purchases certain critical components of its products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make the Company's OraQuick ® HIV, HCV and Ebola products are currently purchased from sole-source suppliers. The Company's OraSure QuickFlu ® test and the fully automated high-throughput drug assays sold with its Intercept i2 ® device are manufactured and supplied by sole-source suppliers and the conjugates used in its MICROPLATE oral fluid drugs-of-abuse assays are obtained from third-party suppliers. The Company has contracted with third parties in Thailand for parts of the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international +31 +Table of Contents +markets. In addition, the Company's subsidiary, DNAG, uses three third-party manufacturers to supply virtually all of its products, including its Oragene ® and ORAcollect ® lines of collection kits. +Additionally, the Company's Intercept i2 ® he collection device is manufactured and supplied under a long-term agreement with Thermo Fisher, the sole-source supplier for these products. If Thermo Fisher were unable or unwilling to supply the necessary components for the manufacture of the Intercept i2 ® he collection devices, the Company would be unable to produce this product or offer it to customers. Any interruption in, or change in the cost or quality of, the supply of the necessary raw materials, manufacturing services, product and process development, or other materials necessary to manufacture the product could adversely impact the efficacy of the product and negatively affect the Company's reputation with its customers. In addition, many of the raw materials used in the Company's DNAG products, including its Oragene ® product line, and components used in these products are also purchased from third parties, some of which are purchased from a sole-source supplier. If the Company's sole-source suppliers were to be acquired by a competitor, they may elect not to provide it with the product, raw materials or other components, as applicable. If the Company's sole-source suppliers were to otherwise cease supplying it, go out of business, or were unable to meet their obligations in a timely fashion or at an acceptable price, or at all, the Company may be forced to incur higher costs to obtain the necessary raw materials elsewhere, if it could even source such materials at all. +Furthermore, the COVID-19 pandemic and the measures taken to contain the spread of the virus, have disrupted, and may in the future disrupt, the normal operations of the Company's third-party suppliers. Additionally, potential future pandemics or other public health emergencies may, in the future, disrupt the normal operations of the Company's third-party suppliers. The Company's third-party suppliers may not have the personnel, raw materials, capacity or capability to manufacture its products according to its schedule and specifications. To the extent any such production and distribution interruption or closures occur and continue for an extended period of time, the impact on the Company's supply chain could have a material adverse effect on its results of operations. If the Company's third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting the Company's specifications, it may need to find another source and/or manufacturer. This could require that the Company perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. The Company may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to its products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce the Company's control over pricing, quality and timely delivery. These events could either disrupt the Company's ability to manufacture and sell certain of its products into one or more markets or completely prevent it from doing so, and could increase the Company's costs. Any such event could have a material adverse effect on the Company's results of operations, cash flow and business. +The Company's U.S. Government Contracts May Affect Its Intellectual Property Rights. +Provisions in the Company's U.S. government contracts may affect its intellectual property rights. Certain of the Company's activities have been funded, and may in the future be funded, by the U.S. government, including its contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose the Company's confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use the Company's patented technology. The government can exercise its march-in rights if it determines that action is necessary because the Company fails to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and the Company's rights in such inventions may be subject to certain requirements to manufacture products in the United States. On December 8, 2023, the National Institute of Standards and Technology published for comment a Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights that would be voluntary for federal government agencies to follow when deciding whether to exercise march-in rights and which for the first time includes the price of a product as a factor a federal government agency can use when deciding to exercise march-in rights. While march-in rights have not previously been exercised, it is uncertain whether the federal government will actually exercise such march-in rights in connection with medical products or whether any such exercise will be subject to judicial review or challenge. +The Company's U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +32 +Table of Contents +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review the Company's performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review the Company's compliance with government regulations and policies and the adequacy of its internal control systems and policies, including its purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, the Company may be subjected to government scrutiny that could delay or otherwise adversely affect its ability to compete for or perform government contracts or collect its revenue in a timely manner. An unfavorable outcome of an audit of the Company's government contracts could adversely affect its results of operations. +Risks Relating to the Company's Industry, Business and Strategy +Consolidation in the Healthcare Industry Could Adversely Affect the Company's Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. The Company may not be able to compete successfully in such a consolidated industry. The Company believes industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of the Company's products. +The Company's Research, Development and Commercialization Efforts May Not Succeed and Its Competitors May Develop and Commercialize More Effective or Successful Offerings. +In order to remain competitive, the Company must regularly commit substantial resources to research and development and the commercialization of new or enhanced products and services. The research and development process generally takes a significant amount of time from inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that the Company will not achieve its goals on a timely basis, or at all, and it may have to abandon a new or enhanced product or service in which it has invested substantial time and money. +Successful products and services can require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval or clearance must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. Similarly, regulatory clearances or registrations, such as a CLIA certification, and compliance with industry guidelines, may be required in order to provide competitive laboratory services. As noted above, regulatory authorities may not issue such approvals, clearances or certifications or may substantially delay or condition such action. Even if a product or service is developed and all applicable regulatory approvals, clearance or certifications are obtained, there may be little or no market for the product or service and entry into or development of new markets for the Company's products and services may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, the Company may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product or service. Other factors that could affect the success of the Company's efforts include its ability to manufacture products or provide laboratory services in a cost-effective manner and whether it can obtain necessary intellectual property rights and protection in the markets where the product or service is sold. +If the Company fails to develop and gain commercial acceptance for its products and services, or if competitors develop more effective products and services or a greater number of successful new products and services, customers may decide not to purchase the Company's products and services or may purchase and use products and services developed by its competitors. This would result in a loss of revenues and adversely affect the Company's results of operations, cash flow and business. +33 +Table of Contents +Customer Concentration Creates Risk for the Company's Business. +One of the Company's customers accounted for approximately 63% of its net consolidated revenues for the year ended December 31, 2023. Certain parts of the Company's business may continue to have a high customer concentration and depend disproportionately on a few large customers. To the extent that such a large customers fail to meet their purchase commitments, change their ordering patterns or business strategies, or otherwise reduce their purchases or stop purchasing the Company's products, or if it experiences difficulty in meeting the high demand by these larger customers for its products, the Company's revenues and results of operations could be adversely affected. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt the Company's Ongoing Business, Distract Its Management, Increase Its Expenses and Adversely Affect Its Business. +Since the beginning of 2019, the Company has acquired or made investments in several companies through which it has gained access to new technologies, products and services which are complementary to its existing business and aligned with its long-term business strategy. For example, in January 2024, the Company announced its investment and entry into wide ranging strategic distribution agreements with KKR Sapphiros, L.P. ("Sapphiors"). The Company will likely continue to pursue strategic acquisitions or investments as a way to expand its business. These activities, and their impact on the Company's business, are subject to many risks, including the following: +• Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to the Company or consistent with its objectives; +• The Company may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, the Company's inexperience with new businesses or markets, general economic conditions and increased competition; +• The Company may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products, services and/or technology into the Company's business; +• Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• Acquisitions may require substantial expense and management time and could disrupt the Company's business; +• The Company may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• The Company may have difficulties in coordinating geographically separate organizations; +• The Company may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• An acquisition may result in a diversion of resources from the Company's existing products, business and technologies; +• An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• To the extent the Company agrees to pay contingent consideration for an acquisition, if and how much of such consideration it is required to pay may be subject to dispute, resulting in the distraction of the Company's management team and the incurrence of legal costs; +• An acquisition may result in employee anxiety, morale and/or engagement issues; +• An acquisition may result in disparate information technology, internal control, financial reporting and record-keeping systems; +• An acquisition may result in new partners or customers who may operate on terms and programs different than the Company's; +34 +Table of Contents +• An acquisition may result in employees not familiar with the Company's operations; +• An acquisition may result in new products and services, including the risk that any underlying intellectual property associated with such products and services may not have been adequately protected or that such products and services may infringe on the proprietary rights of others; +• An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of the Company's earnings or its existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• An acquisition may result in the loss of the Company's or the acquired company’s key personnel, customers, distributors or suppliers; and +• An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and the Company's inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent the Company from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect the Company's financial condition, results of operations and ability to grow its business or otherwise achieve its financial and strategic objectives. +The Company's Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of certain of the Company's products include hospitals, physicians and other healthcare providers. Use of the Company's products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of its products from their patients’ healthcare insurers or payors. The Company's net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for the Company's products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for the Company's existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for the Company's products or its ability to sell its products on a profitable basis. In addition, the reimbursement approval process may delay the market introduction of the Company's products. +Changes in Healthcare Regulation Could Affect the Company's Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of changes to healthcare reform legislation and the resulting impact on the Company are impossible to predict. If significant reforms continue to be made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase the Company's costs or otherwise have an adverse effect on its financial condition and results of operations. +35 +Table of Contents +New or Changed Testing Guidelines Could Affect Sales of the Company's Diagnostic Products. +From time to time, governmental agencies such as the CDC issue diagnostic testing guidelines or recommendations, which can affect the usage of the Company's HIV and HCV tests or other diagnostic products. For example, past sales of domestic professional OraQuick ® HIV tests have decreased in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which the Company's OraQuick ® rapid HIV and HCV testing products or other products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as the Company's OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of the Company's products and its results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect the Company's Business and Financial Results. +The Company sells its OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the U.S. public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. It also sells these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use the Company's products. In international markets, the Company often sell products such as its OraQuick ® HIV Self-Test to or through foreign governmental agencies or parties funded by such agencies. +Many of the Company's molecular sample management solutions are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the U.S. National Institutes of Health and agencies in other countries to pay for the products and services they purchase. These research customers also purchase the Company's genomic and microbiome laboratory tests and analytical services. +The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government or other funding as a result of legislative or regulatory changes or other factors, could cause the Company's customers to delay, reduce or forego purchases of its products and services. +Risks Relating to the Company's Reliance on Third Parties +The Company's Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +The Company has marketed many of its products by collaborating with laboratories, diagnostic companies and distributors. Its sales depend to a substantial degree on its ability to sell products to these customers and on the marketing and distribution abilities of the companies with which it collaborates. +Relying on distributors or others to market and sell the Company's products could harm its business for various reasons, including: +• The Company may not be able to find suitable distributors to distribute its products on satisfactory terms, or at all; +• The Company's distributors or other customers may not fulfill their contractual obligations to it or otherwise market and distribute its products in the manner or at the levels it expects; +• The Company does not control the incentives provided by its distributors to their sales personnel and the effectiveness of these incentives could affect sales of the Company's products; +36 +Table of Contents +• Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• The Company may not be able to renew existing distribution agreements on acceptable terms, or at all; +• The Company's distributors may not devote sufficient resources or priority to the sale of its products; +• The Company's distributors may prioritize their own private label products that compete with its products; +• The Company's existing distributor relationships or contracts may preclude or limit it from entering into arrangements with other distributors; and +• The Company may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although the Company will try to maintain and expand its business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, the Company's revenues and business could be adversely affected. +The Company May Need Strategic Partners to Assist in Developing and Commercializing Some of Its Products. +Although the Company may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond its existing sales force may necessitate involving one or more strategic partners. Further, the Company's ability to enter into agreements with additional strategic partners depends in part on convincing them that its products can help achieve and accelerate their goals and efforts. The Company's strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to the Company's business for a number of reasons, including: +• The Company may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• The Company's collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of its collaboration; +• The Company's collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• The Company has limited access to its collaborator’s confidential corporate information and sudden unexpected changes in ownership or strategy or other material events affecting a collaborator of which the Company is not made aware of in a timely manner, or at all, could adversely impact the Company's relationship; +• The Company's collaborators may be acquired by another company, sell the part of their business related to the Company's collaboration, decide to terminate the Company's collaborative arrangement or become insolvent; +• The Company's collaborators may develop technologies or components competitive with its products; +• The Company's collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• Disagreements with collaborators could result in the termination of the relationship or litigation; +• Collaborators may not have sufficient capital resources; and +• The Company may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +37 +Table of Contents +While the Company generally expects that its collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast the Company's future revenues or operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Risks Relating to Intellectual Property +The Company's Success Depends on Its Ability to Protect Its Proprietary Technology. +The Company's industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. The Company's success depends, in part, on its ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If the Company cannot continue to develop, obtain and protect intellectual property rights, its revenues and profits could be adversely affected. Moreover, the Company's current and future licenses or other rights to patents and other technologies may not be adequate for the operation of its business. +As appropriate, the Company intends to file patent applications and obtain patent protection for its proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for the Company's products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. +The Company also relies on trade secrets, know-how and continuing technological advancements to protect its proprietary technology. The Company has entered, and will continue to enter, into confidentiality agreements with its employees, consultants, advisors and collaborators. The Company's employees and third-party consultants also sign agreements requiring that they assign to it interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +The Company cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements the Company enters into with employees, consultants, advisors or collaborators will provide adequate protection of its intellectual property rights. For example, the Company's competitors may develop similar products without infringing on any of its intellectual property rights or design around its proprietary technologies. Employees, consultants and others who participate in the development of the Company's products may breach their agreements with it regarding its intellectual property, and the Company may not have adequate remedies for the breach. The Company also may not be able to effectively protect its intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. +For a variety of reasons, the Company may decide not to file for patent, copyright or trademark protection outside of the U.S. The Company's trade secrets could become known through other unforeseen means. Although the Company has licensed certain technology for use in its microbiome laboratory services offerings and it has developed proprietary know-how that it uses in this business, it does not currently hold any patents covering the laboratory processes and analytical methods offered to its customers. The absence of patent protection in this or other parts of the Company's business may make it more difficult to protect its intellectual property. In addition, the Company's competitors may independently develop similar or alternative technologies or products that are equal or superior to its technology. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once the Company's patents expire, it may be faced with increased competition, which could reduce its revenues. It may also not be able to successfully protect its rights to unpatented trade secrets and know-how. +Some of the Company's employees, including scientific and management personnel, were previously employed by competing companies. Although the Company encourages and expect all of its employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against the Company. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom the Company's employees, consultants or advisers have prior employment or consulting relationships. An adverse determination may limit or restrict the type of work that certain employees involved with such products may perform. +38 +Table of Contents +The Company may collaborate with universities and governmental research organizations or receive funding for its products from government agencies. As a result, one or more of these entities may acquire part of the rights to any inventions or technical information derived from the Company's collaboration or funding relationship with them. +To facilitate development and commercialization of a proprietary technology base, the Company may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if the Company is unable to obtain these types of licenses, its product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonexclusive, and therefore the Company's competitors may have access to the same technology also licensed to the Company. +The Company May Become Involved in Intellectual Property Disputes, Which Could Increase Its Costs and Limit or Eliminate Its Ability to Sell Products, Provide Services or Use Certain Technologies. +From time to time, the Company may seek to enforce its patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in the Company's product and service areas, and additional patents may be issued to third parties relating to its product and service areas. The Company, its customers or its suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of its products or services. Litigation in the Company's industry regarding patent and other intellectual property rights is prevalent and is expected to continue. The Company may also have disputes with parties that license patents to it if the Company believes the license is no longer needed for its products or services or the licensed patents are no longer valid or enforceable. +The Company's industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies the Company incorporates in its products or services. Accordingly, the Company may be subjected to substantial damages for past infringement or be required to modify its products or services or stop selling them if it is ultimately determined that its products or services infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against the Company's employees or the Company itself relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, the Company's involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect its revenues, market share, results of operations and business because: +• It could consume a substantial portion of managerial and financial resources; +• Its outcome would be uncertain and a court may find that the Company's patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by the Company's products or services; +• An adverse outcome could subject the Company to the loss of the protection of its patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect the Company's future earnings; +• Governmental agencies may commence investigations or criminal proceedings against the Company's employees, former employees and the Company itself relating to claims of misappropriation or misuse of another party’s proprietary rights; +• Failure to obtain a necessary license upon an adverse outcome could prevent the Company from selling its current products or services or other products or services it may develop or acquire; +• The Company may be required to alter its product or services, given the proprietary rights of others; +• The pendency of any litigation may in and of itself cause the Company's distributors and customers to reduce or terminate purchases of its products or services; and +• A court could award a preliminary and/or permanent injunction, which would prevent the Company from selling its current or future products or services. +39 +Table of Contents +The Company may indemnify some customers and strategic partners under its agreements with such parties if its products, services or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, the Company's products or services may contain technology provided to it by other parties, such as universities, contractors, suppliers, customers or collaborators, and it may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify the Company in the event that an infringement or misappropriation claim is asserted against the Company. +The Company may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under federal law, various forms of post issuance patent review proceedings have been authorized, including an inter-parties review process. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. For more information, see Item 3. Legal Proceedings. +Regulatory Risks +The Need to Obtain Regulatory Approvals, Clearances, Authorizations or Certifications Could Increase the Company's Costs and Adversely Affect Its Financial Performance. +Many of the Company's proposed and existing products and services are subject to regulation by the FDA and other governmental or public health agencies. In particular, the Company is subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of its products and the processes and procedure for its laboratory services. The Company's practice is to train its employees on the legal requirements applicable to its business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances, other premarket authorizations or certifications can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances, other premarket authorizations or certifications can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations or certifications. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product or a laboratory certification will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, premarket authorization or certification that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization or certification, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive such approvals, clearances, premarket authorization or certification could have a material adverse effect on the Company's business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the requirements of the relevant EU in vitro diagnostic medical devices legislation. The new EU Regulation 2017/746 on in vitro diagnostic medical devices ("IVDR"), became applicable on May 26, 2022 and repealed the previous Directive 98/79/EC, ("IVDD"). There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the IVDR (subject to compliance with certain requirements under the IVDR, including in respect of post-market surveillance); however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022, while Class D devices benefit from such transitional provisions until May 26, 2025. On January 23, 2024, the European Commission introduced a legislative proposal to extend such transitional provisions for certain devices. The European Commission has provided the legislative proposal to the European Parliament and the European Council for their review and approval. Once the European Commission’s legislative proposal is approved (with or without amendment), it will be adopted into EU law. The Company has obtained the CE mark for several of its existing products under the IVDD. It also intends to apply for CE marks for certain of its future products and is not aware of any material reason why it would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the IVDR will be demonstrated and the CE mark will be obtained or maintained for all products that the Company desires to sell in the EU. The failure to obtain or maintain the CE mark for one or more of the +40 +Table of Contents +Company's products could lead to the termination of strategic alliances and agreements for sales of those products in the EU and mean that the Company is unable to sell such products in the EU. +In addition, the Company or its distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before it can import and sell its products in foreign countries. The Company may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable its customers to access interested funding sources for its products. The Company may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit the Company's ability to market and sell its products in the relevant country. In addition, any change in the Company's arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting the Company's ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require the Company to Suspend Production or Sale of Its Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of the Company's operations and the operations of its suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and recordkeeping. The Company is subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. The Company believes that its facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and the Company cannot be sure that the FDA or other regulators will agree with its compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on the Company or its distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of the Company's suppliers to supply critical components or materials and of its distributors to sell its products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect the Company's revenues, costs and results of operations. +Some of the Company's products, particularly those sold by DNAG, are sold for research purposes in the U.S. The Company does not promote these products for clinical diagnostic use and they are labeled “For Research Use Only” ("RUO"). If the FDA were to disagree with the Company's RUO designation of a product, the Company could be forced to recall and/or stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, the Company must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which the Company has sought to comply with these regulations, it could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of its products. The assessment of any civil and criminal penalties against the Company could severely impair its reputation within the industry and any limitation on its ability to manufacture and market its products could have a material adverse effect on the Company's business. +The Company's Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Its Business. +The Company believes that its products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of its products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to the Company's products, necessitate additional clinical trials or procedures, or make it impractical or impossible for it to market its products for certain uses, in certain markets, or at all. +41 +Table of Contents +The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval or clearance and/or impose new or additional requirements as part of the approval or clearance process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell the Company's products. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +The Company Is Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase the Company's Costs and Affect Its Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict the Company's ability to sell products in those states. While the Company intends to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee it will be successful in these efforts. +The Company must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which it advertises its products. As a device manufacturer, the Company is required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value it has made to physicians and teaching hospitals and any physician ownership or investment interest in the Company's business. In the U.S., before the Company can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, it generally must first receive either 510(k) clearance or De Novo authorization or approval of a PMA from the FDA. Similarly, most major markets for medical devices outside the U.S. also require clearance, approval, authorization or compliance with certain standards before a product can be commercially marketed. Compliance with these laws or any new or changed laws regulating the Company's business could result in substantial costs. Because of the number and extent of the laws and regulations affecting the Company's industry, and the number of governmental agencies whose actions could affect its operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that the Company does not comply, its business and results of operations could be adversely affected. +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase the Company's Costs. +In the past, the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) has generally affected the Company indirectly, as the Company is generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities. The Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If it does not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, it could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, the Company may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. Moreover, the potential for enforcement action against the Company is now greater, as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while the Company believes it is and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of the Company's business. For example, it could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +Failure to Comply With Data Protection Requirements or Privacy Laws Could Increase the Company's Costs . +The Company is subject to European data protection regulations where it collects and uses personal data related to Europe. This includes the EU General Data Protection Regulation (“GDPR”) as well as other national data protection legislation in force in relevant European Economic Area (“EEA”) member states, which govern the collection, use, storage, disclosure, transfer, or other processing of personal data: (i) regarding individuals in the EEA; and/or (ii) carried out in the context of the activities of the Company's establishment in any EEA member state. Failure to comply with the GDPR, and any supplemental European Economic Area (“EEA”) country’s national data protection laws which may apply by virtue of the location of the individuals whose personal data the Company collects, may result in fines and other administrative +42 +Table of Contents +penalties, including fines of up to the greater of 4% of worldwide turnover and €20 million. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. The GDPR imposes several mandatory requirements on companies that process personal data, including requirements relating to the processing of health and other sensitive data, legal basis for processing personal data which may include obtaining the consent of the individuals to whom the personal data relates, providing notice to individuals about personal data processing activities, having data processing agreements with third parties who process personal data, notification of personal data breaches to data protection authorities and individuals, and the implementing of safeguards to protect the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EEA to third countries, including the United States in certain circumstances, unless a derogation exists or a valid GDPR transfer mechanism (for example, the European Commission approved Standard Contractual Clauses, or SCCs) have been put in place and a transfer impact assessment carried out. Any inability to transfer personal data from the EEA to the United States in compliance with data protection laws may impede the Company's ability to conduct trials and may adversely affect its business and financial position. Complying with the enhanced obligations imposed by the GDPR imposes additional obligations and risk upon the Company's business, and may result in significant costs to its business and require it to amend certain of its business practices. Further, the Company has no assurances that violations will not occur, particularly given the complexity of the GDPR. +The Company is also subject to the California Consumer Privacy Act of 2018 (“CCPA”), which took effect on January 1, 2020. The CCPA imposes extensive new requirements and protections on the processing of personal data, aimed at giving California consumers more visibility and control over their personal information. Failure to comply with the CCPA or other data processing or security laws, or any changes in these laws, could adversely impact the Company's business and its business plans. In 2020, California residents voted the California Privacy Rights Act (the "CPRA") into law. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. The CPRA also created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the CPRA provisions became effective on January 1, 2023, and additional compliance investment and potential business process changes may be required. Similar laws have been proposed, and likely will be proposed, in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that would make compliance challenging. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For the Company's Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests ("LDTs"), but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by the FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. The Company cannot predict what policies will be adopted with respect to regulating LDTs. The FDA has been working with regulatory advocacy groups to bring forward legislative approaches specifically for in vitro diagnostic tests including LDTs. For example, in 2021, the Verifying Accurate, Leading-edge, IVCT Development ("VALID") Act was introduced to Congress and provided a framework to change IVDs and LDTs to in vitro clinical tests ("IVCTs"). The proposed regulation would give the FDA oversight of LDTs once it becomes law. In 2022, the VALID Act was incorporated into the Senate user fee bill but was not included in the year-end Consolidated Appropriations Act of 2022. Subsequently, the VALID Act was introduced to Congress again in March 2023. +On October 3, 2023, the FDA published a proposed rule on LDTs, in which the FDA proposes to end enforcement discretion for virtually all LDTs in five stages over a four-year period from the date the FDA publishes a final rule. In Phase 1 (effective one year post-finalization), laboratories would be required to comply with medical device (adverse event) reporting and correction/removal reporting requirements. In Phase 2 (effective two years post-finalization), +43 +Table of Contents +laboratories would be required to comply with all other device requirements (e.g., registration/listing, labeling, investigational use), except for quality systems and premarket review. In Phase 3 (effective three years post-finalization), laboratories would be required to comply with quality systems requirements. In Phase 4 (effective three and a half years post-finalization, but not before October 1, 2027), laboratories would be required to comply with premarket review requirements for high-risk tests (i.e., tests subject to the PMA requirement). Finally, in Phase 5 (effective four years post-finalization, but not before April 1, 2028), laboratories would be required to comply with premarket review requirements for moderate- and low-risk tests (i.e., tests subject to De Novo or the 510(k) requirement). Unlike previous proposals, the proposed rule does not include provisions that would allow for “grandfathering” of existing tests. The content and timing of any final rule on LDTs is uncertain at this time. +The Company's subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDTs and reduce demand for DNAG’s products and adversely impact the Company's revenues. +In recent years, the Department of Justice indicted a number of telemedicine companies and cancer genetic testing laboratories for allegedly submitting fraudulent insurance claims to Medicare. A number of these companies were customers of DNAG. As a result of these activities, the FDA has issued letters to genetic testing laboratories indicating that it plans to increase oversight of this market which has caused some of these companies to stop providing testing options or to change how they are reporting the information provided by the testing. The activities have negatively affected this market and there is a risk that these enforcement actions will continue to negatively affect this market by forcing laboratories to either stop offering such services or restricting the use of such services. Such a reduction in testing could result in decreased sales of the Company's DNA collection devices. +The Company's International Sales Create Potential Exposure Under Anti-Corruption Laws . +The Company has a policy in place prohibiting its employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the FCPA and similar foreign laws. In 2023, approximately $43.8 million of the Company's consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject the Company to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. The Company has operations, enters into agreements with third parties, and makes sales in countries known to experience corruption. Further international expansion, including the acquisition of foreign entities, may create increased exposure to such practices. The Company's activities in these countries creates the risk of unauthorized payments or offers of payments by one of the Company's employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to the Company's control. It is the Company's policy to implement safeguards to discourage these practices by its employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of its distributors. However, the Company's existing safeguards and any future improvements may not prove to be effective, and its employees, consultants, sales agents or distributors may engage in conduct for which the Company might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and the Company may be subject to other liabilities, which could negatively affect its reputation, business, results of operations and financial condition. +Risks Relating to the Economy, the Company's Financial Results, Investments, Credit Facilities and Need for Financing +The Company Has Experienced Losses in the Past and May Not Be Able To Again Achieve and Maintain Profitable Operations . +The Company has experienced annual net losses during the five years prior to 2015 and between 2020 through 2022. In addition, as of December 31, 2023, the Company had an accumulated deficit of $83.9 million. Even though the Company achieved profitability in 2015 through 2019 and in 2023 there can be no assurance that it will be able to achieve or sustain profitability in the future. +The Company's ability to achieve and continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +44 +Table of Contents +• The Company's ability to continue growing sales of its molecular sample management solutions and related genomic and microbiome laboratory services; +• The Company's ability to produce and successfully commercialize its InteliSwab® COVID-19 Rapid Tests and compete with comparable products; +• The Company's ability to grow its OraQuick ADVANCE ® HIV 1/2 test in the United States and expand sales of its OraQuick® HIV Self-Test internationally; +• Changes in the markets in which the Company operates, including changes in the prevalence of COVID-19; +• Changes in customer buying patterns or a buildup of significant quantities in the Company's distributors’ inventories or distribution channels; +• The level of expenditures the Company is required to make in order to develop, obtain regulatory approvals for and successfully commercialize its new products; +• The Company's ability to expand its business through the acquisition of other companies or technologies or through internal development of new or improved products; +• The Company's ability to realize revenues and other anticipated benefits from its distribution relationship with Sapphiros; +• The Company's ability to improve manufacturing efficiencies and reduce cost of goods sold; +• The Company's ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• The degree to which the Company's major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +• Whether the Company or entities in which it invests are successful in obtaining and maintaining required regulatory approvals and registrations for its new products; +• The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with the Company's products; +• Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; +• Global economic and political instability and conflicts, such as terrorism, civil unrest, war and natural disasters in foreign countries; +• Failure to achieve the Company's revenue growth targets; and +• The costs and results of patent infringement, product liability and other litigation or claims asserted by or against the Company. +Recent Volatility In Capital Markets and Lower Market Prices For the Company's Securities May Affect Its Ability to Access New Capital Through Sales of Shares of Its Common Stock or Issuance Of Indebtedness, Which May Materially Harm Its Liquidity, Limit Its Ability to Grow Its Business, Pursue Acquisitions or Improve Its Operating Infrastructure and Restrict Its Ability to Compete in Its Markets . +The Company's operations consume substantial amounts of cash, and it intends to continue to make significant investments to support its business growth, respond to business challenges or opportunities, develop new solutions, retain or expand its current levels of personnel, improve its existing solutions, enhance its operating infrastructure, and potentially acquire complementary businesses and technologies. The Company's future capital requirements may be significantly different from its current estimates and will depend on many factors, including the need to: +• finance unanticipated working capital requirements; +• develop or enhance its technological infrastructure and its existing solutions; +• pursue acquisitions or other strategic relationships; and +• respond to competitive pressures. +45 +Table of Contents +Accordingly, the Company may need to pursue equity or debt financing to meet its capital needs. With uncertainty in the capital markets and other factors, such financing may not be available on terms favorable to the Company or at all. If the Company raises additional funds through further issuances of equity or convertible debt securities, its existing stockholders could suffer significant dilution, and any new equity securities the Company issues could have rights, preferences, and privileges superior to those of holders of its common stock. Any debt financing secured by the Company in the future could involve additional restrictive covenants relating to its capital-raising activities and other financial and operational matters, which may make it more difficult for it to obtain additional capital and to pursue business opportunities, including potential acquisitions. If the Company is unable to obtain adequate financing or financing on terms satisfactory to it, the Company could face significant limitations on its ability to invest in its operations and otherwise suffer harm to its business. +Economic Volatility and Disruption, Including Those Related to the COVID-19 Pandemic, Could Adversely Affect the Company's Business, Financial Performance, Results of Operations, Cash Flow and Financial Condition or Those of Its Customers and Suppliers . +Global and U.S. markets and economies have experienced extreme volatility and disruption following the global outbreak of COVID-19 that has continued throughout 2023. Volatile economic conditions may occur again or continue in the future. +Impacts of the COVID-19 pandemic that the Company has or may experience in the future include, but are not limited to: +• a slowdown or stoppage in the supply chain of the raw materials and components used to manufacture its products; +• interruptions or delays in domestic and/or international shipment of its products to its distributors and customers; +• interruptions in normal operations of certain end-use customers that could result in reductions in demand for its products; +• disruptions to the Company's operations, including a shutdown of its facilities or product lines; restrictions on its operations and sales, marketing and distribution efforts; and interruptions to its research and development, manufacturing, clinical/regulatory and other important business activities; +• shutdown or interruption of the Company's manufacturing facilities due to contamination and costs incurred to clean and disinfect a facility following contamination; +• inefficiencies and increased costs in the Company's production and shipping processes due to premium pay for manufacturing and certain other employees as well as social distancing and personal protective equipment requirements; +• limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions; +• a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties; +• an increase in exposure to credit losses for customers adversely affected by the COVID-19 pandemic; and +• an increase in regulatory restrictions or continued market volatility could hinder the Company's ability to execute strategic business activities, including acquisitions. +These conditions could adversely affect the Company's financial performance and condition or those of its customers and suppliers. These circumstances could also adversely affect the Company's access to liquidity needed to conduct or expand its business or conduct future acquisitions or make other discretionary investments. Many of the Company's customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact the Company's customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute the Company's products or supply it with necessary equipment, raw materials or components. Any or all of these effects would have an adverse effect on the Company's operations, business, financial condition and results of operations. +46 +Table of Contents +Although there are positive signs that COVID-19 has begun to subside as compared to the height of the pandemic, the duration of the COVID-19 pandemic is still unknown, and it is difficult to predict the full extent of potential impacts the pandemic will have in the future on the Company's business, operations, and financial results, or on its customers, suppliers or logistics providers, or on the global economy as a whole. It is uncertain how materially the COVID-19 pandemic will affect the Company's global operations, particularly if the effects continue or get worse over an extended period of time. Even with the improvement of economic conditions, it may take time for the Company's customers and suppliers to establish new budgets and return to normal purchasing and shipping patterns. The Company cannot predict the re-occurrence of any economic slowdown or the strength or sustainability of an economic recovery. +Rising Inflation Rates Could Negatively Impact the Company's Revenues and Profitability if Increases in the Prices of Its Products or a Decrease in Consumer Spending Results in Lower Sales. In Addition, if the Company's Costs Increase and the Company Is Not Able to Pass Along These Price Increases to Its Customers, Its Net Income Would Be Adversely Affected, and the Adverse Impact May Be Material. +Inflation rates, particularly in the United States, have increased recently to levels not seen in years. Increased inflation may result in decreased demand for the Company's products and services, increased operating costs (including the Company's labor costs), reduced liquidity, and limitations on its ability to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve previously raised, and may again raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, the Company may be unable to raise the sales prices of its products at or above the rate at which its costs increase, which could/would reduce its profit margins and have a material adverse effect on its financial results and net income. The Company may also experience lower than expected sales and potential adverse impacts on its competitive position if there is a decrease in consumer spending or a negative reaction to its pricing. A reduction in the Company's revenue would be detrimental to its profitability and financial condition and could also have an adverse impact on its future growth. +An Impairment of Goodwill and Intangible Assets Could Reduce the Company's Earnings . +At December 31, 2023, the Company's consolidated balance sheet reflected approximately $35.7 million of goodwill and approximately $1.2 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles (“U.S. GAAP”) require the Company to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, such as intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment review often cannot be done at the level of the individual asset and it must instead be applied to a group of assets. For the purpose of the Company's annual goodwill impairment testing based on the current circumstances of how the Company manages or business, this group of assets is the Company as a whole. If the Company determines that any of its goodwill or intangible assets were impaired, it will be required to take an immediate charge to earnings and its results of operations could be adversely affected. The Company recognized a pre-tax impairment charge of $8.5 million related to intangible assets during the year ended December 31, 2023, which is reported in loss on impairments in the Company's consolidated statement of operations. +Changes in Foreign Currency Exchange Rates Could Negatively Affect the Company's Operating Results. +The Company's financial statements are stated in U.S. dollars and, historically, most of its international sales have also been denominated in U.S. dollars. As a result, in the past the Company's exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks since changes in the values of foreign currencies relative to the value of the U.S. dollar can render the Company's products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of the Company's products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of the Company's subsidiary, DNAG, are recorded in Canadian dollars and the revenues and expenses of its subsidiary Novosanis are recorded in Euros. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting consolidated financial results. The Company's expectation is that the businesses of its foreign subsidiaries will continue to grow and its exposure to foreign currency exchange rates may be more significant than in past years. +47 +Table of Contents +Exchange rate fluctuations may affect the revenues and expenses of the Company's foreign subsidiaries and the translation of those financial results into U.S. dollars. Favorable movement in exchange rates have benefited the Company in prior periods. However, where there are unfavorable currency exchange rate fluctuations, the Company's consolidated financial statements including its balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, the Company has not generally entered into hedging instruments to manage its currency exchange rate risk, but it may need to do so in the future. However, the Company's attempts to hedge against these risks may not be successful. If the Company is unable to successfully hedge against unfavorable foreign currency exchange rate movements, its consolidated financial results may be adversely impacted. +Risks Relating to the Company's Common Stock +The Company's Stock Price Could Continue to be Volatile. +The Company's stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for the Company's Common Stock: +• The performance of the Company's business, including its efforts to increase sales of OraQuick ® HIV, HCV and Molecular sample management solutions and its OraQuick ® In-Home HIV test and HIV Self-Test; +• The Company's efforts to expand sales of its genomic and microbiome laboratory service offerings; +• The Company's efforts to produce and commercialize its InteliSwab® Covid-19 Rapid Tests; +• Future announcements concerning the Company and its products or services, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions; +• Clinical results with respect to the Company's products or services or those of its competitors; +• The status of clinical studies and pending submissions for required regulatory approvals; +• The announcement of regulatory or enforcement actions by the FDA or other agencies against the Company, its products or services, or one or more of its customers; +• The gain or loss of significant contracts and availability of funding for the purchase of the Company's products and services; +• Delays in the development, regulatory approval or commercialization of new or enhanced products or services; +• Legislative developments and industry or competitive trends; +• Biological or medical discoveries; +• Disputes or developments with key customers, distributors or suppliers; +• Developments in patent or other proprietary rights; +• Litigation or threatened litigation; +• Complaints or concerns about the performance or safety of the Company's products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about the Company by securities analysts or major stockholders; +• Governmental regulation; +• Changes in the level of competition; +48 +Table of Contents +• Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• Period-to-period fluctuations in the Company's operating results; +• Additions or departures of key personnel; +• General market and economic conditions; and +• Terrorist attacks, civil unrest, war and national disasters, including pandemics. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of the Company's Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If the Company were subject to this type of litigation in the future, it could incur substantial costs and experience a subsequent diversion of management’s attention and resources, each of which could have a material adverse effect on the Company's revenue and earnings. Any adverse determination in this type of litigation could also subject the Company to significant liabilities. +Future Sales of the Company's Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Its Common Stock and Make It More Difficult for the Company to Sell Stock in the Future. +Sales of the Company's Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of its Common Stock. The Company is unable to estimate the number of shares of its Common Stock that may actually be resold in the public market since this will depend on the market price for its Common Stock, the individual circumstances of the sellers and other factors. +The Company has a number of institutional stockholders that own significant blocks of its Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of the Company's Common Stock could be negatively affected. In addition, it is possible that one or more of the Company's executive officers or non-employee members of its Board of Directors could sell shares of its Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under the Company's Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of the Company's Common Stock. +Because the Company Does Not Intend to Pay Cash Dividends on Its Common Stock, an Investor in the Company's Common Stock Will Benefit Only if the Its Common Stock Appreciates in Value. +The Company currently intends to retain its current earnings and future earnings, if any, to finance the expansion of its business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. As a result, the success of an investment in the Company's Common Stock will depend entirely upon any future appreciation. There is no guarantee that OraSure's Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in the Company's Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of the Company Difficult. +The Company's Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire it, even if doing so would be beneficial to the Company's stockholders. The Company is also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of it. These provisions could limit the price investors might be willing to pay in the future for shares of the Company's Common Stock. +49 +Table of Contents +General Risk Factors +The Company May Face Product Liability Claims for Injuries Resulting From the Use of Its Products. +The Company may be held liable if any of its products, or any product which is made with the use or incorporation of any of its technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that the Company would be successful in defending any product liability lawsuits brought against it. Moreover, there is no assurance that the Company's products will not be included in unethical, illegal or inappropriate research or applications, which may in turn put the Company at risk of litigation. Regardless of merit or eventual outcome, product liability claims could result in: +• Decreased demand for the Company's products; +• Lost revenues; +• Damage to the Company's image or reputation; +• Costs related to litigation; +• Increased product liability insurance costs; +• Diversion of management time and attention; and +• Incurrence of damages payable to plaintiffs. +The Company is selling the InteliSwab ® COVID-19 Rapid Test and the OraQuick ® In-Home HIV test in the United States OTC market, and it offers HIV Self-Tests to consumers internationally. The Company believes the sale of products for use by consumers increases its potential exposure to product liability and other claims. +Performance of the Company's Products May Affect Its Revenues, Stock Price and Reputation. +The Company's products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, the Company's products may not perform as expected. For example, a defect in one of the Company's diagnostic or specimen collection products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used the Company's product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If the Company's products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of its customers, customers may switch to a competing product or otherwise stop using the Company's products, and the Company's revenues could be adversely affected. Under such circumstances, the Company may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase its costs. In addition, poor performance by one or more of the Company's products and publicity surrounding such performance could have an adverse effect on the Company's reputation, its continuing ability to sell products and the prevailing market price of its Common Stock. +The Company's Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products and Services. +The markets the Company serves are highly competitive and rapidly changing and it expects competition to intensify as technological advances are made and become more widely known, and as new products and services reach the market. Many of the Company's principal competitors have considerably greater financial, technical and marketing resources than it does. As new products and services enter the market, the Company's products and services may become obsolete or a competitor’s products and services may be more effective or attractive or more effectively marketed and sold than the Company's. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for new products and services that would render the Company's technologies, products and services obsolete or otherwise commercially unattractive, or introduce or commercialize such products and services before the Company can do so. If the Company fails to convince its customers of the advantages and economic value of its products and services or otherwise maintain and enhance its competitive position, its customers may decide to use products and services developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +50 +Table of Contents +The Company also faces competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or the Company may be forced to sell its products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of its products. The Company may also be required to increase its marketing efforts in order to compete effectively, which would increase its costs. +Failure to Achieve the Company's Financial and Strategic Objectives Could Have a Material Adverse Impact on Its Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that the Company will be successful in implementing its financial and strategic objectives, including its efforts to increase sales of its products and services or continue growing its business. In addition, the funds for research, clinical development and other projects have in the past come primarily from the Company's business operations. If the Company's business slows and it has less money available to fund research and development and clinical programs, it will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, the Company may be required to delay or scale back its business. The Company's operations will be adversely affected if its total revenue and gross profits do not correspondingly increase or if its technology, product, service, clinical and market development efforts are unsuccessful or delayed. Furthermore, the Company's failure to successfully introduce new or enhanced products and services and develop new markets could have a material adverse effect on its business and prospects. +If the Company Fails To Establish and Maintain Proper And Effective Internal Control Over Financial Reporting, Its Operating Results and Its Ability to Operate Its Business Could Be Harmed. +Ensuring that the Company has adequate internal financial and accounting controls and procedures in place so that it can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Company is required to comply with the requirements of the Sarbanes-Oxley Act of 2002, or SOX, which requires that it maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, the Company must perform system and process evaluation, document its controls and perform testing of its key controls over financial reporting to allow management and its independent public accounting firm to report on the effectiveness of its internal control over financial reporting, as required by Section 404 of SOX. The Company's testing, or the subsequent testing by its independent public accounting firm, may reveal deficiencies in its internal control over financial reporting that are deemed to be material weaknesses. For instance, management identified a material weakness in the Company's internal control over financial reporting related to customer pricing in the revenue recognition process and concluded that its disclosure controls and procedures were not effective due to the existence of the material weakness as of September 30, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. During the fourth quarter of 2023, the Company implemented controls to validate accurate pricing in customer sales orders. As a result the material weakness was remediated as of December 31, 2023. +If the Company Loses Key Personnel or Is Unable to Attract and Retain Qualified Personnel as Necessary, Its Business Could be Harmed. +The Company's success depends to a large extent upon the contributions of its executive officers, management and sales, marketing, operations and scientific staff. The Company's business may be harmed by the loss of a significant number of its executive officers or senior managers. It may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products, laboratory services and other life science businesses. The Company's ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of the Company, and the possibility for advancement within the organization. The Company generally does not enter into employment agreements requiring its employees to work for it for any specified period. +If the Company is not able to attract and retain the necessary personnel to accomplish its business objectives, it may experience constraints that will adversely affect its ability to effectively produce, market and sell its products and services, to meet the demands of its strategic partners in a timely fashion, or to support research, development and clinical programs. Although the Company believes it will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit its ability to do so on acceptable terms. +51 +Table of Contents +The Company has experienced a number of significant changes in its senior leadership in recent years and faces risks related to losses of key personnel and to any such changes that occur in key senior leadership positions. Although the Company has endeavored to implement any management and director transition in a non-disruptive manner, such transitions might impact its business, and give rise to uncertainty among its customers, investors, vendors, employees and others concerning its future direction and performance, which may materially and adversely affect its business, financial condition, results of operations and cash flows, and its ability to execute its business model. The Company can provide no assurance that it will find suitable successors to key roles as transitions occur or that any identified successor will be successfully integrated into the management team. +In addition, because certain members of the Company's management and board of directors have served in their respective capacities for only limited durations, the Company faces the additional risks that these persons have limited familiarity with the Company's past practices, its business and its industry and lack established track records in managing its business strategy. +Increases in Demand for the Company's Products and Services Could Require It to Expend Considerable Resources or Harm Its Customer Relationships if It Is Unable to Meet That Demand. +If the Company experiences significant or unexpected increases in the demand for its products and services, the Company and its suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new products, machinery or new manufacturing or laboratory facilities. This would increase the Company's capital costs, which could adversely affect its earnings. The Company's suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing or laboratory equipment and facilities may require FDA approval or government or industry certification before they can be used to manufacture the Company's products or provide laboratory services. To the extent the Company is unable to obtain or is delayed in obtaining such approvals, its ability to meet the demand for its products and services could be adversely affected. +If the Company is unable to develop necessary manufacturing or laboratory capabilities in a timely manner, its sales could be adversely affected. If the Company fails to increase these capabilities in a cost effective manner or if it experiences lower than anticipated yields or production or performance problems as a result of changes that it makes in its manufacturing or laboratory processes to meet increased demand, it could experience delays or interruptions and increased costs, which could also have a material adverse effect on its revenues and profitability. +Unexpected increases in demand for the Company's products may require it to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. The Company has long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for the Company, such as its potential inability to obtain an adequate supply of raw materials and components and its reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to the Company. Any shortfall in the Company's supply of raw materials and components, or its inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on its ability to meet increased demand for its products. This could negatively affect the Company's total revenues or cost of sales and related profits. +The Company's inability to meet customer demand for its products and services could also harm its customer relationships and impair its reputation within the industry. This, in turn, could have a material adverse effect on the Company's business and prospects. +The Company Relies on Information Technology in Its Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Its Ability to Efficiently Operate Its Business. +The Company relies heavily on enterprise resource planning and other complex information technology systems across its operations and on the internet, including for management of inventory, processing and analyzing laboratory specimens, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. The Company's ability to effectively manage its business, coordinate the production, distribution and sale of its products, process and analyze specimens in its laboratories, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +52 +Table of Contents +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales or the provision of laboratory services and reduced efficiency of the Company's operations. Significant expenditures could be required to remediate any such problem. +Cybersecurity Incidents and Other Disruptions Could Compromise the Company's Information, Expose It to Liability and Harm Its Reputation and Business. +In the ordinary course of business, the Company collects and stores sensitive and confidential data, including intellectual property, personal information, its proprietary business information and that of its customers, suppliers and business partners, and personally identifiable information of its employees in its data centers and on its networks. Secure maintenance and transmission of this information is critical to the Company's operations business strategy. It generally relies on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive and confidential data. +Cyber-attacks and other cybersecurity incidents such as ransomware, phishing, and social engineering attacks could result in unauthorized access to the Company's computer systems or its third-party IT service providers' systems and, if successful, misappropriate personal, sensitive, or confidential information. The Company has in the past and may in the future experience cybersecurity incidents. If successful, these attacks could lead to service interruptions, extortion, theft of confidential, personal or proprietary information, the compromise of data integrity or unauthorized information disclosure. Any technology service interruption or breach of the Company's systems could adversely affect its business operations and/or result in the loss or compromise of personal, sensitive, or confidential information or intellectual property. The Company maintains cyber liability insurance; however, this insurance may not be sufficient to cover the financial, legal, business or reputational losses that may result from an interruption or breach of the Company's systems. +The Company has outsourced significant elements of its IT infrastructure and, as a result, it manages relationships with third-party providers who may or could have access to the Company's sensitive and confidential information. The Company relies on technology developed, supplied and/or maintained by third-parties that may make the Company vulnerable to “supply chain” style cyber-attacks. Further, technology and security vulnerabilities of acquisitions, business partners or third-party providers may not be identified during due diligence or soon enough to mitigate exploitation. The size and complexity of the Company's IT and information security systems, and those of its third-party providers (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security incidents from inadvertent or intentional actions by, but not limited to, Company employees, service providers, business partners, customers or malicious attackers. In addition, a contractor or other third party with whom the Company does business may attempt to circumvent its security measures or obtain such information, and may purposefully or inadvertently cause an incident involving sensitive information. While the Company will continue to evaluate and implement additional protective measures to reduce the risk and detect cybersecurity incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite the Company's cybersecurity measures, its information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to cybersecurity incidents, compromises, or malfeasance. +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted cybersecurity incidents are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of the Company's or its third party’s IT service providers’ data security and access, public disclosure, or loss of personal, sensitive, or confidential business information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt the Company's operations, require significant management attention and resources to remedy any damages that result, and damage the Company's reputation and customers willingness to transact business with it, any of which could adversely affect its business. +As the Company's activities continue to evolve and expand, it may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact its business either directly or indirectly. The Company's failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact its business and future business plans. +53 +Table of Contents +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect the Company's Business, Financial Condition and Results of Operations. +The Company is subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until the Company is in full compliance with these laws, it could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm its business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require the Company to change its business practices or subject its business practices to legal challenges, which could have a material adverse effect on its business, financial condition and results of operations. +The Company May Experience Fluctuations in Its Financial Results or Fail to Meet Its Financial Projections. +The Company's operating results can fluctuate from quarter to quarter and year to year, which could cause its growth or financial performance to fall below the expectations of investors and securities analysts. The Company's financial projections for future periods are based on a number of assumptions, including estimated demand for its products. However, sales to its distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of the Company's financial results. +Customers in certain of the markets the Company serves often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in the Company's sales from year-to-year. This can make it difficult to accurately forecast whether the Company will achieve its quarterly sales forecasts and can cause variability in its operating results. +In addition, the Company's products provide different contributions to its gross margin. Accordingly, its operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect the Company's reputation and the price of its Common Stock. +The Company May Require Future Additional Capital. +The Company's future liquidity and ability to meet its future capital requirements will depend on numerous factors, including, but not limited to, the following: +• The costs, scope and timing of strategic acquisitions; +• The costs and timing of expansion of sales and marketing activities; +• The timing and success of the commercial launch of new products or services; +• The extent to which the Company gains or expands market acceptance for existing, new or enhanced products and services; +• The costs and timing of the expansion of the Company's manufacturing and laboratory capacity; +• The success of the Company's research and product development efforts; +• The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• The magnitude of capital expenditures; +54 +Table of Contents +• Changes in existing and potential relationships with distributors and other business partners; +• The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• The costs and liability associated with patent infringement or other types of litigation; and +• Competing technological and market developments. +If additional financing is needed, the Company may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to the Company on satisfactory terms, or at all. +Conditions in the Banking System and Financial Markets, Including the Failure of Banks and Financial Institutions, Could Have an Adverse Effect on the Company's Operations and Financial Results. +Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10 and March 12, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank, and Signature Bank and Silvergate Capital Corp, respectively, after each bank was unable to continue their operations. Since then, additional financial institutions have experienced similar failures and have been placed into receivership. It is possible that other banks will face similar difficulty in the future. +Although the Company does not maintain any deposit accounts, credit agreements or letters of credit with any financial institution currently in receivership, it is unable to predict the extent or nature of the impacts of these evolving circumstances at this time. If, for example, other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, the Company's ability to access its existing cash, cash equivalents and investments may be threatened. While it is not possible at this time to predict the extent of the impact that the failure of these financial institutions or the high market volatility and instability of the banking sector could have on economic activity and the Company's business in particular, the failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact the Company's business, financial condition and results of operations +Terrorist Attacks, Natural Disasters, Public Health Crises, Political Unrest or Other Catastrophic Events Outside of the Company's Control May Adversely Affect Its Business. +Terrorist attacks, natural disasters, including disasters attributable to climate change impacts, public health crises, political unrest or other catastrophic events outside of the Company's control, including pandemics, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for the Company's products. For example, the COVID-19 outbreak has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, including the United States. This outbreak has resulted in, and until fully resolved is likely to continue to result in, among other things: (i) restrictions on travel, government mandated social distancing measures, and the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories; (ii) significant disruption to the business of many companies, including the Company's customers and suppliers, as well as layoffs of employees; (iii) reduction or termination by public health and other customers of infectious disease testing programs, including for HIV and HCV, and a reallocation of personnel and monetary resources from these programs to programs intended to address COVID-19; (iv) reduction or termination of clinical and research studies by academic and other entities that use the Company's molecular sample management solutions and molecular laboratory services; and (v) rapidly evolving proposals and actions by state and federal governments to address the problems being experienced by markets, businesses and the economy in general, which may have unintended consequences or may not adequately address such problems. These events have disrupted, and threaten to continue to disrupt, the Company's normal operation, the operations of its customers and suppliers and eliminate, reduce or delay its customers’ ability to purchase and use its products and its suppliers’ ability to provide raw materials and finished products. Despite the Company's efforts to manage and mitigate the impact of these events on itself, it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty under applicable laws or regulations that impact the Company. It is clear that these types of events are impacting and will, for at least some time, continue to impact the Company's product development and operation and in many instances the impact +55 +Table of Contents +may be adverse and may be material. Any potential impact to the Company's results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the spread or treat its impact, all of which are beyond the Company's control. These potential impacts, while uncertain, could adversely affect the Company's business and results of operation. In addition, the impacts of political unrest, including as a result geopolitical tension, such as a deterioration in the relationship between the United States and China, escalation of tensions between China and Taiwan, or escalation in conflict between Russia and Ukraine or between Israel and the various countries in the surrounding regions, including any resulting sanctions, export controls or other restrictive actions that may be imposed by the United States and/or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability and volatility in the global markets, which may have an adverse impact on the Company's business or ability to access the capital markets. +Various types of disasters, including earthquakes, fires, floods, riots, acts of terrorism and pandemics, may also affect the Company's manufacturing facilities and computer systems, and increase its cybersecurity risks. Although the Company has business interruption insurance, its facilities, including some pieces of manufacturing equipment and its computer systems, may be difficult to replace and could require substantial replacement lead-time. In the event the Company's existing manufacturing facilities or computer systems are affected by man-made or natural disasters, including pandemics, it may have difficulty operating its business and may be unable to manufacture products for sale or meet customer demands or sales projections. If the Company's manufacturing operations were curtailed or shut down entirely, it would seriously harm its business. Moreover, the Company may incur incremental costs following an unforeseen event which could adversely affect its results of operation. +The Ongoing Conflict Between Russia and Ukraine, and the Israel-Hamas War, and the Related Implications Could Have a Material Adverse Effect on the Company's Business And Results Of Operations. +As a result of the ongoing military conflict between Russia and Ukraine, the United States and other countries have imposed significant sanctions on Russia and could impose even wider sanctions. Such sanctions could damage or disrupt international commerce and the global economy. The Company cannot predict the broader or longer-term consequences of the conflict in Ukraine or Israel, or of the sanctions imposed to date, which could include embargoes, regional instability, geopolitical shifts, exchange rate fluctuations, financial market disruptions and economic recession. Further, the conflict in Ukraine or Israel could exacerbate supply chain challenges, lead to an increase in cyberattacks, affect the global price and availability of key commodities, reduce the Company's sales and earnings or otherwise have an adverse effect on its business and results of operations. +In addition, the conflict between Russia and Ukraine and the Israel-Hamas war may have the effect of heightening other risks disclosed in this Annual Report, any of which could materially and adversely affect the Company's business and results of operations. Such risks include but are not limited to interruptions in the transportation channels for the manufacture and global distribution of the Company's products, heightened inflation, depressed levels of consumer and commercial spending, disruptions to its global technology infrastructure, adverse changes in international trade policies and relations, and the inability to implement and execute its business strategy. The Company is currently unable to predict the extent, nature or duration of any of these occurrences. +Future Sales of Shares of the Company's Common Stock Could Adversely Affect the Trading Price of Its Common Stock and Its Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of the Company's shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of the Company's Common Stock, and could impair its ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of the Company's Common Stock. +ITEM 1B. Unresolved Staff Comments. +None +ITEM IC. Cybersecurity. +56 +Table of Contents +Cybersecurity Risk Management and Strategy +Our management recognizes the impact that cybersecurity threats could have on our business operations, our compliance with regulations, and our reputation. We have identified cybersecurity as a critical business risk as part of our overall risk management strategy, which our board of directors oversees. +We have implemented an information security management system in accordance with our risk profile and business that is designed to protect the Company, our employees, and our customers from cybersecurity threats. This system, which is informed by the National Institute of Standards and Technology (NIST) Cybersecurity Framework, includes, among other things, written policies, technical controls, and employee training. We have also developed an incident response policy and procedure designed to facilitate the handling of cybersecurity incidents. +Our cybersecurity risk management program, which is part of our enterprise risk management program, aims to identify risks from cybersecurity threats. Our cybersecurity risk management program includes a number of components, including informal self-assessments, penetration testing, and vulnerability assessments. Our managed security services provider helps us implement additional security controls, including malware protection and network security tools. +We take a risk-based approach to the evaluation of third-party vendors, and apply mitigations and processes based on our evaluation of the sensitivity of the data accessed by the vendor and the maturity of the vendor’s programs. We use a third-party tool to assess the degree of risk posed by the vendor, and are in the process of developing a vendor security questionnaire. +We have not identified any cybersecurity incidents or threats that have materially affected us or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition. However, like other companies in our industry, we and our third-party vendors have from time to time experienced threats and cybersecurity incidents that could affect our information or systems. For more information, see Item 1A. Risk Factors. +Governance Related to Cybersecurity Risks +Our vice president of information technology (“VP of IT”) is responsible for the strategic leadership and direction of the Company’s information security management system. Our VP of IT has 25 years experience managing IT teams, including 10 years managing IT security teams. Led by the VP of IT, along with our Senior Manager of IT Security, the IT leadership team meets at least annually, and more frequently as needed, to review the Company’s cybersecurity objectives and take steps to further the suitability and effectiveness of the Company’s information security program. The output from these meetings are reviewed periodically with senior management. We are also in the process of establishing a cybersecurity management committee comprised of IT, communications, finance, legal and product personnel. +The board and Audit Committee oversee the management of risks by the Company’s executives. The Audit Committee, pursuant to its charter, is responsible for reviewing the Company’s cybersecurity program and risks, as identified by Company management, and the steps that Company management has taken to protect against threats to the Company’s assets including information systems and data security. The VP of IT provides updates to the Audit Committee approximately annually, which include, as appropriate, a description of risks from cybersecurity threats. +ITEM 2. Properties. +We own a 31,700 square foot facility that houses our primary corporate office, our sales and marketing, research and development, human resources, and regulatory and quality offices, a 48,000 square foot facility and a 33,500 square foot facility which are used for manufacturing activities, and we lease an additional 139,000 square foot manufacturing facility, which is primarily dedicated to the production of our InteliSwab ® COVID-19 Rapid Tests. Each of these facilities is located in Bethlehem, Pennsylvania. Our subsidiary, DNAG, also leases a 35,883 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, manufacturing, distribution, research and development, and regulatory and quality operations. Our other subsidiaries, Diversigen and Novosanis, also lease facilities for their operations. +The Company believes that the facilities described above are adequate for our current requirements. +57 +Table of Contents +ITEM 3. Legal Proceedings. +From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations. +In June 2021, the Company filed a complaint against Spectrum Solutions, LLC (“Spectrum”) in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum filed an answer to the initial complaint, asserting that its device does not infringe the Company’s patent and that the Company’s patent is invalid. In August 2021, the Company amended its complaint to add a second patent to this litigation. Spectrum responded to the Company's amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office (“PTO”), which was granted by the PTO. The District Court issued multiple pretrial orders, resolving the infringement, antitrust, and inequitable conduct claims without trial. First, the District Court granted Spectrum’s motion for summary judgment of noninfringement, holding that Spectrum’s saliva collection devices are not “kits for collecting and preserving a biological sample,” among other rulings. The Company appealed the grant of summary judgment to the Court of Appeals on June 8, 2023. The appeal is pending, with oral argument expected in the second half of 2024. Second, the Court denied Spectrum’s motion to supplement its allegations of alleged antitrust violations, finding that if such an amendment were allowed, Spectrum’s claims would not survive a motion for summary judgment. Spectrum thereafter withdrew its antitrust and inequitable conduct counterclaims. Spectrum did not appeal the District Court's denial of its motion to amend. On February 7, 2024, the PTO issued a Final Written Decision regarding the second patent in the litigation, holding that claims 1, 3–8, 11, and 12 of U.S. Patent No. 11,002,646 B2 are unpatentable. The Company is considering its appellate options. On September 15, 2023, Spectrum filed a separate petition for inter partes review of a third patent, which DNAG did not assert in the District Court. The Company filed a preliminary patent owner response on December 28, 2023. That petition remains pending. +ITEM 4. Mine Safety Disclosures. +Not Applicable. +58 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +The Company's Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “OSUR”. On February 16, 2024, there were 276 holders of record and approximately 24,589 holders in street name of the Company's Common Stock, and the closing price of its Common Stock was $6.75 per share. +Dividends +The Company has never paid any cash dividends and its Board of Directors does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any future earnings to provide funds for the operation and expansion of its business. +Share Repurchases and Retirements +Period Total number of +shares purchased Average price +paid per Share Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar value) +of shares that may yet be +repurchased under the plans +or programs (1, 2) +October 1, 2023 - October 31, 2023 669 +(3) +$ 5.66 — 11,984,720 +November 1, 2023 - November 30, 2023 4,987 +(3) +5.64 — 11,984,720 +December 1, 2023 - December 31, 2023 676 +(3) +8.01 — 11,984,720 +6,332 — +(1) On August 5, 2008, the Board of Directors approved a share repurchase program pursuant to which the Company is permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. The Company has made no commitment to purchase any shares under this plan. +(3) Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted and performance shares, these shares were retired to satisfy minimum tax withholdings. +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the Nasdaq Composite Index, and the Nasdaq Health Care Index for the period from December 31, 2018 through December 31, 2023. The graph assumes that $100 was invested on December 31, 2018 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +The Nasdaq Composite Index was chosen because it is a broad index of companies whose equity securities are traded on Nasdaq. The Nasdaq Health Care Index was chosen as it includes companies relevant to the Company's current business, it utilizes this index as a benchmark for compensation decisions, and many healthcare investors look to this index as an appropriate benchmark for stock performance. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +59 +Table of Contents +Fiscal year ending December 31, +2018 2019 2020 2021 2022 2023 +OraSure Technologies, Inc. 100.00 68.75 90.63 74.40 41.27 70.21 +NASDAQ Composite 100.00 136.69 198.10 242.03 163.28 236.17 +NASDAQ Health Care 100.00 110.75 140.85 126.71 95.29 96.06 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under the Company's equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +Item 6. Reserved +Not Applicable +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to +60 +Table of Contents +provide complete information about the Company, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The Company undertakes no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2023 (this "Annual Report") generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. +Business Overview +The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. These products include tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes molecular sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Additionally, the Company offers laboratory and bioinformatics services for both genomics and microbiome customers. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +Recent Developments +In 2022, the Company's business consisted of two segments: the “Diagnostics” segment, and the “Molecular Solutions” segment. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the "Diagnostics" segment and the "Molecular Solutions" segment, into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. The Company's product portfolio is broadly divided into diagnostics products and sample management solutions. +In January 2024, the Company announced that it is leading the Series B financing and have entered wide-ranging strategic distribution agreements with KKR Sapphiros L.P. ("Sapphiros"), a privately held consumer diagnostics portfolio company based in Boston, and certain of its related entities. Through this strategic relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic tests and molecular sample management solutions to the Company's customers globally. +The Company has funded approximately $28.3 million for a minority interest in Sapphiros, with an aggregate commitment of up to $30.0 million to be funded by June 2024, contingent on certain terms and conditions being met. +61 +Table of Contents +Results of Operations +The Company's consolidated net income for the year ended December 31, 2023 was $53.7 million, or $0.72 per share on a fully diluted basis, compared to a consolidated net loss of $17.1 million, or $0.24 per share on a fully diluted basis, for the year ended December 31, 2022. +Year ended December 31, 2023 compared to December 31, 2022. +CONSOLIDATED NET REVENUES +The table below shows a summary of total consolidated net revenues (dollars in thousands) for the years ended December 31, 2023 and 2022. +For the Years Ended December 31, +Dollars % Change Percentage of Total Net Revenues +2023 2022 2023 2022 +COVID-19 Diagnostics $ 257,493 $ 233,666 10 % 64 % 60 % +Diagnostics (1) +73,694 52,181 41 18 14 +Molecular Sample Management Solutions (2) +54,274 63,342 (14) 13 16 +Other products and services (3) +12,001 11,903 1 3 3 +Molecular Services 4,474 7,296 (39) 1 2 +COVID-19 Molecular Products 286 9,659 (97) — 3 +Net product and services revenues 402,222 378,047 6 99 98 +Non-product and services revenues (4) +3,250 9,432 (66) 1 2 +Net revenues $ 405,472 $ 387,479 5 % 100 % 100 % +(1) Includes HIV and HCV product revenues. +(2) Includes Genomics, Microbiome and Novosanis product revenues. +(3) Includes Risk assessment testing and other product and services revenues. +(4) Includes funded research and development contracts, royalty income and grant revenues. +Product and Services Revenues +Consolidated net revenues increased 5% to $405.5 million for the year ended December 31, 2023 from $387.5 million for the year ended December 31, 2022. +COVID-19 Diagnostics revenues increased by 10% to $257.5 million for the year ended December 31, 2023 compared to $233.7 million for the year ended December 31, 2022 due to increased sales of the Company's InteliSwab ® tests through its U.S. government procurement contracts. The Company expects a significant decline in COVID-19 revenues during 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing. +Sales of the Company's Diagnostics products increased 41% to $73.7 million for the year ended December 31, 2023 from $52.2 million for the year ended December 31, 2022. This increase in revenues was primarily driven by higher sales of the Company's OraQuick® In-Home HIV tests in support of the CDC's "Together Take Me Home" HIV self-test program which commenced during the first quarter of 2023, and higher sales of the Company's OraQuick® HIV Self-Test in international markets due to increased adoption of the Company's self-test in several new African countries and due to customer ordering patterns. +Molecular Sample Management Solutions revenues decreased 14% to $54.3 million for the year ended December 31, 2023 from $63.3 million for the year ended December 31, 2022. Sales of the Company's Molecular Sample Management Solutions are being impacted by macro-economic factors in the market in which the customers operate such as a decline in discretionary consumer spend. Sample Management Solutions revenues are also impacted by customer ordering patterns. +Other products and services revenues increased 1% to $12.0 million for the year ended December 31, 2023 from $11.9 million for the year ended December 31, 2022. +62 +Table of Contents +Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 39% to $4.5 million for the year ended December 31, 2023 from $7.3 million for the year ended December 31, 2022. The decline in services revenues was largely the result of the loss of two customers in 2022: one customer ceased operations in 2022 and the other deprioritized microbiome studies. These loss of customers is coupled with the completion of certain large clinical trial studies which have not been replaced with new studies. +Sales of the Company's COVID-19 Molecular Products collection kits decreased by 97% to $0.3 million for the year ended December 31, 2023 from $9.7 million for the year ended December 31, 2022 due to decline in demand for COVID-19 PCR testing given the availability of rapid antigen tests. +Non-Product and Services Revenues +Non-product and services revenues decreased 66% to $3.3 million for the year ended December 31, 2023 from $9.4 million for the year ended December 31, 2022 as a result lower funding for research and development activities and lower royalty income. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit margin increased to 42% for the year ended December 31, 2023 from 38% for the year ended December 31, 2022. This increase in margins was driven by the higher InteliSwab® sales which also generated higher margins due to reduced costs associated with manufacturing efficiencies and a packaging change implemented during the first quarter of 2023 . Also contributing to improved margins is lower product scrap expense. These improvements in margins were partially offset by $6.9 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company on-shores and automates the manufacturing of this product at its Pennsylvania facilities and $0.5 million from the exit from one of its leased warehouse in an effort to consolidate facilities and further lower costs. +Consolidated operating income for the year ended December 31, 2023 was $32.7 million, a $54.8 million improvement from the $22.2 million operating loss reported for the year ended December 31, 2022. Results for the year ended December 31, 2023 were positively impacted by lower operating expenses and lower impairment losses. Results for the year ended December 31, 2023 included $10.8 million of impairment losses compared to $17.1 million for the year ended December 31, 2022. Impairment losses in 2023 were comprised of impairments of intangible assets and idle manufacturing equipment. +Operating expenses for the year ended December 31, 2023, excluding the impairment charges, decreased by $25.4 million to $128.2 million compared to $153.7 million the year ended December 31, 2022, reflecting the impact of the Company's cost saving measures and headcount reductions. +Research and development expenses decreased 7% to $33.7 million for the year ended December 31, 2023 from $36.2 million for the year ended December 31, 2022 largely due a decrease in spend on COVID-19 product development, a decrease in employee costs associated with a reduction in headcount, partially offset by increased engineering consulting spend associated with the Company's $109 million DOD manufacturing expansion contract. +Sales and marketing expenses decreased 26% to $36.3 million for the year ended December 31, 2023 from $49.2 million for the year ended December 31, 2022 due to lower advertising spend, lower employee costs associated with a decrease in headcount, a decrease in the Company's provision for uncollectible accounts, lower commissions, and lower sales meeting and consulting spend. +General and administrative expenses decreased 15% to $58.2 million for the year ended December 31, 2023 from $68.2 million for the year ended December 31, 2022 largely due a decrease in consulting fees, lower employee costs associated with lower headcount and severance, lower project management fees associated with the $109 million DOD manufacturing expansion contract, and lower sales tax penalties, board of directors fees, legal fees, and recruitment fees. In 2022, the Company incurred high severance expense associated with the Company's former CEO's and general counsel's employment agreements and higher recruitment expense associated with the new CEO search. +All of the above contributed to the Company's operating income of $32.7 million for the year ended December 31, 2023, which included non-cash impairment charges of $10.8 million, non-cash charges of $20.9 million for depreciation and amortization, and $10.7 million for stock-based compensation. The Company's operating loss of $22.2 million for the year ended December 31, 2022 included a non-cash impairment charge of $17.1 million, non-cash charges of $15.3 million for depreciation and amortization, and $11.6 million for stock-based compensation. +63 +Table of Contents +CONSOLIDATED OTHER INCOME +Other income for the year ended December 31, 2023 was $23.6 million compared to $6.5 million for the year ended December 31, 2022. This increase is largely due to $12.8 million of additional profit earned above the guaranteed profit earned under the $109 million DOD manufacturing expansion contract that completed in the fourth quarter. This additional profit resulted from lower spend under the fixed firm contract than originally budgeted. Also contributing to the higher other income is higher interest income offset by lower foreign currency gains. +CONSOLIDATED INCOME TAXES +The Company continues to believe the full valuation allowance established against its total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. Although the Company has achieved another quarter of U.S. cumulative pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in its judgement, support the release of the valuation allowance. For the year ended December 31, 2023 the Company recorded income tax expense of $2.6 million. 2023 income tax expense is comprised of $1.9 million of U.S. state income tax expense, and foreign income tax expense of $0.7 million. For the year ended December 31, 2022, the Company recorded income tax expense of $1.5 million. The Company's 2022 income tax expense is comprised of U.S. state income taxes of $1.0 million, Canadian withholding taxes paid on the repatriation of Canadian earnings of $1.7 million, and a foreign income tax benefit of $1.2 million associated with the Company's Canadian subsidiary. The overall increase in tax expense is associated with an increase in earnings in both the U.S. and in Canada. +Liquidity and Capital Resources +December 31, 2023 December 31, 2022 +(in thousands) +Cash and cash equivalents $ 290,407 $ 83,980 +Available-for-sale securities — 26,867 +Working capital 346,923 256,127 +The Company's cash and cash equivalents and available-for-sale securities increased to $290.4 million at December 31, 2023 from $110.8 million at December 31, 2022. $84.9 million, or 29%, of the Company's $290.4 million in cash, cash equivalents and available-for-sale securities is held by DNAG, the Company's Canadian subsidiary. In 2022, the Company repatriated $65.0 million of cash into the United States and incurred $1.7 million of Canadian withholding tax. Further repatriation of cash from Canada into the United States could have additional adverse tax consequences. It is still the Company's intention going forward to continue to permanently reinvest the historical undistributed earnings of the Company's foreign subsidiaries. +The Company's working capital increased to $346.9 million at December 31, 2023 from $256.1 million at December 31, 2022. Working capital increased primarily due to the increase in cash and cash equivalents and lower accounts receivable, inventory, and lower accounts payable balances. Working capital improved also as a result of receiving final payment under the Company's $109 million manufacturing expansion contract. Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms. +Analysis of the Company's Cash Flows +Operating Activities +During the year ended December 31, 2023, net cash provided by operating activities was $141.6 million. Cash flows from operations can be significantly impacted by factors such as timing of receipt from customers, inventory purchases, and payments to vendors. The Company's net income of $53.7 million included non-cash charges of depreciation and amortization expense of $20.9 million, stock-based compensation expense of $10.7 million, impairment charges taken for idle equipment and intangible assets of $10.8 million, and a decrease in reserve for uncollectible accounts of $0.5 million. +Cash provided by the Company's working capital accounts included a decrease in inventory of $48.2 million as the Company fulfilled demand for its InteliSwab® product and a decrease in accounts receivable of $31.1 million largely associated with collections of monies due from the U.S. government for InteliSwab ® shipments. Offsetting these increases +64 +Table of Contents +of cash was a $27.0 million decrease in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $3.4 million. +Investing Activities +Net cash provided by investing activities was $66.2 million for the year ended December 31, 2023, which reflects proceeds from the maturities and redemptions of investments of $102.4 million, $48.7 million in reimbursement received under the Company's $109 million contract with the U.S. government offset by $74.7 million used to purchase investments. Investing activities also included $5.8 million to acquire property and equipment to support normal operations of the business and $4.5 million used to build additional manufacturing capacity as required by the government contract. +Financing Activities +Net cash used in financing activities was $3.0 million for the year ended December 31, 2023, which reflects $1.9 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted awarded to the Company's employees and payments of lease liabilities of $1.3 million. +Resources +The Company's contractual obligations are included in Notes 8 and 13 of its consolidated financial statements. Additionally, the Sapphiros agreement entered into during 2024 has an aggregate commitment of up to $30.0 million to be funded by June 2024, contingent on certain terms and conditions being met. $28.3 million of that commitment has been paid within the first two months of 2024. The Company expects existing cash and cash equivalents will be sufficient to fund this obligation and its operating expenses and capital expenditure requirements over the next twelve months. The Company's cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress of its research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that the Company make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +The Company's significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. The Company considers the following accounting policies, which have been discussed with its Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition, and cash flows. +Revenue Recognition . +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates. +The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of its OraQuick ® In-Home HIV test to the retail trade, and InteliSwab ® products to the retail trade and certain customers. +65 +Table of Contents +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred. +Service Revenues +Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when it satisfies its performance obligations for services rendered. +Arrangements with multiple-performance obligations +In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Inventories +The Company's inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of its inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. It also considers items identified through specific identification procedures in assessing the adequacy of its reserve. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results. +Goodwill +Goodwill is not amortized, but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit. +ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. +The information with respect to forward-looking statements within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report is incorporated herein by reference. +The Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, has no material derivative risk to report under this Item. +As of December 31, 2023, the Company did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 1.0% of the Company's total revenues for the year ended December 31, 2023. The Company does have foreign currency exchange risk related to its operating subsidiaries in Canada and in Belgium. The principal foreign currencies in which it conducts business are the +66 +Table of Contents +Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. The Company's foreign subsidiaries had net assets, subject to translation, of $117.7 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of December 31, 2023. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have increased the Company's comprehensive loss by approximately $11.8 million in the year ended December 31, 2023. +ITEM 8. Financial Statements and Supplementary Data. +Information with respect to this Item is contained in the Company's Consolidated Financial Statements included under Item 15 of this Annual Report. +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2023. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2023 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework, management concluded that the Company's internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2023. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of the Company's internal control over financial reporting as of December 31, 2023 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +In the third quarter ended September 30, 2023, we identified a material weakness in our internal control over financial reporting related to customer pricing in the revenue recognition process. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A control related to the validation of accurate pricing in customer sales orders did not operate effectively to detect an error in prices, which resulted in the recognition of revenue at an inaccurate price during the six months ended June 30, 2023. +67 +Table of Contents +Although the resulting error was not material to those financial statements, we concluded that the control deficiency represents a material weakness. The financial statements for the nine months ended September 30, 2023 were not impacted by this material weakness and are not misstated. +During the quarter ended December 31, 2023, the Company implemented controls to validate accurate pricing in customer sales orders and remediated the material weakness. +Except for the foregoing, there was no change in the Company's internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a or 15d of the Exchange Act that occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated March 11, 2024 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and +68 +Table of Contents +that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 11, 2024 +ITEM 9B. Other Information. +Not applicable. +ITEM 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +69 +Table of Contents +PART III +The Company has omitted from Part III the information that will appear in its Definitive Proxy Statement for its 2024 Annual Meeting of Stockholders (the “2024 Proxy Statement”), which will be filed within 120 days after the end of its fiscal year pursuant to Regulation 14A. +ITEM 10. Directors, Executive Officers and Corporate Governance. +The information required by this Item 10 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. The Board of Directors has adopted a Code of Business Conduct and Ethics that applies to the Company's principal executive officer, principal financial officer and principal accounting officer, as well as to the members of its Board of Directors and its other officers and employees. This Code of Business Conduct and Ethics is available on the Company's website at www.orasure.com . The Company intends to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on its website. +ITEM 11. Executive Compensation. +The information required by this Item 11 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item 12 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services. +The information required by this Item 14 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. +70 +Table of Contents +PART IV +ITEM 15. Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number Exhibit +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.2 +Second Amended and Restated Bylaws of OraSure Technologies, as of May 9, 2023, is incorporated by referenced to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. +4.1 +Description of Securities is incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 . +10.1 +Employment Agreement dated as of January 3, 2018, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D., is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2018.* +10.2 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.* +10.3 +Amendment No. 1 to Employment Agreement, dated as of December 20, 2021, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to exhibit 10.10 to the Company's Annual Report on form 10-K for the year ended December 31, 2021* +10.4 +Amendment No. 2 to Employment Agreement, dated as of November 7, 2022, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is in corporated by reference to Exhibit 10.5 of the Company's Annual Report on form 10 -K for the year ended December 31, 2022 * +10.5 +Employment Agreement, dated as of May 20, 2022, between OraSure Technologies, Inc. and Carrie Eglinton-Manner is incorporated by reference to exhibit 10.1 to the company's Current Report on Form 8-K filed on May 26, 2022. * +10.6 +Employment Agreement dated August 8, 2022, between OraSure Technologies, Inc. and Kenneth J. McGrath is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 12, 2022.* +10.7 +Severance Letter Agreement, dated August 25, 2021, between OraSure Technologies, Inc. and Michele M. Miller is incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.8 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on form 8-K filed August 14, 2019.* +10.9 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +10.10 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +71 +Table of Contents +10.11 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective April 4, 2020, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 9, 2020, for the 2020 Annual Meeting of Stockholders.* +10.12 +Amended and Restated OraSure Technologies, Inc. 2000 Stock Award Plan, Effective March 31, 2023 , is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 16 , 202 3 .* +10.13 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.14 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.15 +Form of Restricted Unit Award Agreement (Executive Officers-Employment Agreements) for 2021 awards is incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.16 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.17 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.18 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.19 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.20 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.21 +$109 Million Capital Funding Agreement with the U.S. Department of Defense, in coordination with the Department of Health and Human Services is incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the period ended September 30, 2021, filed November 4, 2021. +10.22 +Industrial Lease between Core5 at Laughman Farms Phase 1, LLC as Landlord and OraSure Technologies, Inc. as Tenant, dated January 3, 2022 is incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021. +21.1 +Subsidiaries of the Company are incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +23.1 + +Consent of KPMG LLP. +24.1 + +Powers of Attorney. +31.1 + +Certification of Carrie Eglinton Manner. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 + +Certification of Kenneth J. McGrath required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +32.1^ +Certification of Carrie Eglinton Manner. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2^ +Certification of Kenneth J. McGrath required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . +97.1+ +OraSure Technologies Inc. Compensation Recovery Policy . +72 +Table of Contents +101.INS Inline XBRL Instance Document +101.SCH Inline XBRL Taxonomy Extension Schema Document +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase document +104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL. +________________________________________________ ++ Filed herewith. +^ This certification is deemed not filed for purposes of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filings under the Securities Act or the Exchange Act. +* Management contract or compensatory plan or arrangement. +ITEM 16. Form 10-K Summary. +None +73 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2024. +ORASURE TECHNOLOGIES, INC. +By: /s/ Carrie Eglinton Manner +Carrie Eglinton Manner +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 11, 2024, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE TITLE +/s/ Carrie Eglinton Manner +President, Chief Executive Officer and Director +(Principal Executive Officer) +Carrie Eglinton Manner +/s/ Kenneth J. McGrath +Chief Financial Officer +(Principal Financial Officer) +Kenneth J. McGrath +/s/ Michele Anthony +Senior Vice President, Controller & Chief Accounting Officer +(Principal Accounting Officer) +Michele Anthony +*MARA G. ASPINALL Director +Mara G. Aspinall +*JAMES A. DATIN Director +James A. Datin +*NANCY J. GAGLIANO Director +Nancy J. Gagliano +*LELIO MARMORA Director +Lelio Marmora +*ROBERT W. MCMAHON Director +Robert W. McMahon +*DAVID J. SHULKIN, M.D. Director +David J. Shulkin, M.D. +*By: /s/Stefano Taucer +Stefano Taucer +(Attorney-in-Fact) +74 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Philadelphia, PA , Auditor Firm ID: 185 ) +F- 2 +Consolidated Balance Sheets +F- 4 +Consolidated Statements of Operations +F- 5 +Consolidated Statements of Comprehensive Income (Loss) +F- 6 +Consolidated Statements of Stockholders’ Equity +F- 7 +Consolidated Statements of Cash Flows +F- 8 +Notes to the Consolidated Financial Statements +F- 9 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Evaluation of net realizable value adjustments to inventories for excess and obsolescence +As discussed in Notes 2 and 4 to the consolidated financial statements, the Company has inventories with a carrying value of $47,614 thousand as of December 31, 2023. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The majority of the Company’s inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the reserve. +F-2 +Table of Contents +We identified the evaluation of net realizable value adjustments to inventories for excess or obsolescence as a critical audit matter. Evaluating the Company’s specific identification procedures, which included reviewing historical inventory consumption as compared to inventory balances as of year-end and the resulting inventory consumption and the ability to extend inventory expiration dates, required a high degree of auditor judgment. +The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for determining net realizable value adjustments for inventory excess or obsolescence, which included controls related to the review of the specific identification procedures. For a selection of inventory items, we compared actual physical inventory disposals in the current year to the Company's historic estimates of net realizable value adjustments for excess and obsolescence to evaluate the Company's ability to accurately estimate the net realizable value adjustments. In addition, we selected inventory items from the underlying data used in the Company’s analysis and evaluated the Company’s determination of net realizable value adjustments for those items by: (1) testing historical inventory consumption by independently recalculating the historical consumption and comparing it to the Company determined consumption, (2) comparing that consumption to inventory balances as of year-end, and (3) evaluating changes in the business that could impact future inventory consumption, as applicable. We also selected inventory items from the underlying data used in the Company’s analysis and evaluated the ability to extend the expiration dates by inspecting relevant supporting documentation. +/s/ KPMG LLP +We have served as the Company’s auditor since 2002. +Philadelphia, Pennsylvania +March 11, 2024 +F-3 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2023 December 31, 2022 +ASSETS +Current Assets: +Cash and cash equivalents $ 290,407 $ 83,980 +Short-term investments — 26,867 +Accounts receivable, net of allowance for doubtful accounts of $ 1,216 and $ 2,365 +40,171 70,797 +Inventories 47,614 95,704 +Prepaid expenses 6,041 6,273 +Other current assets 2,226 41,569 +Total current assets 386,459 325,190 +Noncurrent Assets: +Property, plant and equipment, net 45,420 59,413 +Operating right-of-use assets, net 12,270 10,399 +Finance right-of-use assets, net 576 1,293 +Intangible assets, net 1,206 11,694 +Goodwill 35,696 35,104 +Other noncurrent assets 1,218 1,087 +Total noncurrent assets 96,386 118,990 +TOTAL ASSETS $ 482,845 $ 444,180 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current Liabilities: +Accounts payable $ 13,151 $ 38,020 +Deferred revenue 1,559 2,273 +Accrued expenses and other current liabilities 22,710 25,762 +Finance lease liability 539 1,179 +Operating lease liability 1,577 1,764 +Acquisition-related contingent consideration obligation — 65 +Total current liabilities 39,536 69,063 +Noncurrent Liabilities: +Finance lease liability 226 503 +Operating lease liability 11,162 9,101 +Acquisition-related contingent consideration obligation — 99 +Other noncurrent liabilities 696 581 +Deferred income taxes 554 408 +Total noncurrent liabilities 12,638 10,692 +TOTAL LIABILITIES 52,174 79,755 +Commitments and contingencies (Note 14) +STOCKHOLDERS' EQUITY +Preferred stock, par value $ .000001 , 25,000 shares authorized, none issued +— — +Common stock, par value $ .000001 , 120,000 shares authorized, 73,528 and 72,734 shares issued and outstanding +— — +Additional paid-in capital 529,543 520,446 +Accumulated other comprehensive loss ( 14,941 ) ( 18,435 ) +Accumulated deficit ( 83,931 ) ( 137,586 ) +Total stockholders' equity 430,671 364,425 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 482,845 $ 444,180 +See accompanying notes to the consolidated financial statements. +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the Years Ended December 31, +2023 2022 2021 +NET REVENUES: +Products and services $ 402,222 $ 378,047 $ 226,897 +Other 3,250 9,432 6,777 +405,472 387,479 233,674 +COST OF PRODUCTS AND SERVICES SOLD 233,820 239,041 116,074 +Gross profit 171,652 148,438 117,600 +OPERATING EXPENSES: +Research and development 33,728 36,237 34,170 +Sales and marketing 36,319 49,238 44,751 +General and administrative 58,191 68,206 50,328 +Loss on impairments 10,829 17,101 — +Change in the estimated fair value of acquisition-related contingent consideration ( 99 ) ( 188 ) ( 1,485 ) +138,968 170,594 127,764 +Operating income (loss) 32,684 ( 22,156 ) ( 10,164 ) +OTHER INCOME 23,574 6,481 872 +Income (loss) before income taxes 56,258 ( 15,675 ) ( 9,292 ) +INCOME TAX EXPENSE 2,603 1,458 13,706 +NET INCOME (LOSS) $ 53,655 $ ( 17,133 ) $ ( 22,998 ) +INCOME (LOSS) PER SHARE: +BASIC $ 0.73 $ ( 0.24 ) $ ( 0.32 ) +DILUTED $ 0.72 $ ( 0.24 ) $ ( 0.32 ) +SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE: +BASIC 73,348 72,505 71,981 +DILUTED 74,389 72,505 71,981 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the Years Ended December 31, +2023 2022 2021 +NET INCOME (LOSS) $ 53,655 $ ( 17,133 ) $ ( 22,998 ) +OTHER COMPREHENSIVE INCOME (LOSS) +Currency translation adjustments 3,274 ( 8,572 ) ( 894 ) +Unrealized gain (loss) on marketable securities 220 214 ( 86 ) +COMPREHENSIVE INCOME (LOSS) $ 57,149 $ ( 25,491 ) $ ( 23,978 ) +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the Years Ended December 31, 2023, 2022 and 2021 +(in thousands) +Common Stock Additional +Paid-in +Capital Accumulated +Other +Comprehensive +Loss Accumulated +Deficit Total +Shares Amount +Balance at January 1, 2021 71,738 $ — $ 505,123 $ ( 9,097 ) $ ( 97,455 ) $ 398,571 +Common stock issued upon exercise of options 33 — 246 — — 246 +Vesting of restricted stock and performance stock units 451 — — — — — +Purchase and retirement of common shares ( 153 ) — ( 2,113 ) — — ( 2,113 ) +Stock-based compensation — — 7,807 — — 7,807 +Net loss — — — — ( 22,998 ) ( 22,998 ) +Currency translation adjustments — — — ( 894 ) — ( 894 ) +Unrealized loss on marketable securities — — — ( 86 ) — ( 86 ) +Balance at December 31, 2021 72,069 $ — $ 511,063 $ ( 10,077 ) $ ( 120,453 ) $ 380,533 +Common stock issued upon exercise of options +2 — 15 — — 15 +Vesting of restricted stock and performance stock units 992 — — — — — +Purchase and retirement of common shares ( 329 ) — ( 2,254 ) — — ( 2,254 ) +Stock-based compensation — — 11,622 — — 11,622 +Net loss — — — — ( 17,133 ) ( 17,133 ) +Currency translation adjustments — — — ( 8,572 ) — ( 8,572 ) +Unrealized gain on marketable securities — — — 214 — 214 +Balance at December 31, 2022 72,734 $ — $ 520,446 $ ( 18,435 ) $ ( 137,586 ) $ 364,425 +Common stock issued upon exercise of options +44 — 269 — — 269 +Vesting of restricted stock and performance stock units 1,098 — — — — — +Purchase and retirement of common shares ( 348 ) — ( 1,901 ) — — ( 1,901 ) +Stock-based compensation — — 10,729 — — 10,729 +Net income — — — — 53,655 53,655 +Currency translation adjustments — — — 3,274 — 3,274 +Unrealized gain on marketable securities — — — 220 — 220 +Balance at December 31, 2023 73,528 $ — $ 529,543 $ ( 14,941 ) $ ( 83,931 ) $ 430,671 +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the Years Ended December 31, +2023 2022 2021 +OPERATING ACTIVITIES: +Net income (loss) $ 53,655 $ ( 17,133 ) $ ( 22,998 ) +Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: +Stock-based compensation 10,729 11,622 7,807 +Depreciation and amortization 20,936 15,308 11,658 +Loss on impairments 10,829 17,101 — +Other non-cash amortization 3 228 837 +Provision for credit losses ( 462 ) ( 1,032 ) ( 253 ) +Unrealized foreign currency (gain) loss 103 ( 161 ) ( 210 ) +Interest expense on finance leases 51 94 82 +Deferred income taxes 102 ( 1,651 ) 1,026 +Loss on sale of fixed assets — 729 — +Change in the estimated fair value of acquisition-related contingent consideration ( 99 ) ( 188 ) ( 1,485 ) +Payment of acquisition-related contingent consideration ( 19 ) — ( 142 ) +Changes in assets and liabilities: +Accounts receivable 31,116 ( 25,162 ) ( 6,451 ) +Inventories 48,228 ( 43,274 ) ( 21,210 ) +Prepaid expenses and other assets ( 2,499 ) ( 7,091 ) ( 8,674 ) +Accounts payable ( 26,976 ) 2,634 3,234 +Deferred revenue ( 730 ) ( 596 ) ( 1,891 ) +Accrued expenses and other liabilities ( 3,384 ) 1,370 3,288 +Net cash provided by (used in) operating activities 141,583 ( 47,202 ) ( 35,382 ) +INVESTING ACTIVITIES: +Purchases of short-term investments ( 74,652 ) ( 22,873 ) ( 25,822 ) +Proceeds from maturities and redemptions of short-term investments 102,440 47,415 67,925 +Proceeds from sale of assets — 121 — +Purchases of property and equipment ( 5,802 ) ( 6,774 ) ( 21,893 ) +Purchase of property and equipment under government contracts ( 4,501 ) ( 57,135 ) ( 26,224 ) +Proceeds from funding under government contract 48,669 60,331 531 +Other investing activities — — ( 18 ) +Net cash provided by (used in) investing activities 66,154 21,085 ( 5,501 ) +FINANCING ACTIVITIES: +Cash payments for lease liabilities ( 1,345 ) ( 1,381 ) ( 686 ) +Proceeds from exercise of stock options 269 15 246 +Payment of acquisition-related contingent consideration ( 46 ) ( 208 ) ( 264 ) +Repurchase of common stock ( 1,901 ) ( 2,254 ) ( 2,113 ) +Net cash used in financing activities ( 3,023 ) ( 3,828 ) ( 2,817 ) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 1,713 ( 2,837 ) ( 340 ) +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 206,427 ( 32,782 ) ( 44,040 ) +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 83,980 116,762 160,802 +CASH AND CASH EQUIVALENTS, END OF PERIOD $ 290,407 $ 83,980 $ 116,762 +See accompanying notes to the consolidated financial statements. +F-8 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +OraSure Technologies transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the “Diagnostics” segment and the “Molecular Solutions” segment, into one business unit with sales, marketing, product development, and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. +The Company's product portfolio is broadly divided into diagnostics products and molecular sample management solutions. The Company's business consists of the development, manufacture, marketing and sale of simple, diagnostic products and specimen collection devices designed to detect certain infectious diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. The Company's business also includes molecular sample management solutions and molecular services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNAG, Diversigen, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we”, “us”, “our”, or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for property, plant and equipment, intangible assets and goodwill, as well as estimates related to taxes, contingent consideration, and performance-based compensation expense. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Employee Retention Credit +In December 2021, the Company applied for the Employee Retention Credit for payroll taxes paid in the first and second quarters of 2021 as provided by the Coronavirus Aid, Relief and Economic Security Act. The amount due from the Internal Revenue Service of $ 5.7 million was recorded in other current assets in the Company's consolidated balance sheet as of December 31, 2022. The amount was received in 2023. The credit is reported in the Company's consolidated statement of operations for the year ended December 31, 2021 within cost of products and services sold, research and development, sales and marketing and general and administrative costs in the amounts of $ 2.5 million, $ 1.1 million, $ 0.9 million, and $ 1.2 million, respectively. +F-9 +Table of Contents +Supplemental Cash Flow Information +The Company received income tax refunds of $ 4.9 million in 2023, and paid income taxes of $ 9.4 million and $ 13.7 million in 2022 and 2021, respectively. +The Company had account receivable write-offs of $ 0.7 million, $ 2.3 million, and $ 0.1 million in 2023, 2022, and 2021, respectively. +As of December 31, 2023, 2022 and 2021, the Company had accruals for purchases of property and equipment of $ 0.2 million, $ 0.2 million and $ 8.2 million, respectively. +Cash Equivalents & Short-Term Investments +The Company considers all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Securities with maturities ninety days or less are considered cash equivalents. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. +The Company records an allowance for credit loss for the Company's available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value, and the probability that the scheduled cash payments will continue to be made. +The Company had no available-for-sale debt securities as of December 31, 2023. The following is a summary of the Company's available-for-sale securities as of December 31, 2022: +Amortized +Cost Gross +Unrealized +Gains Gross +Unrealized +Losses Fair Value +December 31, 2022 +Guaranteed investment certificates $ 22,109 $ — $ — $ 22,109 +Corporate bonds 4,978 — ( 220 ) 4,758 +Total available-for-sale securities $ 27,087 $ — $ ( 220 ) $ 26,867 +Fair Value of Financial Instruments +As of December 31, 2023 and 2022, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +The Company had no available-for-sale debt securities as of December 31, 2023. All of the Company's available-for-sale debt securities as of December 31, 2022 are measured as Level 2 instruments. The Company's guaranteed investment certificates are measured as Level 1 instruments as of December 31, 2022. +Included in cash and cash equivalents at December 31, 2023 and 2022, was $ 112.7 million and $ 1.7 million, respectively, invested in government money market funds. These funds have investments in United States government securities and are +F-10 +Table of Contents +measured as Level 1 instruments. Included in cash and cash equivalents at December 31, 2023 was $ 71.7 million of guaranteed investment certificates which are also measured as Level 1 instruments. +The Company offers a nonqualified deferred compensation plan for certain eligible employees and members of the Company's Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds. The fair value of the plan assets as of December 31, 2023 and 2022 was $ 0.8 million and $ 0.7 million, respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other noncurrent assets with the same amounts included in accrued expenses and other noncurrent liabilities in the accompanying consolidated balance sheets. +Contingent consideration obligations are measured as Level 3 liabilities due to the unobservable inputs that are required to measure the fair value of these obligations. The Company had no contingent consideration obligations outstanding as of December 31, 2023. +Accounts Receivable +Accounts receivable has been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of the Company's customers and the Company's historical experience related to write-offs. +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of the Company's inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the Company's reserve. Although the Company makes every effort to ensure the accuracy of expected changes in the business and of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results . +Property, Plant and Equipment +Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are typically depreciated over twenty years , while computer equipment and software, machinery and equipment, and furniture and fixtures are depreciated over two to ten years . Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. +Intangible Assets +Intangible assets consist of customer relationships, patents and product rights, acquired technology and trade names. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years . +Impairment of Long-Lived Assets +Long-lived assets, which include property, plant and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company assesses the recoverability of the Company's long-lived assets by determining +F-11 +Table of Contents +whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect the Company's assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. See Notes 5 and 6 for discussion of property, plant and equipment and intangible asset impairments, respectively, recorded for the year ended December 31, 2023. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment. If the Company concludes that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then the Company would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The Company has historically performed an annual goodwill impairment assessment as of July 31. On July 31, 2023, the Company performed a quantitative goodwill impairment test which concluded that the carrying value was below fair value indicating there was no impairment. During the three months ended December 31, 2023, the Company changed the date of its the annual impairment assessment to November 30, to better align with the Company's annual forecasting process. As of November, 30, 2023, the Company performed a qualitative analysis that concluded it was more likely than not that the fair value of the Company's reporting units is greater than their carrying value. +A more frequent evaluation is performed if an event occurs or circumstances change between annual tests that could more likely than not reduce the fair value of a reporting unit below its carrying amount. +Revenue +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates. +The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of the Company's OraQuick ® In-Home HIV test to retail trade customers, and InteliSwab ® products to retail trade and certain other customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred. +The Company records shipping and handling charges billed to the Company's customers as product revenue and the related expense as cost of products sold. +Service revenues. Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when the Company satisfies its performance obligations for services rendered. +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each performance obligation is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues . Other revenues consist primarily of royalty income and funding from grants of research and development efforts. For the year ended December 31, 2021, other revenue also included cost reimbursements under a charitable support +F-12 +Table of Contents +agreement which ended in June 2021. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Research and development grant revenue is recognized pursuant to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20") . The expenses are recorded in research and development expense and the reimbursements are recorded in other revenue. Funding of research and development efforts and charitable support reimbursements are recorded as the activities are performed in accordance with the respective agreements. +Deferred revenue. The Company records deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2023 and 2022 included customer prepayments of $ 1.2 million and $ 1.5 million, respectively. Deferred revenue as of December 31, 2023 and 2022 also included $ 0.4 million and $ 0.7 million, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue is recognized at that average price. +Financing and payment . The Company's payment terms vary by the type and location of the customer and products or services offered. Payment terms differ by jurisdiction and customer, but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, the Company may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, the Company defers the cost of the commission and expenses it over the life of the related sales contract. +Revenues by product . The following table represents total net revenues by product line: +For the Years Ended December 31, +2023 2022 2021 +COVID-19 (1) +$ 257,779 $ 243,325 $ 76,874 +HIV 60,823 38,812 42,144 +Molecular Sample Management Solutions (2) +54,274 63,342 72,603 +HCV 12,871 13,369 11,783 +Risk assessment testing 9,736 10,269 9,678 +Molecular Services 4,474 7,296 11,840 +Other product and services revenues 2,265 1,634 1,975 +Net product and services revenues 402,222 378,047 226,897 +Non-product and services revenues (3) +3,250 9,432 6,777 +Net revenues $ 405,472 $ 387,479 $ 233,674 +(1) Includes COVID-19 Diagnostics and COVID-19 Molecular Products. +(2) Includes Genomics, Microbiome and Novosanis product revenues. +(3) Non-product and services revenues include funded research and development contracts, royalty income and grant revenues. +F-13 +Table of Contents +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +For the Years Ended December 31, +2023 2022 2021 +United States $ 361,660 $ 350,206 $ 188,383 +Europe 8,111 11,536 13,799 +Other regions 35,701 25,737 31,492 +$ 405,472 $ 387,479 $ 233,674 +Customer and vendor concentrations. The Company had one customer that accounted for more than 40 % of the Company's consolidated accounts receivable as of December 31, 2023 and 57 % as of December 31, 2022. The same customer accounted for approximately 63 % of the Company's consolidated net revenues for the year ended December 31, 2023 and 58 % for the year ended December 31, 2022. The Company had no customers that accounted for more than 10% of the Company's consolidated net revenues for the year ended December 31, 2021. +The Company currently purchases certain products and critical components of the Company's products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, the Company could be subject to increased costs and substantial delays in the delivery of the Company's products to its customers. Third-party suppliers also manufacture certain products. The Company's inability to have a timely supply of any of these components and products could have a material adverse effect on the Company's business, as well as the Company's financial condition and results of operations. +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2023, 2022, and 2021, the Company incurred $ 1.6 million, $ 4.8 million, and $ 5.1 million, respectively, in advertising expenses. +Stock-Based Compensation +The Company accounts for stock-based compensation to employees and directors using the fair value method. The Company recognizes compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. The Company recognizes compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. To satisfy the exercise of stock options, issuance of restricted stock, or redemption of performance-based restricted stock units, the Company issues new shares rather than purchase shares in the open market. +Income Taxes +The Company follows the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +The Company assesses the realizability of its net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, the Company reduces its net deferred tax assets by a valuation allowance. The realization of the net deferred tax +F-14 +Table of Contents +assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the Company's net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in the Company's consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income in the Company's consolidated statements of operations were $( 0.1 ) million, $ 1.6 million, and $( 0.7 ) million for the years ended December 31, 2023, 2022, and 2021, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is anti-dilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive. +For the Years Ended December 31, +2023 2022 2021 +Net income (loss) $ 53,655 $ ( 17,133 ) $ ( 22,998 ) +Weighted average shares of common stock outstanding: +Basic 73,348 72,505 71,981 +Dilutive effect of stock options, restricted stock, and performance stock units 1,041 — — +Diluted 74,389 72,505 71,981 +Earnings per share: +Basic $ 0.73 $ ( 0.24 ) $ ( 0.32 ) +Diluted $ 0.72 $ ( 0.24 ) $ ( 0.32 ) +For the year ended December 31, 2023, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 1,778 shares were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. For the years ended December 31, 2022, and 2021 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 436 , and 769 shares, respectively, were excluded from the computation of diluted loss per share. +Accumulated Other Comprehensive Loss +The Company classifies items of other comprehensive income (loss) by their nature and discloses the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of the Company's consolidated balance sheets. +The Company has defined the Canadian dollar as the functional currency of the Company's Canadian subsidiary, DNAG, and the Company has defined the Euro as the functional currency of the Company's Belgian subsidiary, Novosanis. The results of operations are translated into U.S. dollars, which is the reporting currency of the Company. Changes in accumulated other comprehensive loss by component is listed below: +F-15 +Table of Contents +Foreign Currency Marketable Securities Total +Balance as of December 31, 2022 $ ( 18,215 ) $ ( 220 ) $ ( 18,435 ) +Other comprehensive gain 3,274 220 3,494 +Balance as of December 31, 2023 $ ( 14,941 ) $ — $ ( 14,941 ) +Recent Accounting Pronouncements +In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures . The purpose of the update was to improve financial reporting by requiring disclosures of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires retrospective application to all periods presented in the consolidated financial statements. Management is evaluating the impact on the Company's consolidated financial statements. +In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. The purpose of the update was to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and incomes taxes paid information. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. The amendments may be applied prospectively or retrospectively, and early adoption is permitted. Management is evaluating the impact on the Company's consolidated financial statements. +Immaterial Correction of Errors +In the first quarter of 2023, the Company identified an immaterial error that was corrected in its consolidated financial statements. Inventories, accounts payable and cost of products and services were reduced by $ 0.5 million, $ 1.3 million and $ 0.8 million, respectively, as of and for the year ended December 31, 2022 to correct for the accounting of a vendor rebate earned in 2022. Furthermore, stockholder's equity at December 31, 2022 increased $ 0.8 million to reflect the reduction in cost of products and services sold. The tax impact of the vendor rebate was negligible. This correction was deemed to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2022. The respective operating activities on the consolidated statement of cash flows for the year ended December 31, 2022 have also been adjusted. +3. GOVERNMENT CAPITAL CONTRACTS: +In September 2021, the Company entered into an agreement for $ 109.0 million in funding from the DOD, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. In accordance with the agreement, funding was paid to the Company based on achievement of milestones for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement. In accordance with the milestone payment schedule, 15 % of the total was not billed and funded until the completion of the final validation testing, which occurred in October 2023. The Company began making payments to vendors for the capital project during the fourth quarter of 2021. The Company began receiving funds from the DOD in January 2022 and has received $ 109.0 million as of December 31, 2023. In connection with the completion of the contract in the fourth quarter of 2023, all funds were received. +Activity for these capital contracts is accounted for pursuant to International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance . Funding received in relation to capital-related costs incurred for government contracts is recorded as a reduction to the cost of property, plant and equipment and reflected within investing activities in the consolidated statements of cash flows and associated unpaid liabilities and government proceeds receivable are considered non-cash changes in such balances within the operating section of the consolidated statements of cash flows. +Amounts earned for the Company's guaranteed profit which covered project management costs were recognized straight-line in other income over the term of the government contract. The Company recognized $ 2.8 million, $ 2.2 million and +F-16 +Table of Contents +$ 0.6 million of such income, which is reported as other income in the Company's consolidated statement of operations for the years ended December 31, 2023, 2022 and 2021, respectively. Additionally, in connection with the completion of the contract, the Company recognized $ 12.8 million in excess of the guaranteed profit in other income in the Company's consolidated statement of operations for the year ended December 31, 2023, which reflects the difference in overall spend compared to the firm fixed price contract amount of $ 109.0 million. +The DOD also reimbursed the Company for certain engineering consulting costs. These expenses are reflected in research and development expenses as incurred with the corresponding amount presented in other income. For the years ended December 31, 2023 and 2022, $ 2.0 million and $ 1.4 million was recorded in research and development expenses and other income, respectively. +Additionally, during 2021, the Company received $ 0.5 million in funding from the Commonwealth of Pennsylvania, acting through the Department of Community and Economic Development, for the purchase of machinery and equipment as part of an expansion of manufacturing operations in Pennsylvania. All related purchases were completed in 2021. +The balances corresponding to government contracts included in the Company's consolidated balance sheet are as follows: +December 31, +2022 +Other current assets: +Billed receivables $ — +Unbilled receivables 27,013 +Total other current assets 27,013 +Other noncurrent assets — +Accrued expenses and other current liabilities $ ( 318 ) +The activity corresponding to the government contracts included in the Company's consolidated statements of cash flows is as follows: +December 31, +2023 2022 +Cost of assets, cumulative $ 86,993 $ 83,359 +Reduction for funding earned to date, not yet received — ( 22,497 ) +Reduction for funding received to date ( 86,993 ) ( 60,862 ) +Total property, plant and equipment, net $ — $ — +4. INVENTORIES: +December 31, +2023 2022 +Raw materials $ 20,727 $ 42,445 +Work in process 1,900 2,335 +Finished goods 24,987 50,924 +$ 47,614 $ 95,704 +During the years ended December 31, 2023, 2022, and 2021, the Company recorded adjustments to inventory which had a cost of $ 8.9 million, $ 15.6 million, and $ 13.4 million, respectively. The adjustments in 2021 included a write-off of $ 3.0 million of COVID-19 antibody inventory, which the Company did not believe it could sell as a result of the decision to no longer pursue an emergency use authorization for the enzyme-linked immunosorbent assay ("ELISA") antibody test. Additionally, a significant portion of the Company's 2022 and 2021 adjustments were related to production and tech-transfer issues associated with the Company's COVID-19 rapid test. The year ended December 31, 2023 adjustments were primarily related to reduction in COVID-19 demand and the need to reserve for excess inventory levels. +F-17 +Table of Contents +5. PROPERTY, PLANT AND EQUIPMENT: +December 31, +2023 2022 +Land $ 1,118 $ 1,118 +Buildings and improvements 34,606 35,582 +Machinery and equipment 64,156 60,725 +Computer equipment and software 17,739 16,681 +Furniture and fixtures 3,748 4,064 +Construction in progress 9,196 11,124 +130,563 129,294 +Accumulated depreciation ( 85,143 ) ( 69,881 ) +$ 45,420 $ 59,413 +During the year ended December 31, 2023, the Company determined several manufacturing lines would not be utilized due to changes in forecasted demand for the products the lines are intended to produce. Additionally, the Company elected not to proceed with certain leasehold improvements to its research and development laboratories. As a result of these decisions, the Company determined that the carrying values of the equipment and leasehold improvements are not recoverable and recorded aggregate pre-tax asset impairment charges of $ 2.3 million for the year ended December 31, 2023. +During the year ended December 31, 2022, the Company determined several manufacturing lines and associated supporting assets would not be utilized due to changes in forecasted demand for the products the lines are intended to produce. As a result of this decision, the Company determined that the carrying values of the equipment and supporting assets were not recoverable and recorded aggregate pre-tax asset impairment charges of $ 13.5 million for the year ended December 31, 2022. Due to the extremely specialized nature of the equipment and various market data points, the estimated fair value was zero. These charges are reported within loss on impairments in the consolidated statement of operations. +During the second quarter of 2023, the Company shortened the useful lives of machinery and equipment utilized for InteliSwab® production in Thailand. This reduction in useful lives resulted in $ 6.9 million of accelerated depreciation during the second quarter of 2023, recorded in cost of products and services sold. During the fourth quarter of 2023, the Company shortened the useful lives of leasehold improvements and equipment due a lease termination. This reduction in useful lives resulted in $ 0.5 million of accelerated depreciation during the fourth quarter of 2023, recorded in cost of products and services sold. +Depreciation expense for 2023, 2022, and 2021 was $ 17.9 million, $ 11.7 million, and $ 7.5 million, respectively. +6. GOODWILL AND OTHER INTANGIBLE ASSETS: +Changes in goodwill are as follows: +December 31, +2023 2022 +Balance as of January 1 $ 35,104 $ 40,279 +Impairment — ( 3,604 ) +Change related to foreign currency translation 592 ( 1,571 ) +Balance as of December 31 $ 35,696 $ 35,104 +On July 31, 2023, the Company performed a quantitative goodwill impairment test which concluded that the carrying value of its reporting units were below fair value indicating there was no impairment. The Company performed a quantitative goodwill impairment test due to the depressed market price of the Company's common stock and concluded no impairment of goodwill. +During the second quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding decline in the Company's market capitalization. As a +F-18 +Table of Contents +result, the Company performed an interim quantitative goodwill impairment test and concluded that the carrying value of the Company's Diagnostics reporting unit exceeded its estimated fair value and the goodwill balance for that segment was fully impaired. The Company recognized a pre-tax impairment charge of $ 3.6 million during the year ended December 31, 2022, which is reported in loss on impairments in the Company's consolidated statement of operations. +Intangible assets consist of the following: +December 31, 2023 +Amortization +Period (Years) Gross Accumulated Amortization Net +Customer relationships 10 $ 11,629 $ ( 11,629 ) $ — +Patents and product rights 5 7,673 ( 7,102 ) 571 +Developed technology +7 - 10 +10,926 ( 10,926 ) — +Trade names +5 - 15 +4,626 ( 3,991 ) 635 +$ 34,854 $ ( 33,649 ) $ 1,206 +December 31, 2022 +Amortization +Period (Years) Gross Accumulated +Amortization Net +Customer relationships 10 $ 14,286 $ ( 11,011 ) $ 3,275 +Patents and product rights 5 7,620 ( 6,615 ) 1,005 +Developed technology +7 - 10 +15,478 ( 9,940 ) 5,538 +Trade names +5 - 15 +5,387 ( 3,511 ) 1,876 +$ 42,771 $ ( 31,077 ) $ 11,694 +During the third quarter of 2023, the Company identified a triggering event to test for the recoverability of intangible assets given the decline in the Company's market capitalization leading up to and as of its annual goodwill impairment testing date. The Company performed an undiscounted cash flow analysis and determined the carrying value of the developed technology, trade names, and customer relationships intangible assets could not be recovered through the sum of the undiscounted future cash flows. The Company used an income approach to determine the fair value of the developed technology and customer relationships intangible assets and the relief from royalty method for the trade names. As a result of this analysis, the Company determined the intangible assets associated with Diversigen and Novosanis were impaired as the fair value of the developed technology, trade names, and customer relationships did not exceed their carrying value. The Company recognized a pre-tax impairment charge of $ 6.2 million during the year ended December 31, 2023, which is reported in loss on impairments in the Company's consolidated statement of operations. +During the fourth quarter of 2023, the Company determined that its remaining developed technology intangible asset was fully impaired. As a result of failed stability studies, the Company decided to no longer pursue the technology. The Company recognized a pre-tax impairment charge of $ 2.4 million during the year ended December 31, 2023, which is reported in loss on impairments in the Company's consolidated statement of operations. +Amortization expense for 2023, 2022, and 2021 was $ 2.0 million, $ 2.3 million, and $ 3.3 million, respectively. +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2024 $ 679 +2025 314 +2026 213 +2027 — +2028 — +Beyond — +$ 1,206 +F-19 +Table of Contents +7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: +December 31, +2023 2022 +Payroll and related benefits $ 14,654 $ 14,103 +Professional fees 2,827 4,685 +Sales tax payable 1,245 1,519 +Other 3,984 5,455 +$ 22,710 $ 25,762 +8. TERMINATION BENEFITS: +During the first and second quarters of 2023, the Company executed a reduction in workforce. This was accounted for pursuant to Accounting Standards Codification ("ASC") 420, Exit or Disposal Cost Obligations . +The expense included in the Company's consolidated statements of operations are as follows: +For the Year Ended December 31, 2023 +Cost of products and services sold $ 369 +Research and development 566 +Sales and marketing 1,543 +General and administrative 787 +Total $ 3,265 +As of December 31, 2023 the Company had $ 0.4 million accrued and had paid $ 2.9 million related to the reduction in workforce. +9. LEASES: +The Company determines whether an arrangement is a lease at inception. The Company has operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of December 31, 2023, the Company is the lessee in all lease agreements. The Company's leases have remaining lease terms of 1 to 10 years, some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year. The Company presents the operating right-of-use asset amortization and the change in operating lease liabilities on the other non-cash amortization line item of the consolidated statements of cash flows. +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. +The Company has lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, the Company accounts for lease components separately from non-lease components. +F-20 +Table of Contents +The components of lease expense are as follows: +For the Years Ended December 31, +2023 2022 2021 +Operating lease cost $ 2,407 $ 2,910 $ 2,226 +Variable and short-term lease cost 381 521 201 +Finance lease cost: +Amortization of right-of use assets 1,091 1,299 900 +Interest on lease liabilities 51 94 82 +Total finance lease cost 1,142 1,393 982 +Total lease cost $ 3,930 $ 4,824 $ 3,409 +Supplemental cash flow information related to leases is as follows: +For the Years Ended December 31, +2023 2022 2021 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 1,863 $ 2,209 $ 3,733 +Operating cash flows from financing leases 51 94 82 +Financing cash flows from financing leases 1,345 1,381 686 +Non-cash activity: +Right-of-use assets obtained in exchange for operating lease obligations 4,363 3,963 6,480 +Right-of-use assets obtained in exchange for finance lease obligations 334 117 2,074 +Supplemental balance sheet information related to leases is as follows: +December 31, +2023 2022 +Weighted Average Remaining Lease Term +Weighted-average remaining lease term — operating leases 8.51 years 6.24 years +Weighted-average remaining lease term — finance leases 1.71 years 1.33 years +Weighted Average Discount Rate +Weighted-average discount rate — operating leases 3.71 % 4.06 % +Weighted-average discount rate — finance leases 3.45 % 3.44 % +F-21 +Table of Contents +As of December 31, 2023, minimum lease payments by period are expected to be as follows: +Finance Operating +2024 $ 578 $ 2,016 +2025 97 2,005 +2026 95 1,745 +2027 45 1,559 +2028 — 1,499 +Thereafter — 5,999 +Total minimum lease payments 815 14,823 +Less: imputed interest ( 50 ) ( 2,084 ) +Present value of lease liabilities $ 765 $ 12,739 +10. INCOME TAXES: +Income (loss) before income tax expense consists of the following: +For the Years Ended December 31, +2023 2022 2021 +United States $ 61,671 $ ( 7,111 ) $ ( 60,500 ) +Foreign ( 5,413 ) ( 8,564 ) 51,208 +$ 56,258 $ ( 15,675 ) $ ( 9,292 ) +The components of income tax expense (benefit) are as follows: +For the Years Ended December 31, +2023 2022 2021 +Current +Federal $ — $ — $ — +State 1,896 955 163 +Foreign 605 2,154 12,517 +2,501 3,109 12,680 +Deferred +Federal 13,570 ( 2,250 ) ( 10,318 ) +State ( 382 ) ( 633 ) ( 965 ) +Foreign ( 1,867 ) ( 2,617 ) ( 151 ) +11,321 ( 5,500 ) ( 11,434 ) +Increase (decrease) in valuation allowance ( 11,219 ) 3,849 12,460 +102 ( 1,651 ) 1,026 +Total income tax expense $ 2,603 $ 1,458 $ 13,706 +For the years ended December 31, 2023, 2022, and 2021 the Company recorded net foreign income tax expense of $ 0.7 million, $ 0.5 million, and $ 13.5 million, respectively. The Company's 2022 foreign income tax expense includes $ 1.7 million of Canadian withholding taxes paid on the repatriation of Canadian earnings offset by a foreign income tax benefit of $ 1.2 million associated with the Company's Canadian subsidiary. For the years ended December 31, 2023, 2022, and 2021 the Company recorded U.S. state tax expense of $ 1.9 million, $ 1.0 million, and $ 0.2 million respectively. +F-22 +Table of Contents +The reconciliation of the statutory United States federal income tax rate to the Company's effective tax rate is as follows: +For the Years Ended December 31, +2023 2022 2021 +Statutory U.S. federal income tax rate 21.0 % 21.0 % 21.0 % +Nondeductible executive compensation 0.5 ( 5.8 ) ( 6.1 ) +Impact of stock-based payment awards ( 0.3 ) ( 5.1 ) ( 3.3 ) +Tax effect of foreign items ( 0.4 ) ( 6.0 ) ( 30.8 ) +State income taxes, net of federal benefit 2.0 ( 0.8 ) 6.8 +U.S. and foreign tax credits 1.3 3.7 2.5 +Nondeductible expenses and other 0.9 8.7 ( 4.0 ) +Change in valuation allowance, federal and state ( 20.4 ) ( 25.0 ) ( 133.6 ) +Effective tax rate 4.6 % ( 9.3 ) % ( 147.5 ) % +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of the Company's deferred tax assets (liabilities) are as follows: +December 31, +2023 2022 +Deferred tax assets (liabilities): +Net operating loss carryforwards $ 28,014 $ 39,783 +Inventories 2,654 4,504 +Capitalized research and development costs 3,897 6,505 +Accruals and reserves currently not deductible 3,324 2,799 +Acquired intangible assets ( 164 ) ( 2,641 ) +Depreciation and amortization ( 3,567 ) ( 6,227 ) +Right-of-use assets ( 3,010 ) ( 2,775 ) +Lease liabilities 3,173 2,990 +Stock-based compensation 3,467 3,032 +Tax credit carryforwards 3,326 4,509 +Net deferred tax asset 41,114 52,479 +Valuation allowance ( 41,668 ) ( 52,887 ) +Net deferred tax liability $ ( 554 ) $ ( 408 ) +In assessing the realizability of the Company's deferred tax asset, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income, to realize the NOL carryforwards. In 2008, the Company established a full valuation allowance against the Company's U.S. deferred tax asset, and although the Company has achieved another year of U.S. pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in the Company's judgement, support the release of the valuation allowance. Management believes the full valuation allowance is still appropriate as of December 31, 2023 and 2022. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2023, 2022, and 2021. +The Company's federal NOL carryforwards of $ 100.0 million have no expiration date. +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. The Company does not believe that there is a Section 382 limitation that will impair the Company's future ability to utilize NOLs to offset the Company's future taxable income. The Company continues to review ownership +F-23 +Table of Contents +changes on an annual basis and the Company does not believe it has had a subsequent ownership change that would impact the NOLs. +In January 2022, approximately $ 65.0 million was repatriated from the Company's Canadian subsidiary as a one-time event. Associated with this repatriation the Company paid $ 1.7 million in Canadian withholding tax which is included in the Company's foreign income tax expense within the table further above. It is still the Company's intention to continue to permanently reinvest the historical undistributed earnings of the Company's foreign subsidiary to the extent that the Company will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2023. +As of December 31, 2023, the Company's gross unrecognized tax benefits totaled $ 0.3 million, and based upon the valuation allowance for the Company's U.S. operations, the recognition of any tax benefit would not impact the Company's effective tax rate. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2023, 2022, and 2021. As a result of the Company's net operating loss carryforward position, the Company is subject to audit by the Internal Revenue Service since the Company's inception, as well as by several jurisdictions for the years ended September 30, 1998 through December 31, 2023. +The reconciliation of the Company's unrecognized tax benefits is as follows: +2023 2022 2021 +Balance as of January 1 $ 373 $ 805 $ 1,172 +Additions for tax positions of prior periods — 1 1 +Reductions for tax positions of prior periods ( 69 ) ( 433 ) ( 368 ) +Balance as of December 31 $ 304 $ 373 $ 805 +11. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +The Company grants stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2023, 4,581 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including the Company's officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years , with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years . +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +For the Years Ended December 31, +Black-Scholes Option Valuation Assumptions 2023 2022 2021 +Risk-free interest rate (1) +4.23 % 1.65 % 0.47 % +Expected dividend yield — — — +Expected stock price volatility (2) +51 % 50 % 50 % +Expected life of stock options (in years) (2) +5 5 5 +(1) Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of the Company's stock options. +F-24 +Table of Contents +(2) Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2023, 2022, and 2021 was $ 3.24 , $ 4.15 and $ 6.14 , respectively. +Compensation expense recognized in the financial statements related to stock options was $ 1.3 million, $ 1.5 million, and $ 1.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. +The aggregate intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $ 43.0 thousand, $ 4.0 thousand, and $ 130.0 thousand, respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options Weighted- +Average +Exercise Price +Per Share Weighted- +Average +Remaining +Contractual +Term +(in years) Aggregate Intrinsic Value +Outstanding on January 1, 2023 1,758 $ 10.25 +Granted 617 6.18 +Exercised ( 44 ) 6.14 +Expired ( 89 ) 9.42 +Forfeited ( 172 ) 8.92 +Outstanding on December 31, 2023 2,070 $ 9.27 6.27 $ — +Vested or expected to vest as of December 31, 2023 2,070 $ 9.27 6.27 $ — +Exercisable on December 31, 2023 1,234 $ 10.58 4.58 $ — +As of December 31, 2023, there was $ 2.6 million of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 2.6 years. +Net cash proceeds from the exercise of stock options were $ 0.3 million, $ 0.02 million and $ 0.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. As a result of the Company's net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +The following table summarizes information about stock options outstanding as of December 31, 2023: +Options Outstanding Options Exercisable +Range of Exercise Prices Number +Outstanding Weighted- +Average +Remaining +Contractual +Term +(in years) Weighted- +Average +Exercise +Price Per +Share Number +Exercisable Weighted- +Average +Exercise +Price Per +Share +$ 5.37 - $ 8.86 +1,422 7.20 $ 7.19 628 $ 7.58 +$ 8.87 - $ 13.31 +323 3.65 10.78 323 10.78 +$ 14.95 - $ 22.43 +325 4.81 16.83 283 17.02 +2,070 6.27 $ 9.27 1,234 $ 10.58 +The Stock Plan also permits the Company to grant restricted shares and restricted units of the Company's common stock to eligible employees, including officers, and the Company's outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by the Company's Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the vesting restrictions lapse. Compensation cost of $ 7.6 +F-25 +Table of Contents +million, $ 9.2 million and $ 4.1 million related to restricted shares was recognized during the years ended December 31, 2023, 2022, and 2021, respectively. +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2023 2,573 $ 6.51 +Granted 912 6.05 +Vested ( 813 ) 7.13 +Forfeited ( 151 ) 8.22 +Issued and unvested, December 31, 2023 2,521 $ 6.04 +Issued and expected to vest, December 31, 2023 2,518 $ 6.04 +As of December 31, 2023, there was $ 7.7 million of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 1.5 years. +In connection with the vesting of restricted shares during the years ended December 31, 2023, 2022, and 2021, the Company purchased and immediately retired 262 , 241 and 107 shares with aggregate values of $ 1.4 million, $ 1.6 million and $ 1.4 million, respectively, in satisfaction of minimum tax withholding and exercise obligations. +The Company grants performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of certain performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in the Company's service for three years from the grant date. Performance shares were granted based on the achievement of three-year cumulative revenue metrics with a market-based condition, or a total shareholder return modifier. PSUs are converted into shares of the Company's common stock once vested and the number of shares actually earned at the end of the performance period will vary, based on actual performance, from 0 % to 150 % of the target number of performance share units granted. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +Compensation cost of $ 1.8 million, $ 0.9 million and $ 2.7 million related to the PSUs was recognized during the years ended December 31, 2023, 2022, and 2021, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2023 715 $ 6.86 +Granted (1) +548 6.32 +Performance adjustment (2) +107 N/A +Vested ( 285 ) 7.17 +Forfeited ( 94 ) 6.67 +Issued and unvested, December 31, 2023 991 $ 6.52 +Issued and expected to vest, December 31, 2023 991 $ 6.52 +(1) Grant activity for all PSUs disclosed at target. +(2) Reflects the performance adjustment based on actual performance measured at the end of the performance period. +F-26 +Table of Contents +As of December 31, 2023, there was $ 4.4 million of unrecognized compensation expense related to unvested performance stock units that is expected to be recognized over a weighted average period of 1.9 years. +In connection with the vesting of performance stock units during the year ended December 31, 2023, 2022 and 2021, the Company purchased and immediately retired 86 , 88 , and 46 shares with aggregate values of $ 0.5 million, $ 0.6 million and $ 0.7 million, respectively. +Share Repurchase Program +On August 5, 2008, the Company's Board of Directors approved a share repurchase program pursuant to which the Company is permitted to acquire up to $ 25.0 million of the Company's outstanding common shares. No shares were purchased and retired in 2023, 2022, and 2021. +12. TRANSITION COSTS +On December 31, 2021, the Company's Board of Directors approved the termination of Stephen S. Tang, the Company’s President and Chief Executive Officer, without cause under his existing employment agreement with the Company, with such termination effective as of March 31, 2022. On January 2, 2022, Dr. Tang and the Company entered into a Transition Agreement providing for the terms of the cessation of Dr. Tang’s employment with the Company, including the cessation of his service as President and Chief Executive Officer of the Company and as a member of the Board. Under the Transition Agreement, Dr. Tang’s service to the Company in all capacities ended on March 31, 2022. +Pursuant to the Transition Agreement, Dr. Tang received severance of $ 1.6 million, which was accrued in the consolidated financial statements at December 31, 2021 and paid in April 2022. Additionally, in accordance with his Transition Agreement, certain of his unvested time-vesting restricted stock awards and unvested PSUs that were outstanding at March 31, 2022 vested on April 8, 2022. His remaining unvested time-vesting restricted stock awards and PSUs were forfeited on March 31, 2022. These payments, rights and benefits are substantially similar to the severance benefits contemplated by his previous employment agreement in respect to a termination without cause thereunder. In aggregate, the Company recognized $ 1.5 million of expense in relation to Dr. Tang's stock compensation for the year ended December 31, 2022. +13. BUSINESS SEGMENT INFORMATION: +The Company is organized on the basis of products and services under a new organizational structure. All products and services reside under the same reporting hierarchy. Historically there was separate management leading the Company's Diagnostics and Molecular Solutions businesses. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across the Diagnostics and Molecular Solutions segments into one operating segment with sales, marketing, product development and research teams covering all product lines and reporting to a Chief Product Officer. Resources are allocated and performance is assessed on a consolidated basis by the Company's Chief Executive Officer, whom the Company has determined to be its Chief Operating Decision Maker ("CODM"). The CODM reviews the business based on individual product success. Therefore, the Company's historical reportable segments - Diagnostics and Molecular Solutions - are considered one reportable segment and there is no longer is a distinction between Diagnostics and Molecular Solutions, only the Company holistically. +The following table represents total long-lived assets by geographic area: +December 31, +2023 2022 +United States $ 48,311 $ 60,751 +Canada 8,777 8,526 +Other regions 1,178 1,828 +$ 58,266 $ 71,105 +F-27 +Table of Contents +14. COMMITMENTS AND CONTINGENCIES: +Purchase Commitments +As of December 31, 2023, the Company had manufacturing agreements with certain third party vendors, in which minimum purchase commitments are required. If the minimum commitments are not achieved, the Company will be required to make annual penalty payments over the next three years . Based on current forecasts, these penalties aggregate to approximately $ 1.0 million and are accrued for in the consolidated balance sheet. These estimated penalties can fluctuate based on changes in forecasted demand. The table below represents an estimate of future purchases under those agreements. +2024 $ 3,964 +2025 2,407 +2026 — +2027 — +2028 — +$ 6,371 +Litigation +From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, based upon the advice of counsel, the outcomes of such actions are not expected, individually or in the aggregate, to have a material adverse effect on the Company's future financial position or results of operations. +Spectrum Patent Litigation +In June 2021, the Company filed a complaint against Spectrum Solutions, LLC (“Spectrum”) in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum filed an answer to the initial complaint, asserting that its device does not infringe the Company’s patent and that the Company’s patent is invalid. In August 2021, the Company amended its complaint to add a second patent to this litigation. Spectrum responded to the Company's amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office (“PTO”), which was granted by the PTO. The District Court issued multiple pretrial orders, resolving the infringement, antitrust, and inequitable conduct claims without trial. First, the District Court granted Spectrum’s motion for summary judgment of noninfringement, holding that Spectrum’s saliva collection devices are not “kits for collecting and preserving a biological sample,” among other rulings. The Company appealed the grant of summary judgment to the Court of Appeals on June 8, 2023. The appeal is pending, with oral argument expected in the second half of 2024. Second, the Court denied Spectrum’s motion to supplement its allegations of alleged antitrust violations, finding that if such an amendment were allowed, Spectrum’s claims would not survive a motion for summary judgment. Spectrum thereafter withdrew its antitrust and inequitable conduct counterclaims. Spectrum did not appeal the District Court's denial of its motion to amend. On February 7, 2024, the PTO issued a Final Written Decision regarding the second patent in the litigation, holding that claims 1, 3–8, 11, and 12 of U.S. Patent No. 11,002,646 B2 are unpatentable. The Company is considering its appellate options. On September 15, 2023, Spectrum filed a separate petition for inter partes review of a third patent, which DNAG did not assert in the District Court. The Company filed a preliminary patent owner response on December 28, 2023. That petition remains pending. +15. RETIREMENT PLANS: +Substantially all of the Company's U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for the Company to match employee contributions up to $ 4 thousand per year. The Company contributed $ 1.6 million, $ 1.8 million and $ 1.3 million to the 401(k) Plan, net of forfeitures, in 2023, 2022, and 2021, respectively. +In addition to the Company's 401(k) plan, the Company offers a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. +F-28 +Table of Contents +The Company also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2023 and 2022, the value of the assets associated with this plan was $ 0.8 million and $ 0.7 million, respectively, and is included in current assets and other assets in the Company's consolidated balance sheets. The Company's obligation related to the deferred compensation plan is included in accrued expenses and other liabilities in the Company's consolidated balance sheets. As of December 31, 2023 and 2022, the Company's total obligation under this plan was $ 0.8 million and $ 0.7 million, respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Canada Revenue Agency. The RRSP also provides for DNAG to match employee contributions up to $ 4 thousand CAD per year. The Company contributed $ 0.4 million, $ 0.5 million and $ 0.4 million to the RRSP in 2023, 2022, and 2021, respectively. +16. SUBSEQUENT EVENTS: +In January 2024, the Company announced that it is leading the Series B financing and has entered wide-ranging strategic distribution agreements with Sapphiros, a privately held consumer diagnostics portfolio company based in Boston, and certain of its related entities. Through this strategic relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic tests and molecular sample management solutions to its customers globally. +On January 2, 2024 and on February 13, 2024, the Company invested $ 10.0 million and $ 18.3 million, respectively in Sapphiros for a minority interest, which will be accounted for using the cost basis of accounting. There are future investment commitments of $ 1.7 million to be paid by June 2024, contingent on certain terms and conditions being met. +F-29 \ No newline at end of file diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/filing_metadata.csv b/raw/filings/0001116463/2023/0001116463-24-000012/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..be5623d8470cbe3e7d0613717265a77c02f946c5 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2024-03-11,2023-12-31,2024-03-11T21:12:16.000Z,0001116463-24-000012,osur-20231231.htm,10-K,10182261,1,1,https://www.sec.gov/Archives/edgar/data/1116463/000111646324000012/osur-20231231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000111646324000012/,2023,2023,1 diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/item1.txt b/raw/filings/0001116463/2023/0001116463-24-000012/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..40b5439db4a67048521292b63f36018a146aa0f8 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/item1.txt @@ -0,0 +1,268 @@ +ITEM 1. Business. +OraSure Technologies transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. +In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the "Diagnostics" segment and the "Molecular Solutions" segment, into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. The Company's product portfolio is broadly divided into diagnostics products and sample management solutions. +Products and Services +The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using its proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our diagnostic products include tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes molecular sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental market segments. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Additionally, the Company offers laboratory and bioinformatics services for both genomics and microbiome customers. These services are primarily provided to pharmaceutical, biotech companies, and research institutions. +In 2020, the Company expanded its market focus by selling existing collection products for use with COVID-19 tests. Beginning in 2022 and continuing through 2023, demand for COVID-19 PCR testing declined significantly, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. +Business Update Related to InteliSwab® Covid-19 Rapid Tests +In June 2021, the Company received three Emergency Use Authorizations ("EUA") from the FDA for its InteliSwab ® COVID-19 Rapid Tests (“InteliSwab ® ”) for non-prescription OTC, professional point-of-care use and prescription home use. The Company began recording revenues on the sales of its InteliSwab ® tests during the third quarter of 2021. In January 2022, the Company received FDA authorization for pediatric use of InteliSwab® tests for children ages 2 to 14. In September 2023, the Company received FDA approval for extension of InteliSwab® test shelf-life from 18 months to 24 months. In September 2021, the Defense Logistics Agency (“DLA”) awarded the Company a procurement contract for the InteliSwab® tests for OTC use, which the DLA estimated to have a value of $205 million and which would provide InteliSwab ® tests to up to 20,000 sites throughout the United States. On November 22, 2022, the DLA awarded the Company a second procurement contract for the InteliSwab ® tests for OTC use. In 2023, the Company delivered 18 million tests under the contract, which ran from November 2022 through November 2023. In December 2022, the U.S. Department of Health and Human Services ("HHS") awarded the Company a fully funded firm fixed price contract for a total of 3.2 million InteliSwab ® tests which were delivered in February 2023. +In September 2021, the Company entered into an agreement with Biomedical Advanced Research Development Authority ("BARDA"), which is part of the office of the Assistant Secretary for Preparedness and Response at HHS, pursuant to +2 +Table of Contents +which BARDA would provide up to $13.6 million in funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) waiver of the InteliSwab ® tests. The Company continued development work and analytical testing on this test throughout 2023. However, in early 2024, the Company has communicated to BARDA that it does not intend to pursue further development of this product. +Through 2023, the Company maintained its expanded United States production capacity for InteliSwab ® tests to meet capacity targets, set out in its 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the HHS), of more than 100 million tests annually. +In 2023, the Company announced that the FDA provided approval for a new packaging and labeling configuration for InteliSwab® tests. The Company completed the transition to this new configuration in March 2023, which resulted in lower shipping costs, less packaging and reduced truckloads. +Products +The following is a summary of the Company's principal products for the infectious disease and risk management markets as well as its sample management products: +InteliSwab ® COVID-19 Rapid Test +InteliSwab ® is the Company's rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received EUA from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the FDA for use by laboratories located in the United States certified under CLIA. The Company has also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +OraQuick ® Rapid HIV Test +The OraQuick® Rapid HIV Test is the Company's rapid point-of-care test product designed to test for the presence of HIV-1 and HIV-2 antibodies. This product is sold under the OraQuick ADVANCE® name in North America, Europe and certain other countries, and under the OraQuick® name in other developing countries. The OraQuick ADVANCE® test has received premarket approval (“PMA”) from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. The OraQuick® test has received World Health Organization ("WHO") pre-qualification and registration in other countries for the detection of HIV-1 and HIV-2 antibodies in oral fluid, whole blood (fingerstick and venous), serum and plasma. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood-based specimens are to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and the test is allowed to develop. The specimen and developer solution then flow through the testing device +3 +Table of Contents +where test results are observable between 20 and 40 minutes. The OraQuick® device is a screening test and requires a confirmation test where an initial positive result is obtained. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. The Company has also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +The OraQuick ADVANCE ® test is also CE marked for sale in Europe and other countries accepting the CE mark for commercialization. This product is also registered for sale in other countries. The Company has distributors in place for several countries and is seeking to increase awareness and expand its distribution network for this product throughout the world. The Company has also received WHO pre-qualification for its export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of the Company's OraQuick ADVANCE ® HIV 1/2 Antibody Test. The Company received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, the Company has established toll-free, 24/7, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, UNITAID and other agencies. +OraQuick ® HCV Rapid Antibody Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +The Company has received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +OraQuick ® Ebola Rapid Antigen Test +The Company has received De Novo authorization from the FDA for its rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, the Company entered into an agreement with BARDA, pursuant to which BARDA will provide up to $8.6 million in funding to the Company to develop a 2nd generation Ebola test on the OraQuick ® testing platform with the objective of developing increased sensitivity, utilizing sustainable raw materials and increasing shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. In September 2023, the agreement was modified to add an additional $6.8 million in funding to be used to obtain the appropriate regulatory approvals for the product. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. The Company has received FDA 510(k) clearance to use +4 +Table of Contents +the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. The Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +The Company believes that the Intercept ® device has several advantages over competing urine and other drugs-of-abuse testing products, including its lower total testing cost, its non-invasive nature, mobility and accuracy, the ease of maintaining a chain-of-custody, the treatment of test subjects with greater dignity, no requirement for specially-prepared collection facilities and difficulty of sample adulteration. The availability of an oral fluid test is intended to allow the Company's customers to test for drug impairment and eliminate scheduling costs and inconvenience, thereby streamlining the testing process. +The Company has also developed a next-generation collection device, which it is marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over the original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is currently being sold as a forensic use only device within the criminal justice and drug treatment markets along with a panel of fully-automated high-throughput oral fluid drug assays that the Company distributes under an agreement with Thermo Fisher Scientific. +Immunoassay Tests and Reagents +The Company develops and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of its customers. The Company also sell fully-automated high-throughput oral fluid drug assays developed under its agreement with Thermo Fisher Scientific. +The Company's MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in oral fluid, urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and the Company is selling a panel of high-throughput assays supplied by Thermo Fisher Scientific to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +Genomic Products +The Company sells many genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. The Company's lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. The Company has obtained FDA clearance for its ORAcollect ® and its Oragene ® saliva collection device for general use, including professional and OTC clearances, which allows the Company's commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +The Company's genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +The Company believes these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +5 +Table of Contents +Benefits include: +• Reliable high-quality and stable genetic samples. +• Simple, non-invasive collection methods. +• The ability to store and transport collected samples for extended periods at ambient temperatures. +• Compatibility with fully automated laboratory testing systems. +The Company also sells the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. The Colli-Pee ® collection device is is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Microbiome Products +The Company also markets several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. The Company's microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +The Company's OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. The Company's OMNIgene ® • GUT DNA and RNA collection device is available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. The Company believes its product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. In 2023, the Company's OMNIgene ® • SALIVA DNA and RNA collection device became available to researchers for self-collection of saliva with stabilization of total nucleic acids. The Company's microbiome products also include devices that apply the principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +The Company's OMNIgene ® •GUT Dx collection device received de novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. +Laboratory and Data Analytical Services +The Company also offers its customers microbiome laboratory testing and analytical services. Its services focus on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. The Company's goal is to help customers unleash the translational potential of the microbiome by providing fast and information-rich characterizations of microbial diversity and function paired with expert analytics. The Company also offers comprehensive microbiome and metagenomics services to improve human, animal, and environmental health including its metatranscriptomics sequencing and analysis services for gut microbiome samples. These services generate a microbial community’s gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample’s microbial functions and expression levels. Diversigen has obtained the College of American Pathologists (“CAP”) accreditation at its laboratory facilities. +Other Products +In addition to the products described above, the Company offers the following products: +OraSure ® Collection Device +6 +Table of Contents +The Company's OraSure® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies and is FDA approved for use in the detection of HIV-1 antibodies. The Company also sells a generic version, which can be used for other analytes. This generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. +Q.E.D. ® Saliva Alcohol Test +The Company's Q.E.D.® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +COVID Collection Products +Since 2020, the Company has sold its ORAcollect® • RNA and OMNIgene® • ORAL collection devices for use in connection with COVID-19 molecular testing. The Company has actively engaged with several laboratories and researchers to demonstrate the effectiveness of its existing collection products for use with COVID-19 molecular testing. +Products Under Development +Diagnostic Products +The Company's research and development efforts include programs targeted at expanding and enhancing its diagnostics business. These programs typically focus on products related rapid tests for various diseases. +The Company is working to develop a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under its contract with BARDA. +Sample Management Solutions +In order to intersect evolving customer needs within the academic and commercial markets, the Company's molecular sample management solutions business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, the Company continues to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The field of microbiome services is fast paced with evolving biological understanding and development of new methodologies. The Company's development efforts are focused on remaining at the forefront of laboratory and informatics technologies, as well as providing new and relevant services to its customers. These include a focus on laboratory and informatics methods to integrate DNA, RNA and metabolites from microbial communities across different sample types. +Sales and Marketing +The Company markets its products in the United States and internationally. It attempts to reach major target markets through a combination of direct sales, strategic arrangements and independent distributors. The Company's marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. The Company's revenues by geographic area are described in Note 2 of the notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +The Company's InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +The Company markets the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other +7 +Table of Contents +governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. The Company sells its OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, the Company distributes its OraQuick ® HIV test in certain foreign countries through distributors. +The OraQuick ® HCV test is sold primarily to the same markets where the OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. The Company also sells this test in other countries through distributors. +Diagnostics - OTC and Self-Test +The Company sells its InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by U.S. customers on Walmart's and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the U.S. military. +The Company sells its OraQuick ® In-Home HIV test in the U.S. retail or consumer market as well as to the same markets as the OraQuick ADVANCE ® test for use in public health-oriented programs. The product is also available for purchase online through certain retailers and from the Company's website, www.oraquick.com. The Company also sells its OraQuick ® HIV Self-Test in certain international markets. +The Company's OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing HIV Self-Test pilots and programs to access international funding to purchase the Company's test. +Substance Abuse Testing +The Company's substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +The Company has entered into agreements for the distribution of its Intercept ® collection device and associated MICRO-PLATE assays for drugs-of-abuse testing in the workplace testing market in the United States and Canada through several laboratory distributors and internationally for workplace, criminal justice and forensic toxicology testing through other distributors. The Company also markets the Intercept ® collection device on its own and as a kit in combination with laboratory testing services. To better serve its workplace customers, the Company has contracted with commercial laboratories to provide prepackaged Intercept ® test kits, with prepaid laboratory testing and specimen shipping costs included. +The criminal justice market in the United States for the Company's substance abuse testing products consists of a wide variety of entities in the criminal justice system that require drug screening, such as pre-trial services, parole and probation offices, police forces, drug courts, prisons, drug treatment programs and community/family service programs. The forensic toxicology market consists of several hundred laboratories including federal, state and county crime laboratories, medical examiner laboratories and reference laboratories. +The Company also sells its next generation Intercept i2 ® he collection device with a panel of fully-automated high-throughput oral fluid assays developed with Thermo Fisher Scientific for the detection of PCP, THC, opiates, cocaine, methamphetamines, amphetamines, barbiturates, benzodiazepines, methadone and oxycodone. These products are currently sold as forensic use only into the criminal justice and drug treatment markets. +The Company distributes its Q.E.D. ® saliva alcohol test primarily through various distributors in the United States and internationally. The markets for alcohol testing are relatively small and fragmented with a broad range of legal and procedural barriers to entry. Markets range from law enforcement testing to workplace testing of employees in safety sensitive occupations. Typical usage situations include pre-employment, random, post-accident, reasonable-cause and return-to-duty testing. +8 +Table of Contents +Molecular Sample Management Solutions and Molecular Services +The Company's sample management products are sold directly to customers, primarily through its internal sales force in U.S. markets. However, in many international markets, distributors are used. +Most of the Company's revenues from sample management products are derived from sales to commercial customers and sales into the academic and research markets. The Company's commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. The Company also has customers in the livestock, companion animal and pharmaceutical markets. +The Company has expanded the market focus of its sample management products by selling certain existing collection products for use in infectious disease testing, including by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. The Company's primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). The Company is leveraging its existing sales force and global research connections to engage microbiome customers around the world and establish itself as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +The Company's products include the Colli-Pee ® device, a product developed and sold by its Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. The Colli-Pee ® collection device is is registered as a class 1 urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +The Company also offers laboratory and analytical services for both genomics and microbiome customers in order to more fully meet the needs of customers. These services are primarily provided to pharmaceutical and biotech companies and research institutions. +Significant Products and Customers +Several different product lines have contributed significantly to the Company's financial performance, accounting for 10% or more of its total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands): +For the Years Ended December 31, +2023 2022 2021 +InteliSwab® $ 257,493 $ 233,666 $ 22,405 +Genomics 47,005 54,335 63,350 +OraQuick® HIV 60,823 38,812 42,144 +COVID-19 collection kits 286 9,659 54,167 +One customer accounted for approximately 63% of the Company's consolidated net revenues for the year ended December 31, 2023 and 58% for the year ended December 31, 2022. No other individual customers accounted for more than 10% of the Company's consolidated net revenues for the years ended December 31, 2023 and 2022. The Company had no customers that accounted for more than 10% of consolidated net revenues for the year ended December 31, 2021. +Supply and Manufacturing +The Company manufactures its OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in its Bethlehem, Pennsylvania facilities. The Company expects to continue to manufacture these products at this location for the foreseeable future. +The Company has contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV Self-Test in order to supply certain international markets. The Company believes that other firms would be +9 +Table of Contents +able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. The Company has long-term agreements in place for the contract manufacturing in Thailand and one of its suppliers, which has been pre-qualified by the WHO, has been manufacturing for the Company for the past 20 years. +The Company can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in its OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply the Company's antigen or nitrocellulose needs, the Company believes that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in the Company's products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase costs and disrupt the Company's ability to manufacture and sell the affected products. +The Company manufactures all of the proprietary chemistry and assay cards for its InteliSwab ® COVID-19 Rapid Tests in its Bethlehem, Pennsylvania facilities. The Company significantly scaled up manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests and has achieved manufacturing capacity targets under its 2021 contract with the U.S. DOD, in coordination with HHS. All milestones under this contract have been achieved and the Company received corresponding milestone payments in 2023. The Company's Opus Way facility was customized to accommodate increased manufacturing capacity. Throughout 2023, the Company made progress on consolidating its manufacturing footprint by using the Opus Way facility for a more significant portion of its manufacturing and distribution needs, including re-shoring of capacity to the United States. One Pennsylvania facility was eliminated from the Company's sites. +The Company's MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the analyte of interest. Substantially all the Company's antibody raw materials are provided by contract suppliers. The Company believes that it has adequate reserves of antibody supplies and that it has access to sufficient raw materials for these products. +The fully-automated high-throughput oral fluid drug assays sold with the Company's new Intercept i2 ® he collection device are manufactured and supplied under a long-term agreement with Thermo Fisher Scientific. There is no other supply source for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. The Company is actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products are produced in Canada. +The Company's Colli-Pee ® device is currently being manufactured in Canada by its existing contract manufacturers with components supplied by third party vendors. +The Company's genomic, microbiome and metatranscriptomics laboratory testing and analytical services are provided by its subsidiary, Diversigen. +Human Capital Resources +In order to achieve the Company's goals and expectations, it is crucial that it continues to attract and retain top talent. To facilitate talent attraction and retention, the Company strives to be a safe and rewarding workplace with opportunities for its employees to grow and develop in their careers. +As of December 31, 2023, the Company had 638 full-time employees, which compares to 840 employees as of December 31, 2022. The decrease in employees during 2023 was primarily the result of the need to reduce manufacturing capacity for the Company's InteliSwab ® COVID-19 Rapid Test. In February 2023, the Company announced an 11% reduction in its non-production workforce. The Company's employees are not currently represented by a U.S. collective bargaining agreement. +The Company believes its employees are among its most important resources and are critical to its continued success. The Company focuses significant attention on attracting and retaining talented and experienced individuals to manage and support its operations, and its management team routinely reviews employee turnover rates at various levels of the +10 +Table of Contents +organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of the Company's workforce is fundamental to the success of its business. The Company safeguards its people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering its work responsibly and sustainably. The Company provides its employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive compensation and benefits programs for its employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering an inclusive workplace that reflects and contributes to the global communities in which it does business and the customers and partners it serves. This includes all communities impacted by its corporate presence. The Company's management team and all of its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of the Company's employees must adhere to a Code of Business Conduct and Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. The Company strives to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is Company policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. The Company has an active "All Means You" council that strives to drive inclusion and belonging within the workplace. OraSure believes a variety of perspectives are critical to achieving success, and that inclusion and belonging are key drivers to growth-based innovation and profitability. The Company aims to create a culture where all people feel valued, supported, and inspired to be themselves fearlessly, without judgment. The Company believes that when all voices are heard, it honors and exemplifies its core values and best serves its communities. +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of the Company's competitors are substantially larger than the Company, and have greater financial, research, manufacturing and marketing resources. The Company has many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, the Company differentiates based on its tests’ ease of use, which has enabled it to expand its self-testing offering. +The primary competitive factors for the Company's products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• Scientific and technological capability; +• Proprietary know-how; +• The ability to develop and market products and processes; +• The ability to obtain FDA or other regulatory approvals; +• The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• Commercial execution and strength of distribution; +• Access to adequate capital; +• The ability to attract and retain qualified personnel; and +• The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables the Company to serve specific segments where the products provide a unique benefit. +11 +Table of Contents +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +The Company expects competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render the Company's products impractical, uneconomical or obsolete. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective than those it develops or that would render its technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before the Company can do so. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. The Company's principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. The Company's OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. The Company's OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +The Company's OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. +Outside the U.S., the Company's rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below OraSure's HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the U.S. with WHO Prequalification status and the CE mark. The majority of the Company's sales outside the U.S. are in Africa due to the greater incidence of HIV in that region. The Company's OraQuick ® HIV Self-Test is CE marked, which enables it to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. The Company's InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +In the substance abuse testing market, the Company's Intercept ® drug testing system competes with laboratory-based drug testing products using sample matrices such as urine, hair, sweat and oral fluid. The Company expects competition for its products to intensify, particularly from other domestic and international companies that have developed, or may develop, competing oral fluid drug testing products. +The Company's MICRO-PLATE oral fluid drug assays, which are sold for use with the original Intercept ® collector and the OraSure ® collection device, also continue to come under increasing competitive pressure from “home-brew” assays developed internally by the Company's laboratory customers. The Company's oral fluid MICRO-PLATE assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. +The Company's MICRO-PLATE drugs-of-abuse reagents sold in the forensic toxicology market are targeted to forensic testing laboratories where sensitivity, automation and “system solutions” are important. The Company competes with both homogeneous and heterogeneous tests manufactured by many companies. +Q.E.D. ® competes against other semi-quantitative saliva-based alcohol tests that have received U.S. Department of Transportation approval as well as breath alcohol tests. Although there are lower priced tests on the market that use oral fluid or breath as a test medium, the Company believes that these tests are qualitative tests that are lower in quality and provide fewer benefits than OraSure's Q.E.D. ® test. +The Company's Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although the Company believes the Oragene ® and ORAcollect ® +12 +Table of Contents +devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. The Company's Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which are beginning to enter the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, the Company is one of the few vendors to offer a solution that fully meets these requirements. +The Company's genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +The Company seeks patents and other intellectual property rights to protect and preserve its proprietary technology and its right to capitalize on the results of its research and development activities. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for its products in its markets and to accelerate new product introductions. The Company regularly searches for third-party patents in fields related to its business to shape its own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +The Company has patents throughout its product and service lines. Its patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools, and services and analysis. The Company's portfolio protects its innovative sampling tools, services and diagnostics that provide access to accurate, essential information that advances global health and well-being. +Diagnostics and testing products include the OraSure ® and Intercept ® collection devices that are covered by one utility and one design patent in each of the U.S., Canada, Japan, and throughout Europe. The Company has numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. The utility patents will expire in January 2028, and the design patents will expire in 2025. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications entered their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications will expire in March 2041. +The Company has U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application entered its national phase in countries throughout the world in May 2023 and patents issuing from these applications will expire in December 2041. Related design patent applications are pending in the U.S., Canada, and Europe. +The Company has additional pending applications directed to new direct sample collection pads for its InteliSwab ® COVID-19 Rapid Test. These applications entered their national phase in countries throughout the world in October 2023, and patents issuing from these applications will expire in December 2042. A related design patent issued in 2022 in the U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2035. +The Company has registered design patents for a collection funnel and corresponding plunger device in Europe, China, and India and a corresponding U.S. design patent application is pending. +The Company has pending patent applications throughout its product and service lines directed to assays, methods, devices, and reagents for monitoring adherence to HIV medications, such as nucleoside reverse transcriptase inhibitors used in PrEP regimens. +13 +Table of Contents +The Company has two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +The Company holds, through its subsidiary, DNAG, thirty granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. Certain patents expired in June 2023, and others will expire through October 2037. +The Company holds through its subsidiary, Novosanis, one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in September 2033. The Company has also applied for additional patents, in both the United States and certain foreign countries, in novel urine collection devices. +The Company's subsidiary, Diversigen, has licensed one United States patent and several foreign patent applications from the University of Minnesota for analytical standards to detect and/or measure sampling, processing, and/or amplification errors in a biological sample containing polynucleotide molecules. These patents will expire in May 2036. This license also covers certain software and know-how related to laboratory and bioinformatics procedures and processes. Diversigen has also licensed certain know-how and database assets from the Baylor College of Medicine related to laboratory processes for microbiome and metagenomics services. +The Company requires its employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with the Company or the performance by the consultant of services for the Company will be OraSure's exclusive property. +The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark TM , Novosanis ® , Colli-Pee ® , UCM ® , UAS TM , THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also owns many of these marks and others in several foreign countries and it is pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of the Company's business. Competitors may be able to produce products competing with the Company's patented products without infringing its patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of the Company's products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. The Company believes that its products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of its products may be unclear and are subject to change. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +14 +Table of Contents +Many of the Company's FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, the Company must continue to comply with other FDA requirements applicable to marketed products and is subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt the Company's ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export the Company's products if the agency determines that it is not in compliance. +Domestic Regulation +Most of the Company's products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, De Novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for De Novo classification before marketing can begin. A De Novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a De Novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” +15 +Table of Contents +letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. The FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made, amongst other reasons, following a determination by the Secretary of Health and Human Services that there is a public health emergency or a significant potential for a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to the Company's marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a De Novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of the Company's products are used for research only or for other nonclinical or non-diagnostic purposes. The Company's molecular sample management solutions are sold to many academic and research institutions for research purposes and the Company's drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +16 +Table of Contents +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment regulations, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +In February 2024, the FDA issued the Quality Management System Regulation (“QMSR”) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the International Organization for Standardization (“ISO”), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. The Company believes that its facilities and procedures are in material compliance with the FDA’s OSR regulations, the European Union's Quality Management Systems requirements, ISO 13485:2016, and other post-market requirements, but the regulations are subject to change or may be unclear, and the Company cannot be sure that FDA investigators will agree with the Company's compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. The Company considers the applicability of CLIA requirements in the design and development of its products. The Company has obtained a waiver of the CLIA requirements for its OraQuick ADVANCE ® rapid HIV-1/2 antibody test, its OraQuick ® HCV rapid antibody test and its Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. In addition, the supplier of the OraSure Quick-Flu® test has obtained a CLIA waiver for that product. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +The laboratory services provided by the Company's subsidiary, Diversigen, consist of microbiome, metatranscriptomics and metagenomics sequencing, bioinformatics and analysis. Diversigen has elected to obtain a license from CLIA and has received a certificate of accreditation from the College of American Pathologists (CAP). +Certain of the Company's products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, the Company may not promote its products for such “off-label” uses and can only market its products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection +17 +Table of Contents +statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that the Company's promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that the Company modify its training or promotional materials or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, the Company's reputation could be damaged and sales of its products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that the Company's facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until the Company resolves the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit the Company's ability to export its products to countries that require such certificates. +International +The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. The Company generally pursues approval only in those countries that the Company believes have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that the Company's quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The EU Medical Devices Regulation (EU) 2017/745 (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (EU) 2017/74 (the “EU IVDR”), which repealed and replaced the Medical Devices Directive 93/42/EEC (“MDD”) and the In Vitro Diagnostic Medical Devices Directive 98/79/EC (“IVDD”) respectively, govern the regulation of medical devices and in vitro diagnostic devices in the European Union (“EU”). The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices than the previous Directives, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became fully applicable on May 26, 2022. There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the IVDR (subject to compliance with certain requirements under the IVDR, including in respect of post-market surveillance); however, class A non-sterile products do not benefit from such transitional provisions and have been required to be IVDR compliant since May 26, 2022, class D devices benefit from such transitional provisions until May 26, 2025. On January 23, 2024, the European Commission introduced a legislative proposal to extend such transitional provisions for certain devices. The European Commission has provided the legislative proposal to the European Parliament and the European Council for their review and approval. Once the European Commission’s legislative proposal is approved (with or without amendment), it will be adopted into EU law. +In the EU, products that fall under the scope of the MDR and the IVDR may not be placed on the EU market without a valid CE mark. Approval of a regulatory authority is not required to obtain CE certification, but, depending on the class of product, conformity assessment by a notified body may be required. Notified bodies are accredited and supervised by +18 +Table of Contents +national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. The conformity assessment procedure for medical devices and in vitro diagnostic devices is to assess whether the device is compliant with the general safety and performance requirements set forth in the EU MDR or EU IVDR (as applicable), and includes an examination of the product’s technical dossier and the manufacturer’s quality system. ISO certification of the quality system in accordance with the relevant standard for medical devices or in vitro diagnostic devices creates a rebuttable presumption that the product satisfies the applicable requirements of the EU MDR or EU IVDR (as applicable) with respect to the quality management system. Compliance with these general safety and performance requirements allows the Company to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to its products, without which they may not be placed on the market in the EU. The Company also notes that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to the Company's international strategy. +The Company must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. The Company has completed this process for several of its current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). +The Company has obtained WHO pre-qualification for its OraQuick ® HIV-1/Antibody Test, OraQuick® HIV Self-Test and OraQuick ® HCV. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +The Company's products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on the Company's ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on the Company's business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on the Company's ability to operate in these jurisdictions and significant damage to its reputation. +The Company is also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require the Company to adopt a compliance program. Taken +19 +Table of Contents +together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, the Company has implemented necessary systems to accurately track gifts and other payments. +The Company has implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While the Company believes that its practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which the Company is subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. The Company's present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to the Company as a result of its international sales. The Company is also subject to the FCPA’s accounting provisions, which require it to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the Company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which the Company is subject as a result of its international sales also includes the U.K. Bribery Act 2010 (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of the Company's current and proposed research, development, and manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that the Company sells in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing +20 +Table of Contents +medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require the Company to alter its manufacturing processes, thereby increasing its manufacturing costs, or may impose other additional obligations on the Company or its products. The Company believes that its products and manufacturing processes at its facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of the Company's business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +Information Available on the Internet +The Company's filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on the Company's website (www.orasure.com) free of charge as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on the Company's website is not a part of this Annual Report. +21 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/item13.txt b/raw/filings/0001116463/2023/0001116463-24-000012/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..eaa42c25b4bf50319d36a7a1a02664514778a043 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in the Company's 2024 Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/item9a.txt b/raw/filings/0001116463/2023/0001116463-24-000012/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e796813e06c583c38f4f150b9b5b2e6cdb2d4465 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/item9a.txt @@ -0,0 +1,32 @@ +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2023. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2023 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework, management concluded that the Company's internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2023. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The effectiveness of the Company's internal control over financial reporting as of December 31, 2023 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +In the third quarter ended September 30, 2023, we identified a material weakness in our internal control over financial reporting related to customer pricing in the revenue recognition process. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A control related to the validation of accurate pricing in customer sales orders did not operate effectively to detect an error in prices, which resulted in the recognition of revenue at an inaccurate price during the six months ended June 30, 2023. +67 +Table of Contents +Although the resulting error was not material to those financial statements, we concluded that the control deficiency represents a material weakness. The financial statements for the nine months ended September 30, 2023 were not impacted by this material weakness and are not misstated. +During the quarter ended December 31, 2023, the Company implemented controls to validate accurate pricing in customer sales orders and remediated the material weakness. +Except for the foregoing, there was no change in the Company's internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a or 15d of the Exchange Act that occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated March 11, 2024 expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and +68 +Table of Contents +that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ KPMG LLP +Philadelphia, Pennsylvania +March 11, 2024 \ No newline at end of file diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/rp_note.txt b/raw/filings/0001116463/2023/0001116463-24-000012/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2023/0001116463-24-000012/rpt_disclosure.txt b/raw/filings/0001116463/2023/0001116463-24-000012/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..140a0448eb4c93b81039b3b3b7195b7293780d10 --- /dev/null +++ b/raw/filings/0001116463/2023/0001116463-24-000012/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2023, there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. +30 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/filing.txt b/raw/filings/0001116463/2024/0001116463-25-000010/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..e9adda276feb1863c4fe676ba89be004daee0df5 --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/filing.txt @@ -0,0 +1,2323 @@ +osur-20241231 +0001116463 2024 FY false P5Y http://fasb.org/us-gaap/2024#AssetImpairmentCharges http://fasb.org/us-gaap/2024#AssetImpairmentCharges P1Y iso4217:USD xbrli:shares iso4217:USD xbrli:shares 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osur:SherlockBiosciencesMember 2024-12-19 0001116463 osur:SherlockBiosciencesMember 2024-12-19 2024-12-19 0001116463 osur:SherlockBiosciencesMember 2024-01-01 2024-12-31 0001116463 osur:SherlockBiosciencesMember 2024-01-01 2024-12-31 0001116463 osur:SherlockBiosciencesMember 2023-01-01 2023-12-31 0001116463 osur:RegisteredRetirementSavingsPlanMember osur:DNAGenotekMember 2024-01-01 2024-12-31 0001116463 osur:RegisteredRetirementSavingsPlanMember osur:DNAGenotekMember 2023-01-01 2023-12-31 0001116463 osur:RegisteredRetirementSavingsPlanMember osur:DNAGenotekMember 2022-01-01 2022-12-31 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +__________________________________________________________ +FORM 10-K +__________________________________________________________ +(Mark One) +x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2024 +or +o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from _________ to +Commission File No. 001-16537 +__________________________________________________________ +ORASURE TECHNOLOGIES, INC . +(Exact name of registrant as specified in its charter) +__________________________________________________________ +Delaware 36-4370966 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +220 East First Street +Bethlehem , Pennsylvania +18015 +(Address of principal executive offices) (Zip Code) +(Registrant’s telephone number, including area code): ( 610 ) 882-1820 +Securities registered pursuant to Section 12(b) of the Act: +Title of Each Class Trading Symbol Name of Each Exchange on Which Registered +Common Stock, $0.000001 par value per share OSUR The Nasdaq Stock Market LLC +Securities registered pursuant to Section 12(g) of the Act: None +__________________________________________________________ +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No o +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer o Accelerated filer x +Non-accelerated filer o Smaller reporting company o +Emerging Growth Company o +If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o +Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. x +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). o +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x +State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2024) : $ 314,835,036 . +Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of February 24, 2025: 74,800,131 shares. +Documents Incorporated by Reference: +Part III of this Annual Report on Form 10-K will be incorporated by reference from certain portions of the Registrant's Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders, or will be included in an amendment hereto, to be filed not later than 120 days after the close of the fiscal year ended December 31, 2024. Except with respect to information specifically incorporated by reference in the Annual Report on Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part hereof. +Table of Contents +Table of Contents +PART I +Page +ITEM 1. +Business +2 +ITEM 1A. +Risk Factors +21 +ITEM 1B. +Unresolved Staff Comments +57 +ITEM IC. +Cybersecurity +57 +ITEM 2. +Properties +58 +ITEM 3. +Legal Proceedings +58 +ITEM 4. +Mine Safety Disclosures +58 +PART II +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +59 +ITEM 6. +Reserved +60 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +60 +ITEM 7A. +Quantitative and Qualitative Disclosures About Market Risk +67 +ITEM 8. +Financial Statements and Supplementary Data +67 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +68 +ITEM 9A. +Controls and Procedures +68 +ITEM 9B. +Other Information +69 +ITEM 9C. +Disclosure Regarding Foreign Jurisdictions That Prevent Inspections +70 +PART III +ITEM 10. +Directors, Executive Officers and Corporate Governance +71 +ITEM 11. +Executive Compensation +71 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +71 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +71 +ITEM 14. +Principal Accountant Fees and Services +71 +PART IV +ITEM 15. +Exhibits and Consolidated Financial Statement Schedules +72 +ITEM 16. +Form 10-K Summary +74 +Signatures +75 +Table of Contents +Use of Names +References in this Annual Report on Form 10-K for the fiscal year ended December 31, 2024, (the "Annual Report") to "OraSure" mean OraSure Technologies, Inc. References in this Annual Report to “DNAG” mean DNA Genotek, Inc., references to “Diversigen” mean Diversigen, Inc., references to “Novosanis” mean Novosanis NV, and reference to "Sherlock" mean Sherlock Biosciences, Inc. and its wholly owned subsidiaries. References in this Annual Report to "we", "us", "our", "OTI" or the "Company" mean OraSure and its consolidated subsidiaries, DNAG, Diversigen, Novosanis, and Sherlock, unless otherwise indicated. +Disclosure Regarding Forward Looking Statements +This Annual Report contains certain “forward-looking statements,” within the meaning of the Federal securities laws. These may include statements about the Company's expected revenues, earnings/losses per share, net income (loss), expenses, cash flow or other financial performance, or developments, clinical trial or development activities, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect the Company's future operations, results of operations or financial position. These statements often include words, such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. +Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: +• Market acceptance of, and the Company's ability to market and sell, its products and services, whether through its internal, direct sales force or third parties; +• Failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for the Company's products; +• Significant customer concentrations that exist or may develop in the future; +• The Company's ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; +• The Company's ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; +• The Company's ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (or the "FDA”), or other regulators; +• Changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; +• The Company's ability to meet increased demand for its products; +• The impact of replacing distributors on the Company's business; +• Inventory levels at distributors and other customers; +• The Company's ability to achieve its financial and strategic objectives and continue to increase its revenues, including the ability to expand international sales; +• The impact of competitors, competing products and technology changes on the Company's business; +• Reduction or deferral of public funding available to customers; +• Competition from new or better technology or lower cost products; +• The Company's ability to develop, commercialize and market new products; +Table of Contents +• Changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention, (the “CDC”) or other agencies; ability to fund research and development and other products and operations; +• The Company's ability to fulfill its commitments under its contracts with the U.S. government for InteliSwab ® COVID-19 Rapid Tests; +• The Company's ability to obtain and maintain new or existing product distribution channels; +• Reliance on sole supply sources for critical products and components; +• Availability of related products produced by third parties or products required for use of the Company's products; +• The impact of contracting with the U.S. government on the Company's business; +• The impact of negative economic conditions on the Company's business; +• The Company's ability to maintain sustained profitability; +• The Company's ability to increase its gross margins; +• The ability to utilize net operating loss carry forwards or other deferred tax assets; +• Volatility of the Company's stock price; +• Uncertainty relating to patent protection and potential patent infringement claims; +• Uncertainty and costs of litigation relating to patents and other intellectual property; +• Availability of licenses to patents or other technology; +• Ability to enter into international manufacturing agreements; +• Obstacles to international marketing and manufacturing of products; +• The impact of changes in international funding sources and testing algorithms on international sales; +• Adverse movements in foreign currency exchange rates; +• Loss or impairment of sources of capital; +• The Company's ability to attract and retain qualified personnel; +• The Company's exposure to product liability and other types of litigation; +• Changes in international, federal or state laws and regulations; +• Customer consolidations and inventory practices; +• Equipment failures and ability to obtain needed raw materials and components; +• The impact of terrorist attacks and civil unrest; and +• General political, business and economic conditions, including inflationary pressures. +These and other factors that could affect the Company's results are discussed more fully under Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements and Risk Factors are made as of the date of this Annual Report and the Company undertakes no duty to update these statements, unless it is required to do so by law. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make updates with respect to other forward-looking statements or that it will make any further updates to those forward-looking statements at any future time. +Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing +Table of Contents +or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure. +Trademarks, Trade Names and Service Marks +This Annual Report contains certain trademarks, which are protected under applicable intellectual property laws and are the Company's property. Solely for convenience, the Company's trademarks and trade names referred to in this Annual Report may appear without the ® or ™ symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark ® , Novosanis ® , Colli-Pee ® , UCM ® , UAS™, THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also licenses the SHERLOCK™ mark from The Broad Institute, Inc. The Company also owns many of these marks and others in several foreign countries and it pursues the registration of other trademarks where appropriate. +Table of Contents +PART I +1 +Table of Contents +ITEM 1. Business. +OTI transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. +Our products and services reside under one reporting hierarchy, with commercial and innovation teams, which are part of a single business unit covering multiple product lines. Our business is principally comprised of the development, manufacture, marketing, sale and distribution of (i) diagnostics products, and (ii) sample management solutions. +In January 2024, the Company completed an equity investment in KKR Sapphiros L.P. ("Sapphiros"), leading its Series B financing and entering into a wide-ranging strategic distribution relationship with Sapphiros, which secures exclusive distribution rights to certain products in Sapphiros' development pipeline, including self-collected blood test and diagnostic tests. Sapphiros is a privately held consumer diagnostics portfolio company based in Boston. +In December 2024, the Company acquired Sherlock Biosciences, Inc. and its subsidiaries ("Sherlock"). Sherlock is a global health company focused on next generation diagnostics. Sherlock's molecular diagnostics platform aims to provide rapid results with strong sensitivity and specificity in a disposable format. Sherlock's first test for Chlamydia Trachomatis (CT) and Neisseria Gonorrhoeae (NG) is currently in Phase 3 clinical studies and is expected to be submitted to the FDA for approval by the end of 2025. Subject to regulatory approvals, this test is expected to expand the Company's portfolio for rapid diagnostics for sexually transmitted infections. +Products and Services +The Company's business consists of the development, manufacture, marketing, sale and distribution of simple, easy to use diagnostic products and specimen collection devices using its proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests. Our diagnostic products include tests for diseases including HIV, Hepatitis C, Syphilis and COVID-19 that are performed on a rapid basis at the point of care. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's HIV, HCV and COVID-19 products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV and HCV products, as a self-test to individuals in a number of other countries, including, for the HIV products, as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental market segments. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. +In 2020, the Company expanded its market focus by selling existing collection products for use with COVID-19 tests. Beginning in 2022 and continuing through 2024, demand for COVID-19 PCR testing declined significantly, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. +Products +The following is a summary of the Company's principal products for the infectious disease and risk management markets as well as its sample management products: +OraQuick ® Rapid HIV Test +The OraQuick® Rapid HIV Test is the Company's rapid point-of-care test product designed to test for the presence of HIV-1 and HIV-2 antibodies. This product is sold under the OraQuick ADVANCE® name in North America, Europe and certain other countries, and under the OraQuick® name in other developing countries. The OraQuick ADVANCE® test has received premarket approval (“PMA”) from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. The OraQuick® test has received World Health +2 +Table of Contents +Organization ("WHO") pre-qualification and registration in other countries for the detection of HIV-1 and HIV-2 antibodies in oral fluid, whole blood (fingerstick and venous), serum and plasma. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood-based specimens are to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and the test is allowed to develop. The specimen and developer solution then flow through the testing device where test results are observable between 20 and 40 minutes. The OraQuick® device is a screening test and requires a confirmation test where an initial positive result is obtained. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. The Company has also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +The OraQuick ADVANCE ® test is also CE marked for sale in Europe and other countries accepting the CE mark for commercialization. This product is also registered for sale in other countries. The Company has distributors in place for several countries and is seeking to increase awareness and expand its distribution network for this product throughout the world. The Company has also received WHO pre-qualification for its export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of the Company's OraQuick ADVANCE ® HIV 1/2 Antibody Test. The Company received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, the Company has established toll-free, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. On January 7, 2025, the Company announced that the FDA had approved a premarket approval application supplement for a labeling change to include individuals 14 years of age and older. The previous approval was available for individuals 17 years of age and older. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is an in-vitro diagnostic home-use test for HIV (HIV-1 and HIV-2) in oral fluid, and is sold for use by individuals. OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, PEPFAR and other agencies. +OraQuick ® HCV Rapid Antibody Test and Self-Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +The Company has received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +Additionally, the OraQuick ® HCV Self-Test is an over the counter self-test that operates in substantially the same way as the OraQuick ® HCV rapid antibody test. The OraQuick ® HCV self-test received WHO pre-qualification in 2024 and is the first hepatitis C self-test to earn this designation. +Diagnostics Direct Syphilis Health Check ™ +In February 2024, the Company entered into a strategic agreement with Diagnostics Direct to distribute its Syphilis Health Check ™ rapid diagnostic test. Syphilis Health Check ™ is the first CLIA-waived treponemal test. The test, which uses fingerstick whole blood and delivers point of care results in 10 minutes, offers the ability to test in non-traditional +3 +Table of Contents +environments, such as outreach programs and mobile testing clinics. Syphilis Health Check ™ is approved for use with people aged 13 years and older. +OraQuick ® Ebola Rapid Antigen Test +The Company has received De Novo authorization from the FDA for its rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, the Company entered into an agreement with the Biomedical Advanced Research and Development Authority ("BARDA"), pursuant to which BARDA will provide up to $8.6 million in funding to the Company to develop a 2nd generation Ebola test on the OraQuick ® testing platform with the objective of developing increased sensitivity, utilizing sustainable raw materials and increasing shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. In September 2023, the agreement was modified to add an additional $6.8 million in funding to be used to obtain the appropriate regulatory approvals for the product. +InteliSwab ® COVID-19 Rapid Test +The InteliSwab ® COVID-19 rapid test ("InteliSwab") is the Company's rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received an Emergency Use Authorization ("EUA") from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +Through 2024, the Company maintained its expanded United States production capacity for InteliSwab ® tests to meet capacity targets set out in its 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the U.S. Department of Health and Human Services ("HHS")), of more than 100 million tests annually. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the FDA for use by laboratories located in the United States certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). The Company has also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. The Company has received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. +4 +Table of Contents +Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. The Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +The Company has also developed a next-generation collection device, which it is marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over the original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is sold as a forensic use only device within the criminal justice and drug treatment markets along with a panel of fully-automated high-throughput oral fluid drug assays that the Company distributes under an agreement with Thermo Fisher Scientific. +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its Intercept ® Drug Testing System products through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Immunoassay Tests and Reagents +The Company develops and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of its customers. The Company also sell fully-automated high-throughput oral fluid drug assays developed under its agreement with Thermo Fisher Scientific. +The Company's MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in oral fluid, urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and the Company is selling a panel of high-throughput assays supplied by Thermo Fisher Scientific to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its immunoassay products through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Genomic Products +The Company sells genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. The Company's lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. The Company has obtained FDA clearance for its ORAcollect ® and its Oragene ® saliva collection device for general use, including professional and OTC clearances, which allows the Company's commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +The Company's genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +The Company believes these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• Reliable high-quality and stable genetic samples. +5 +Table of Contents +• Simple, non-invasive collection methods. +• The ability to store and transport collected samples for extended periods at ambient temperatures. +• Compatibility with fully automated laboratory testing systems. +The Company also sells the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. The Colli-Pee ® collection device is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Microbiome Products +The Company also markets several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. The Company's microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +The Company's OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. The Company's OMNIgene ® • GUT DNA and RNA collection device is available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. The Company believes its product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. In 2023, the Company's OMNIgene ® • SALIVA DNA and RNA collection device became available to researchers for self-collection of saliva with stabilization of total nucleic acids. The Company's microbiome products also include devices that apply the principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +The Company's OMNIgene ® •GUT Dx collection device received de novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. +Laboratory and Data Analytical Services +During the third quarter of 2024, the Company exited its microbiome laboratory testing and data analytical services, with the Company continuing to close out limited and modest final service orders. These services focused on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. +Other Products +In addition to the products described above, the Company offers the following products: +OraSure ® Collection Device +The Company's OraSure® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies and is FDA approved for use in the detection of HIV-1 antibodies. The Company also sells a generic version, which can be used for other analytes. This generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. +Q.E.D. ® Saliva Alcohol Test +The Company's Q.E.D.® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +6 +Table of Contents +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its Q.E.D.® saliva alcohol test through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Products Under Development +Diagnostic Products +The Company's research and development efforts include programs targeted at expanding and enhancing its diagnostics business. These programs typically focus on products related rapid tests for various diseases. +The Company is developing a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under its contract with BARDA. +The Company is developing a single-use lateral flow immunoassay intended for the qualitative detection of antigens from viruses within the Marburg virus genus. The Company is developing this test and hopes to achieve FDA 510(k) clearance in whole or in part with federal funds obtained from the HHS Administration for Strategic Preparedness and Response (ASPR); BARDA under Other Transaction Number: 75A50123D00005. +Through its Sherlock subsidiary, the Company is developing a molecular self-test for Chlamydia Trachomatis (CT) and Neisseria Gonorrhoeae (NG), which is currently in clinical studies. The Company acquired this program in connection with its acquisition of Sherlock. +Through its Sherlock subsidiary, the Company is also developing of a Covid/Flu molecular test, funded in part with Federal funds obtained from the HHS Administration for Strategic Preparedness and Response (ASPR) under contract number: 75A50124C00055. The Company acquired this program in connection with its Sherlock acquisition. +Sample Management Solutions +In order to intersect evolving customer needs within the academic and commercial markets, the Company's sample management solutions business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, the Company continues to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The Company is working to develop a blood proteomics product, which, if approved, the Company expects will be used in emerging applications, like liquid biopsy, oncology and neurology, and in connection with chronic illnesses like Alzheimer's and diabetes. +Sales and Marketing +The Company markets its products in the United States and internationally. It attempts to reach major target markets through a combination of direct sales, strategic arrangements and independent distributors. The Company's marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. The Company's revenues by geographic area are described in Note 2 of the notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +The Company's InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +The Company markets the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other +7 +Table of Contents +governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. The Company sells its OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, the Company distributes its OraQuick ® HIV test in certain foreign countries through distributors. +The OraQuick ® HCV test is sold primarily to the same markets where the OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. The Company also sells this test in other countries through distributors. +The Syphilis Health Check ™ is a CLIA-waived professional test sold for use by clinicians, community health providers and public health agencies and can be used as an initial screening test or in conjunction with a nontreponemal laboratory test and clinical findings to aid in the diagnosis of syphilis infection. +Diagnostics - OTC and Self-Test +The Company sells its InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by U.S. customers on Walmart's and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the U.S. military. +The Company sells its OraQuick ® In-Home HIV test in the U.S. retail or consumer market as well as to the same markets as the OraQuick ADVANCE ® test for use in public health-oriented programs. The product is also available for purchase online through certain retailers and from the Company's website, www.oraquick.com. The Company also sells its OraQuick ® HIV Self-Test in certain international markets. +The Company's OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO and the Company's OraQuick ® HCV Self-Test is the first Hepatitis C self-test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing self-test pilots and programs to access international funding to purchase the Company's test. +Substance Abuse Testing +On November 6, 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its substance abuse testing products, it substantially ceased the production and sale of such products as of the end of 2024. The Company's substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +Sample Management Solutions and Molecular Services +The Company's sample management products are sold directly to customers, primarily through its internal sales force in U.S. markets. However, in many international markets, distributors are used. +Most of the Company's revenues from sample management products are derived from sales to commercial customers and sales into the academic and research markets. The Company's commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. The Company also has customers in the livestock, companion animal and pharmaceutical markets. +The Company has expanded the market focus of its sample management products by selling certain existing collection products for use in infectious disease testing, including by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. The Company's primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). The Company is leveraging its existing sales force and global research connections to engage microbiome customers around the world and establish itself as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +8 +Table of Contents +The Company's products include the Colli-Pee ® collection device for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. The Colli-Pee ® collection device is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Significant Products and Customers +Several different product lines have contributed significantly to the Company's financial performance, accounting for 10% or more of its total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands): +For the Years Ended December 31, +2024 2023 2022 +OraQuick® HIV $ 60,804 $ 60,823 $ 38,812 +InteliSwab® 45,136 257,493 233,666 +Genomics 44,861 47,005 54,335 +One non-commercial customer accounted for approximately 24% of the Company's consolidated net revenues for the year ended December 31, 2024 and 63% and 58% for the years ended December 31, 2023 and 2022, respectively. The Company had no other customers that accounted for more than 10% of consolidated net revenues for the years ended December 31, 2024, 2023 and 2022. +Supply and Manufacturing +The Company manufactures its InteliSwab ® COVID-19 Rapid Test, OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in its Bethlehem, Pennsylvania facilities. With the exception of its substance abuse testing products, the Company expects to continue to manufacture these products at this location for the foreseeable future. +The Company has contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV Self-Test in order to supply certain international markets. The Company believes that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. The Company has long-term agreements in place for the contract manufacturing in Thailand and one of its suppliers, which has been pre-qualified by the WHO, has been manufacturing for the Company for the past 20 years. +The Company can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in its OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply the Company's antigen or nitrocellulose needs, the Company believes that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in the Company's products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase costs and disrupt the Company's ability to manufacture and sell the affected products. +The Company manufactures all of the proprietary chemistry and assay cards for its InteliSwab ® COVID-19 Rapid Tests in its Bethlehem, Pennsylvania facilities. The Company significantly scaled up manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests and achieved manufacturing capacity targets under its 2021 contract with the U.S. DOD, in coordination with the HHS. The Company's Opus Way facility was customized to accommodate increased manufacturing capacity. Throughout 2024, the Company made progress on consolidating its manufacturing footprint by using the Opus Way facility for a more significant portion of its manufacturing and distribution needs, including re-shoring of capacity to the United States. +The Company's MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the analyte of interest. Substantially all the Company's antibody raw materials are provided by +9 +Table of Contents +contract suppliers. The Company believes that it has adequate reserves of antibody supplies and that it has access to sufficient raw materials for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. The Company is actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products are produced in Canada and the United States. +The Company's Colli-Pee ® device is currently being manufactured in Canada by its existing contract manufacturers with components supplied by third party vendors. +Human Capital Resources +In order to achieve the Company's goals and expectations, it is crucial that it continues to attract and retain top talent. To facilitate talent attraction and retention, the Company strives to be a safe and rewarding workplace with opportunities for its employees to grow and develop in their careers. +As of December 31, 2024, the Company had 501 full-time employees, which compares to 638 employees as of December 31, 2023. The decrease in employees during 2024 was the result of the need to reduce manufacturing capacity for the Company's InteliSwab ® COVID-19 Rapid Test, transition away from the microbiome molecular sequencing services business and close its Belgian operations. In addition, the Company exited its risk assessment business. The Company's employees are not currently represented by a U.S. collective bargaining agreement. +The Company believes its employees are among its most important resources and are critical to its continued success. The Company focuses significant attention on attracting and retaining talented and experienced individuals to manage and support its operations, and its management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of the Company's workforce is fundamental to the success of its business. The Company safeguards its people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering its work responsibly and sustainably. The Company provides its employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive compensation and benefits programs for its employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering an inclusive workplace that reflects and contributes to the global communities in which it does business and the customers and partners it serves. This includes all communities impacted by its corporate presence. The Company's management team and all of its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of the Company's employees must adhere to a Code of Business Conduct and Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. The Company strives to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is Company policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. The Company has an active "All Means You" council that strives to drive inclusion and belonging within the workplace. OraSure believes a variety of perspectives are critical to achieving success, and that inclusion and belonging are key drivers to growth-based innovation and profitability. The Company aims to create a culture where all people feel valued, supported, and inspired to be themselves authentically and fearlessly. The Company believes that when all voices are heard, it honors and exemplifies its core values and best serves its communities. +10 +Table of Contents +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of the Company's competitors are substantially larger than the Company, and have greater financial, research, manufacturing and marketing resources. The Company has many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, the Company differentiates based on its tests’ ease of use, which has enabled it to expand its self-testing offering. +The primary competitive factors for the Company's products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• Scientific and technological capability; +• Proprietary know-how; +• The ability to develop and market products and processes; +• The ability to obtain FDA or other regulatory approvals; +• The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• Commercial execution and strength of distribution; +• Access to adequate capital; +• The ability to attract and retain qualified personnel; and +• The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables the Company to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +The Company expects competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render the Company's products impractical, uneconomical or obsolete. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective than those it develops or that would render its technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before the Company can do so. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. The Company's principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. The Company's OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. The Company's OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +The Company's OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. +Outside the U.S., the Company's rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below OraSure's HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the U.S. with WHO Prequalification status and the CE mark. The majority of the Company's sales outside the U.S. are in Africa due to the greater incidence of HIV in that region. +11 +Table of Contents +The Company's OraQuick ® HIV Self-Test is CE marked, which enables it to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. The Company's InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +The Company's Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although the Company believes the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. The Company's Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which have entered the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, the Company is one of the few vendors to offer a solution that fully meets these requirements. +The Company's genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +The Company seeks patents and other intellectual property rights to protect and preserve its proprietary technology and its right to capitalize on the results of its research and development activities. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for its products in its markets and to accelerate new product introductions. The Company regularly searches for third-party patents in fields related to its business to shape its own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +The Company has patents throughout its product lines. Its patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools and sample preservatives. The Company's portfolio protects its innovative sampling tools, sample preservatives, and diagnostics that provide access to accurate, essential information that advances global health and well-being. +The Company has numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications entered their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications are expected to expire in March 2042. +The Company has U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application entered its national phase in countries throughout the world in May 2023 and patents issuing from these applications are expected to expire in December 2041. One related design patent is issued in the U.S. and will expire in November 2038, and other related design patent applications are pending in the U.S., Canada, and Europe. +The Company has additional pending applications directed to new direct sample collection pads for its InteliSwab ® COVID-19 Rapid Test. These applications entered their national phase in countries throughout the world in October 2023, and patents issuing from these applications will expire in December 2042. Two related design patents issued in 2022 in the +12 +Table of Contents +U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2038 and 2039. +The Company has registered design patents for a collection funnel and corresponding plunger device in Europe, Canada China, India, and the U.S. +The Company has two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +The Company holds, through its subsidiary, DNAG, nineteen granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. Certain patents expired in June 2023, and others will expire through November 2040. +The Company holds one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in April 2034. The Company has also applied for additional patents and designs, in both the United States and certain foreign countries, in novel urine collection devices. +The Company requires its employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with the Company or the performance by the consultant of services for the Company will be OraSure's exclusive property. +The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark ® , Novosanis ® , Colli-Pee ® , UCM ® , UAS™, THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also licenses the SHERLOCK™ mark from The Broad Institute, Inc. The Company also owns many of these marks and others in several foreign countries and it is pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of the Company's business. Competitors may be able to produce products competing with the Company's patented products without infringing its patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of the Company's products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. The Company believes that its products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of its products may be unclear and are subject to change. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +13 +Table of Contents +Many of the Company's FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, the Company must continue to comply with other FDA requirements applicable to marketed products and is subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt the Company's ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export the Company's products if the agency determines that it is not in compliance. +Domestic Regulation +Most of the Company's products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, De Novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for De Novo classification before marketing can begin. A De Novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a De Novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” +14 +Table of Contents +letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. The FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made, amongst other reasons, following a determination by the Secretary of Health and Human Services that there is a public health emergency or a significant potential for a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to the Company's marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a De Novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of the Company's products are used for research only or for other nonclinical or non-diagnostic purposes. The Company's sample management solutions are sold to many academic and research institutions for research purposes and the Company's drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +15 +Table of Contents +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment licenses, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +In February 2024, the FDA issued the Quality Management System Regulation (“QMSR”) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the International Organization for Standardization (“ISO”), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. The Company believes that its facilities and procedures are in material compliance with the FDA’s QSR requirements, the European Union's Quality Management Systems requirements, ISO 13485:2016, and other post-market requirements, but the regulations are subject to change or may be unclear, and the Company cannot be sure that FDA investigators will agree with the Company's compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. The Company considers the applicability of CLIA requirements in the design and development of its products. The Company has obtained a waiver of the CLIA requirements for its OraQuick ADVANCE ® rapid HIV-1/2 antibody test, its OraQuick ® HCV rapid antibody test and its Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +Certain of the Company's products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, the Company may not promote its products for such “off-label” uses and can only market its products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that the Company's promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that the Company modify its training or promotional materials or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a notice +16 +Table of Contents +of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, the Company's reputation could be damaged and sales of its products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that the Company's facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until the Company resolves the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit the Company's ability to export its products to countries that require such certificates. +International +The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. The Company generally pursues approval only in those countries that the Company believes have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that the Company's quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The EU Medical Devices Regulation (EU) 2017/745 (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (EU) 2017/746 (the “EU IVDR”), which repealed and replaced the Medical Devices Directive 93/42/EEC (“MDD”) and the In Vitro Diagnostic Medical Devices Directive 98/79/EC (“IVDD”) respectively, govern the regulation of medical devices and in vitro diagnostic devices in the European Union (“EU”). The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices than the previous Directives, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became fully applicable on May 26, 2022. There is a transitional period (which was extended in July 2024) during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the EU IVDR (subject to compliance with certain requirements under the EU IVDR, including in respect of post-market surveillance); however, class A non-sterile products do not benefit from such transitional provisions and have been required to be EU IVDR compliant since May 26, 2022. The transition deadline for other classes of devices ranges between December 21, 2027 and December 31, 2029, provided certain transitional activities are performed by earlier deadlines (e.g. the manufacturer must sign a formal written agreement with a notified boy for assessment under the EU IVDR). +In the EU, products that fall under the scope of the MDR and the EU IVDR may not be placed on the EU market without a valid CE mark. Approval of a regulatory authority is not required to obtain CE certification, but, depending on the class of product, conformity assessment by a notified body may be required. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. The conformity assessment procedure for medical devices and in vitro diagnostic devices is to assess whether the device is compliant with the general safety and performance requirements set forth in the EU MDR or EU IVDR (as applicable), and includes an examination of the product’s technical dossier and the manufacturer’s quality system. ISO certification of the quality system in accordance with the relevant standard for medical devices or in vitro diagnostic devices creates a rebuttable presumption that the product satisfies the applicable requirements of the EU MDR or EU IVDR (as applicable) +17 +Table of Contents +with respect to the quality management system. Compliance with these general safety and performance requirements allows the Company to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to its products, without which they may not be placed on the market in the EU. The Company also notes that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to the Company's international strategy. +The Company must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. The Company has completed this process for several of its current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). +The Company has obtained WHO pre-qualification for its OraQuick ® HIV-1/2 Antibody Test, OraQuick® HIV Self-Test, OraQuick ® HCV Rapid Antibody Test, and OraQuick ® HCV Self-Test. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +The Company's products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on the Company's ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on the Company's business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on the Company's ability to operate in these jurisdictions and significant damage to its reputation. +The Company is also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require the Company to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the +18 +Table of Contents +medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, the Company has implemented necessary systems to accurately track gifts and other payments. +The Company has implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While the Company believes that its practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which the Company is subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. The Company's present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to the Company as a result of its international sales. The Company is also subject to the FCPA’s accounting provisions, which require it to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the Company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which the Company is subject as a result of its international sales also includes the U.K. Bribery Act 2010 (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of the Company's current and proposed research, development, and manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that the Company sells in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require the Company to alter its manufacturing processes, thereby increasing its manufacturing costs, or may impose other additional obligations on the Company or its products. The Company believes that its products and manufacturing processes at its facilities comply in all material respects with +19 +Table of Contents +applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of the Company's business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +Information Available on the Internet +The Company's filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on the Company's website (www.orasure.com) free of charge as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on the Company's website is not a part of this Annual Report. +20 +Table of Contents +ITEM 1A. Risk Factors +Summary of Risk Factors +Investing in the Company's securities involves risk. Below is a summary of the principal factors that could adversely affect OraSure's business, operations and financial results. You should carefully consider the following risks and uncertainties, together with all other information in this Annual Report, including the Company's consolidated financial statements and related notes and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, before investing in the Company. This summary does not address all of the risks that the Company faces. Additional discussion of the summarized risks can be found below following this summary. +Risks Relating to Products, Marketing and Sales +• Changes in the genomics market may adversely affect the Company's business. +• The Company's future success depends upon market acceptance of its existing and future products and service offerings. +• The Company may not realize revenue levels from its InteliSwab® COVID-19 Rapid Test consistent with prior years. +• Marketing of the Company's COVID-19 tests and collection kits under EUAs from the FDA is subject to certain limitations and it is required to maintain compliance with the terms of the EUA, among other things, and the continuance of the EUAs is subject to government discretion. +• If acceptance and adoption of oral fluid testing and collection products does not continue, the Company's future results may suffer. +• The Company expects to face increasing competition from other providers of diagnostic tests, and sample collection products. +• The Company's inability to expand international sales could adversely affect its business and results of operations. +• The Company's international presence may increase its risks and expose its business to regulatory, cultural or other restraints. +• The Company's U.S. government contracts require compliance with numerous laws and increase its risk and liability. +• The Company's inability to manufacture products in accordance with applicable specifications, performance standards or quality requirements could adversely affect its business. +• The Company's business will suffer if it does not effectively manage challenges to its manufacturing processes and it may be unable to successfully scale-up manufacturing of its products in sufficient quality and quantity to meet demand, which would negatively impact revenue expectations. +Risks Relating to the Company's Industry, Business and Strategy +• Consolidation in the healthcare industry could adversely affect the Company's future revenues and operating results. +• The Company's research, development and commercialization efforts may not succeed and its competitors may develop and commercialize more effective or successful offerings. +• Customer concentration creates risk for the Company's business. +• The Company is subject to risks related to government funding and customer ordering. +• Acquisitions or investments may not generate the expected benefits and could disrupt the Company's ongoing business, distract its management, increase its expenses and adversely affect its business. +Risks Relating to the Company's Reliance on Third Parties +• The use of third party supply sources for critical components of the Company's products could adversely affect its business. +21 +Table of Contents +• The Company's failure to maintain existing distribution channels, or develop new distribution channels, may result in lower revenues. +Risks Relating to Intellectual Property +• The Company's success depends on its ability to protect its proprietary technology. +• The Company may become involved in intellectual property disputes, which could increase its costs and limit or eliminate its ability to sell products, provide services or use certain technologies. +Regulatory Risks +• The need to obtain regulatory approvals, clearances, authorizations or certifications could increase the Company's costs and adversely affect its financial performance. +• Failure to comply with FDA or other regulatory requirements may require the Company to suspend production or sale of its products or institute a recall which could result in higher costs and loss of revenues. +• The Company is subject to numerous government regulations in addition to FDA requirements, which could increase its costs and affect its operations. +• Failure to comply with privacy, security and breach notification regulations may increase our costs. +• Failure to comply with data protection requirements or privacy laws could increase our costs. +Risks Relating to the Economy, Company Financial Results, Investments, Credit Facilities and Need for Financing +• The Company has experienced losses in the past and may not be able to again achieve and maintain profitable operations. +Risks Relating to the Company's Common Stock +• The Company's stock price could continue to be volatile. +General Risk Factors +• Cybersecurity incidents and other disruptions could compromise the company's information, expose it to liability and harm its reputation and business. +Risk Factors +You should carefully consider the risks and uncertainties described below. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not disclosed or not presently known to the Company or that it currently deems immaterial may also impair its business operations. The occurrence of any of the following risks could harm the Company's business, financial condition or results of operations. +Risks Relating to Products, Marketing and Sales +Changes in the Genomics Market May Adversely Affect the Company's Business . +The genomics market has been the largest component of the Company's overall sample management solutions business for some time and the major drivers of this market have been the consumer genomics segment, which offers products and services to consumers to provide them with personalized health and genealogical information, and the disease risk management segment which offers genetic testing through physicians for a variety of applications including prenatal testing, risk screening and pharmacogenomics. The ancestry portion of the consumer genomics market may be maturing and the Company's sales to customers with offerings in this market have been volatile. The Company's genomics revenues have also been volatile due to changes in promotional strategies and purchasing patterns by certain customers which serve the consumer ancestry and genetic testing market and cost cutting and de-stocking efforts at some of the Company's disease risk management customers. These trends in the ancestry testing market may continue and revenues in this market may continue to be volatile. +22 +Table of Contents +In an effort to increase the Company's molecular revenues, it has devoted increasing time and attention to expanding sales of its genomics products both domestically and internationally, with both new and existing accounts, including co-clearances and co-promotions with strategic partners. While the Company believes these new markets represent large growth opportunities, there is no assurance that it will be successful in capitalizing on these opportunities or that it will be able to increase the Company's product sales consistent with the Company's expectations. Factors include, but are not limited to, the market acceptance of the Company's products, available funding, cost containment strategies implemented by customers, increasing competition and regulatory constraints could limit sales of the Company's genomics products. To the extent that the Company is unsuccessful or limited in expanding the its business into new markets, the Company's revenues and results of operations could be negatively affected. +Despite these challenges, the Company believes there is significant growth opportunity for its genomics products in the area of research by biotechnology companies, animal genetics, and disease risk management, which includes genetic risk testing, prenatal testing, carrier screening, pharmacogenomics testing and population heath studies. +The Company's Future Success Depends Upon Market Acceptance of its Existing and Future Products and Service Offerings. +The Company's future success will depend, in part, on the market acceptance, and the timing of such acceptance, of products such as InteliSwab ® , OraQuick ® HIV Self-Test, OraQuick ® Ebola test and OMNIgene ® • GUT product offerings, and other new products or technologies that may be developed or acquired. In addition, the Company's future revenues will depend on market acceptance of new uses for the Company's saliva collection products, and the Company's new service offerings, such as Syphilis Health Check ® and OraQuick ® HCV Self-Test. To commercially market new uses of the Company's products and to achieve market acceptance, it will likely be required to undertake clinical studies to validate the new uses for its products and spend significant funds to complete product development and clinical studies and then undertake substantial marketing efforts to inform potential customers and the public of the existence and perceived benefits of these products and services. In addition, governmental funding may be needed to help complete development, obtain required regulatory approvals, clearances or EUAs and create market acceptance and expand the use of these products and services. +There may be limited evidence on which to evaluate the market reaction to products and services that may be developed and the Company's marketing efforts for new products and services or products with new uses may not be successful. The market for microbiome products and services is in its early stages and its future development and acceptance by the Company's customers is uncertain. Also, the Company continues to develop and seek 510(k) regulatory clearance for the InteliSwab® tests, and it is uncertain whether it will be successful in the development and validation efforts or whether these products will prove effective, receive applicable regulatory approvals and gain widespread acceptance in the marketplace. As such, there can be no assurance that any products or services will obtain significant market acceptance and fill the market need that is perceived to exist on a timely basis, or at all. It is possible that the Company's expenses to develop and market any such products, including, without limitation the Company's InteliSwab ® tests, will exceed any benefit in revenues, which may be short-lived. In addition, other products that compete with the Company's may achieve 510(k) clearance earlier than the Company's do, providing market advantages. +The Company Expects Revenue Levels From its InteliSwab® COVID-19 Rapid Test to Continue to Decline . +The Company experienced a significant decline in revenues from InteliSwab ® COVID-19 Rapid Test sales in 2024 and expects revenues to continue to decline in 2025. The Company has seen a reduction in the prevalence of COVID-19 since the height of the pandemic, particularly following the expiration of the public health emergency declarations related to COVID-19 in mid-2023. The Company's revenues relating to the Company's COVID-19 testing products have declined, and it expects they will continue to decline in the future if the prevalence of COVID-19 remains low. Further, if the COVID-19 pandemic becomes a seasonal virus or experiences fluctuations in prevalence, the Company could experience fluctuations in its revenues associated with its InteliSwab® COVID-19 Rapid Tests. While there is still limited demand for COVID-19 testing products, there is no guarantee that current or anticipated demand will continue, or if demand does continue, that the Company will be able to produce its InteliSwab® COVID-19 Rapid Test in quantities to meet the demand. A significant decline in demand for the InteliSwab ® COVID-19 Rapid Test without a corresponding increase in the Company's other businesses could have a material, adverse effect on the Company's results of operations, cash flow and financial position. +23 +Table of Contents +Marketing of the Company's COVID-19 Tests and Collection Kits Under EUAs from the FDA Is Subject To Certain Limitations and the Company Is Required To Maintain Compliance with the Terms of the EUA, Among Other Things, and the Continuance of the EUAs Is Subject To Government Discretion. +In early 2020, the HHS issued a declaration that the threat to public health posed by COVID-19 justifies the emergency use of unapproved in vitro diagnostics for the detection or diagnosis of SARS-CoV-2. Under Section 564 of the FDCA, because HHS has issued this declaration, the FDA Commissioner is authorized to issue EUAs to permit certain developers of SARS-CoV-2 diagnostics to begin offering the tests for detection and diagnosis of COVID-19 without having completed the normally applicable FDA review and clearance or approval process for marketing authorization (with the related standards that would apply to demonstrate safety and effectiveness). The issuance of an EUA reflects an FDA conclusion that based on the totality of scientific evidence available to the FDA, it is reasonable to believe that the product may be effective in diagnosing COVID-19, the known potential benefits of the product outweigh the known and potential risks, and there is no adequate, approved, and available alternative to the emergency use of the product. +During 2020, the Company's ORAcollect ® ·RNA and OMNIgene ® ·ORAL collection devices were included in EUAs granted by the FDA to certain third parties for use in the detection of SARS-CoV-2, and the Company has separately obtained EUAs for these products. In addition, the Company obtained three EUAs for its new InteliSwab® COVID-19 Rapid Test. Although there are certain regulatory requirements the FDA has waived for the duration of the EUAs, the Company remains subject to specific conditions of the authorization, including ensuring appropriate labeling as approved by FDA specifically for purposes of the EUA, maintaining records of distribution to authorized laboratories, collecting data on occurrences of any false positives or false negatives, and tracking any adverse events. As part of the conditions of authorization, OraSure was required to conduct a clinical study in a pediatric population ages 2-14 and an asymptomatic population in addition to launching an app for consumers to report their test results to public health jurisdictions. OraSure has completed the required conditions of authorization with respect to the pediatric claim and launched the InteliSwab® Connect application for reporting test results to public health jurisdictions. As a result of the National Institutes of Health study (Performance of Screening for SARS-CoV-2 using Rapid Antigen Tests to Detect Incidence of Symptomatic and Asymptomatic SARS-CoV-2 Infection: findings from the Test Us at Home prospective cohort study), the FDA has requested modifications to labeling to include serial testing and has removed the requirement for the Company to conduct a study in an asymptomatic population. Labeling has been modified as required for inclusion of serial testing and authorized by FDA. +As with other FDA-regulated products, issues could emerge during the course of the marketing and use of the Company's products under an EUA that could impact the Company's ability to continue the sale and distribution of these products (for example, compliance or product performance issues). The applicable EUAs remain effective only until the HHS declaration is terminated or revoked, and the FDA may also revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety. If that were to occur, then in order to market the Company's diagnostic products or collection kits for the purpose of detecting COVID-19 the Company would be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations for device manufacturers, including the QSR under 21 CFR Part 820. It is possible that the Company may not be able to obtain those clearances or approvals in a timely manner, or at all, and that one or more of OraSure's competitors may obtain the necessary clearances or approvals for their products before the Company does. +If Acceptance and Adoption of Oral Fluid Testing and Collection Products Does Not Continue, the Company's Future Results May Suffer. +The Company has made significant progress in gaining acceptance of oral fluid testing products, particularly for HIV testing in the public health, hospital, insurance and other markets. However, the degree of acceptance for these products is uncertain, and one or more markets may resist the adoption of oral fluid products as a replacement for other testing or collection methods in use today. As a result, there can be no assurance that the Company will be able to expand the use of its oral fluid testing products in these or other markets. +However, clinical reference laboratories and hospital-based laboratories currently provide the majority of diagnostic tests used by physicians and other healthcare providers in the U.S. In certain international markets such as Europe, diagnostic testing is performed primarily by centralized laboratories. The Company's future sales will depend, in part, on the Company's ability to expand market acceptance of rapid point-of-care testing by physicians, other healthcare providers and consumers and successfully compete against laboratory testing methods and products. Even if the Company can +24 +Table of Contents +demonstrate that its products are more cost effective, save time, or have better performance or other benefits, physicians, other healthcare providers and consumers may resist changing to rapid point-of-care tests and instead may choose to obtain diagnostic results through laboratory tests. The Company's failure to achieve and expand market acceptance of its rapid point-of-care diagnostic tests with customers would have a negative effect on its future sales growth. +The Company Expects to Face Increasing Competition From Other Providers of Diagnostic Tests and Sample Collection Products. +The Company's rapid point-of-care tests compete with other point-of-care products made by the Company's competitors. This competition is particularly evident with respect to the Company's OraQuick ADVANCE ® HIV-1/2 test and the Company's HIV Self-Test outside of the United States. The Oragene ® product line sold by the Company's subsidiary, DNAG, competes against other sample management solutions, such as blood collection kits and buccal swabs and will likely face additional competition from collection devices similar in design and operation to the Company's Oragene ® and ORAcollect ® products. Additionally, there are a number of products for the detection of antigen to SARS-CoV-2 that compete with the Company's InteliSwab ® COVID-19 diagnostic test. +There is significant competition, including from other companies and governmental organizations, who make and distribute rapid tests for COVID-19. Many of these entities have substantially greater resources (including capital and personnel) than OraSure does. Even if the Company is successful in marketing its InteliSwab® tests, there is no guarantee that competitors will not take market share from the Company's offerings through more effective marketing or competitive pricing, higher quality or technological superiority. +A number of the Company's competitors are making investments in competing technologies, products and services, and several may have a competitive advantage because of their greater financial, technical, research and other resources. Some competitors offer broader product lines and service offerings, aggressively discount prices for their products and services and may have greater name recognition than the Company does. The Company also faces competition from certain of its distributors or former customers that have created, or may decide to create, their own products to compete with the Company's. If the Company's competitors take market share from its offerings through more effective marketing or competitive pricing, higher quality or technological superiority, the Company's revenues, margins and operating results could be adversely affected. In addition, the Company's revenues and operating results could be negatively impacted if some of its customers use internally developed or acquired sample collection devices or services in order to reduce costs. +The Company's Product Sales Cycles Can be Lengthy, and May Depend on Public Funding, Which Can Cause Variability and Unpredictability in the Company's Operating Results. +The sales cycles for certain of the Company's products can be lengthy and unpredictable, which makes it more difficult to accurately forecast revenues in a given period and may cause revenues and operating results to vary from period to period. Sales of the Company's products often involve purchasing decisions by large public and private institutions, may require many levels of approval and may be dependent on economic or political conditions and the availability of grants or funding from governmental or public health agencies which can vary from period to period in both amount and timing. For example, in past years the Company's OraQuick ADVANCE ® HIV-1/2 test has been purchased through bulk procurement or other funding provided by governmental agencies. The Company's OraQuick ® HCV test has been purchased by customers who receive government funding, and the Company believes increased funding from government agencies will be required to substantially increase the volume of HCV testing, especially in the public health market. There can be no assurance that purchases or funding from these agencies will occur or continue. In addition, government funding is subject to the political process, which is inherently fluid and unpredictable. For example, the National Institutes of Health (“NIH”) announced on February 7, 2025, a policy significantly reducing research grants by limiting payments for indirect costs. While, as of the date of this filing, the order has been temporarily stayed, there can be no assurance that it will not take effect or that other adverse actions will not be taken. Further, our revenue may be adversely affected if our clients delay purchases as a result of uncertainties surrounding the approval of government budget proposals, including reduced allocations to government agencies. In addition, government funding is subject to the political process, which is inherently fluid and unpredictable. As a result, the Company may expend considerable resources on unsuccessful sales efforts or it +25 +Table of Contents +may not be able to complete transactions at all or on a schedule and in an amount consistent with its objectives or previous order patterns. +The Company's Inability To Expand International Sales Could Adversely Affect its Business and Results of Operations. +One of the Company's strategic priorities is to substantially expand its product sales internationally. An opportunity to accomplish this objective is with the sale of the Company's OraQuick ® HIV Self-Test in support of large self-testing programs in certain African countries and elsewhere. The Company's OraQuick ® HIV Self-Test is also currently available in six European countries: United Kingdom, Germany, France, Italy, Spain and Portugal. The Company is also working to expand international sales of its professional HIV and HCV products and its sample management solutions. +While the Company believes international sales of these and other products represent attractive long-term opportunities with significant growth potential, there is no guarantee that these opportunities will materialize, continue or increase. Among other factors, competition from competitive lower priced products and the uncertainties of available funding could negatively impact the success of these opportunities. If international sales of these products do not occur or increase or if the Company is otherwise unable to expand international sales of its products, the Company's revenues and results of operations could be negatively impacted. +In addition, market conditions in many countries often require that the Company's sell its products at a price below the typical U.S. or European pricing in order to participate in these markets. As a result, sales in certain countries may contribute lower profit margins to the Company's business. To the extent these international sales comprise a large or increasing part of the Company's business, the Company's gross margins will be negatively affected. In addition, the Company may have difficulty selling its products at a sufficiently low price to maintain or increase this business over the long term without funding support from public health entities, government agencies or other sources. If the Company is unable to obtain or continue this funding support at sufficient levels, or at all, its revenues and results of operations could be negatively affected. +The Company's International Presence May Increase Its Risks and Expose Its Business to Regulatory, Cultural or Other Restraints. +The Company seeks to increase revenue derived from international sales of its products. Its international sales accounted for $13.9 million, or 7% of consolidated revenues in 2024, $14.6 million, or 4% of consolidated revenues in 2023, and $19.1 million, or 5% of consolidated net revenues in 2022. In addition, the Company's subsidiary DNAG, which accounted for $52.5 million or 28% of consolidated net revenues in 2024, is operated in Canada. The Company has previously acquired foreign companies and it may acquire other foreign companies as part of its business development efforts. +A number of factors could adversely affect the performance of the Company's business and/or cause it to incur substantially increased costs because of its international presence and sales, including, but not limited to those set forth below: +• Uncertainty in the application of foreign laws and the interpretation of contracts with foreign parties; +• The potential for inconsistent imposition of legal and regulatory requirements; +• Cultural and political differences that favor local competitors or make it difficult to effectively market, sell and gain acceptance of the Company's products; +• Cultural and language differences that make international operations and business management more difficult; +• Inexperience in international markets and territories and difficulties in staffing and managing foreign operations; +• Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on international distributors or representatives; +• Regulatory requirements, including compliance with applicable customs regulations and the need to obtain or maintain regulatory approvals, registrations or reimbursement approvals for the Company's products; +26 +Table of Contents +• Trade protection measures, additional trade sanctions and import/export licensing requirements, and tariffs; +• The inability to obtain or maintain ISO certification for the Company's or the Company's suppliers’ manufacturing facilities; +• The Company's inability to identify international distributors and negotiate acceptable terms for distribution agreements; +• Diversion to the U.S. of the Company's products that are sold at lower prices into international markets; +• The loss of one or more distributors and difficulties or delays in obtaining new or transferred product registrations or approvals for use by a replacement distributor; +• Differing tax laws across jurisdictions, as well as changes in those laws; +• An increase of withholding and other taxes on remittances and other payments by a foreign subsidiary; +• The creditworthiness of foreign distributors and customers and difficulty in collecting foreign accounts receivable; +• Difficulty of enforcing contractual obligations or recovering damages under foreign legal systems; +• Difficulty collecting amounts owed by foreign governments or other customers; +• Economic conditions, inflation, political instability, the absence of available funding sources, terrorism, civil unrest, war and natural disasters in foreign countries; +• Exposure to infectious disease and epidemics, including the effects of the COVID-19 outbreak on the Company's business operations and on the business operations of the Company's customers and suppliers; +• Long sales cycles in international markets, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies; +• The sale of competing products by foreign competitors at prices at or below the prices offered for the Company's products; +• Restrictions on the Company's ability to repatriate investments and earnings from foreign operations; +• Changes in shipping costs; +• The unavailability of licenses to certain patents in force in a foreign country which cover the Company's products; and +• Reduced protection for, or enforcement of, the Company's patents and other intellectual property rights in foreign countries. +In addition, the Company has contracted with a third party in Thailand for the manufacture of a portion of the Company's OraQuick ® HIV tests and certain DNAG products are produced in Canada. The Company may enter into agreements to manufacture these or other products in additional foreign countries as well. However, economic, cultural and political conditions and foreign regulatory requirements may slow or prevent the manufacture of the Company's products in countries other than the United States. Interruption of the supply of the Company's products could reduce revenues or cause it to incur significant additional expenses in finding an alternative source of supply. Foreign currency fluctuations and economic conditions in foreign countries could also increase the costs of manufacturing the Company's products in foreign countries. In addition, the COVID-19 pandemic resulted in, and potential future pandemics or other public health emergencies may in the future result in, increased government-imposed travel restrictions and extended shutdowns of certain businesses in the affected locations as well as logistics delays due to the global logistical crisis from such pandemic or other health emergency. Future governmental responses to public health crises, including pandemics and epidemics could result in social, economic and labor instability of foreign countries, which could have a material adverse effect on the Company's business, results of operations and financial condition. +27 +Table of Contents +The Company's U.S. Government Contracts Require Compliance With Numerous Laws and Increases Its Risk and Liability. +From time to time, the Company receives funding from the U.S. government and sells some of its products to the federal government. Historically, the Company has sold a number of its products to the government under contracts with the General Services Administration and the Veterans Administration. +In September 2022, the Company entered into an $8.6 million contract with BARDA to develop a second generation Ebola test on the OraQuick ® testing platform, which was subsequently modified in September 2023 to add an additional $6.8 in funding to be used to obtain the appropriate regulatory approvals. Also in September, 2022, the Company was selected to provide its OraQuick ® In-Home HIV tests in support of the CDC "Together Take me Home," HIV self-test program. Under the program, the CDC is expected to provide $41.5 million over a five-year period to support community testing. During the third quarter of 2022, the Company entered into a contract with the Defense Logistics Agency ("DLA") for the second procurement of the Company's InteliSwab ® COVID-19 Rapid Test for OTC use. During the same quarter, the Company entered into a contract with the BARDA to provide it with up to $13.6 million in funding to obtain an FDA 510(k) clearance and CLIA waiver for the Company's InteliSwab® test. The Company continued development work and analytical testing on this test throughout 2023. However, in early 2024, the Company has communicated to BARDA that it does not intend to pursue further development of this product. In September 2021, the Company entered into a contract with the U.S. DOD in coordination with the HHS for $109 million in funding to build additional manufacturing capacity in the United States for the Company's InteliSwab ® test. +As a result of the Company's U.S. government funding and product sales to the U.S. government, it must comply with laws and regulations relating to the award, administration and performance of U.S. government contracts. U.S. government contracts typically contain a number of extraordinary provisions that would not typically be found in commercial contracts and which may create a disadvantage and additional risks to the Company as compared to competitors that do not rely on government contracts. For example, the government has the right to terminate one or more of these contracts at its convenience even if the Company has not defaulted in any of its obligations. +As a U.S. government contractor, the Company is subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector companies are not. The results of any such actions could adversely impact the Company's business and have an adverse effect on its consolidated financial performance. +A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of the Company's contracts, as well as suspension or debarment. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to the Company's entire enterprise in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect the Company's ability to renew contracts and to secure new contracts, both with the U.S. government and private customers, which could materially and adversely affect the Company's business and results of operations. Fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow rules relating to billing on cost-plus contracts, receiving or paying kickbacks, or filing false claims, among other potential violations. In addition, the Company could suffer serious reputational harm and the value of its common stock could be negatively affected if allegations of impropriety related to such contracts are made against it. +The Company's Inability to Manufacture Products in Accordance with Applicable Specifications, Performance Standards or Quality Requirements Could Adversely Affect Its Business. +The materials and processes used to manufacture the Company's products must meet detailed specifications, performance standards and quality requirements to ensure its products will perform in accordance with their label claims, customers’ expectations and applicable regulatory requirements. As a result, the Company's products and the materials used in their manufacture or assembly undergo regular inspections and quality testing. Factors such as defective materials or processes, mechanical failures, human errors, environmental conditions, changes in materials or production methods, and other events or conditions could cause the Company's products or the materials used to produce or assemble its products to fail inspections and quality testing or otherwise not perform in accordance with their label claims or the expectations of the Company's customers. +In February 2024, the FDA issued the Quality Management System Regulation (QMSR) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the +28 +Table of Contents +International Organization for Standardization (ISO), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. We believe that our facilities and procedures are in material compliance with the FDA’s QSR requirements, the European Union’s Quality Management Systems requirements, ISO 13485:2016, but the regulations are subject to change or may be unclear, and we cannot be sure that FDA investigators will agree with our compliance with the FDA’s post-market requirements. +Any failure or delay in the Company's ability to meet the applicable specifications, performance standards, quality requirements or customer expectations could adversely affect its ability to manufacture and sell its products or comply with regulatory requirements. These events could, in turn, adversely affect the Company's revenues and results of operations. +The Company's Business Will Suffer if It Does Not Effectively Manage Challenges to Its Manufacturing Processes and It May be Unable to Successfully Scale-Up Manufacturing of Its Products in Sufficient Quality and Quantity to Meet Demand, Which Would Negatively Impact Revenue Expectations. +In the event of a sudden and significant increase in demand for the Company's products, challenges in the manufacture of products could adversely affect, the Company's operating efficiency and results of operations. Although the Company has expanded its manufacturing capacity, the Company faces risks, including with respect to expanding its overall production capacity, that could increase costs, divert management attention and reduce the Company's operating results, with no guarantee of success. +As the Company increases its manufacturing capacity to meet market demand or begin to manufacture new products at scale, it may face unanticipated manufacturing challenges as production volumes increase, new processes are implemented and new supplies of raw materials used in these products are secured. In addition, the Company could experience delays in production as it increases manufacturing capacity or begins to manufacture new products that may result in its inability to meet product demand as the products ordered by its customers being on back-order as initial production issues are addressed. If it experiences production delays or inefficiencies, a deterioration in the quality of the Company's products or other complications in managing changes to its manufacturing processes, including those that are designed to increase capacity, enhance efficiencies and reduce costs or that relate to new products or technologies, the Company may not achieve the benefits that it anticipates from these actions when expected, or at all, and the Company's operations could experience disruptions, the Company's manufacturing efficiency could suffer and the Company's business, financial condition and results of operations could be materially and adversely affected. Any such delays could allow the Company's competitors to seize market advantage, which could have a material, adverse effect on the Company's reputation, revenues, results of operations, cash flow and financial position. +The Company's Business Results Depend on Its Ability to Manage Disruptions in Its Domestic and Global Supply Chains and Distribution Channels. +The Company's ability to meet its customers' needs and achieve its financial objectives depends on its ability to maintain key manufacturing, supply and distribution arrangements. The loss or disruption of such manufacturing and supply arrangements could, in the future, interrupt the Company's ability to obtain necessary raw materials and manufacture its products. Such disruptions could result from labor disputes, financial liquidity, natural disasters, extreme weather conditions, public health emergencies and pandemics, supply constraints and general economic and political conditions that could limit the ability of the Company's suppliers to timely provide it with raw materials and components and distribute its products in a timely manner in accordance with applicable quality requirements. Disruptions in the global supply chain could also delay or preclude the ability of the Company's distributors to sell and deliver its products to customers. +The availability and price of these materials, parts, products and services are affected by a variety of factors beyond the Company's control, including the willingness of suppliers to sell into the medical device industry, changes in supply and demand, general economic conditions, labor costs, fuel-related transportation costs, liability concerns, climate change (including new and existing laws and regulations to address climate change), competition, import duties, tariffs, currency exchange rates, inflationary pressures and political uncertainty around the world. Recently, the United States and certain other countries from which we import materials have imposed or signaled a willingness to impose tariffs on goods coming into the United States and elsewhere. While we cannot be certain how this will impact our supply chain, the Company's suppliers often pass some of their cost increases on to it, and if such increased costs are sustained or increase further, its suppliers may pass further cost increases on to it. In addition, transportation costs have generally increased and may further increase if crude oil prices increase. The Company's transportation and service providers are typically able to pass any significant increases in oil prices on to it. The Company's costs may also be impacted by laws to increase minimum wages, +29 +Table of Contents +including the potential increase to the federal minimum wage in the United States that has been recently proposed by the current administration. +The Company's ability to recover such increased costs may depend upon its ability to raise prices on its products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of the Company's customers and third-party payers, the Company may be unable to pass along cost increases through higher prices. If the Company is unable to fully recover these costs through price increases or offset these increases through cost reductions, or it experiences terminations or interruption of its relationships with its suppliers, it could experience lower margins and profitability, and the Company's results of operations, financial condition and cash flows could be materially harmed. +In recent years, the global supply chain has experienced significant disruptions, resulting in shortages of labor and equipment. These conditions, if not mitigated or remedied in a timely manner, could delay or preclude delivery of raw materials needed to manufacture the Company's products or delivery of the Company's products to customers, particularly in international markets. This in turn could have an adverse impact on the Company's business, financial condition, results of operations or cash flows. +Certain of the Company's Products Depend on Components From a Sole-Source Supplier, the Loss of Which Would Cause the Company to be Unable to Deliver Such Products. +The Company currently purchases certain critical components of its products from sole supply sources or other third-party suppliers. For example, the biological antigens and antibodies, nitrocellulose and certain other components required to make the Company's OraQuick ® HIV, HCV and Ebola products are currently purchased from sole-source suppliers. The Company has contracted with third parties in Thailand for parts of the assembly of OraQuick ® HIV device and the OraQuick ® HIV Self-Test in order to supply certain international markets. In addition, the Company's subsidiary, DNAG, uses third-party manufacturers to supply certain products, including its Colli-Pee ® , Oragene ® and ORAcollect ® lines of collection kits. +Any interruption in, or change in the cost or quality of, the supply of the necessary raw materials, manufacturing services, product and process development, or other materials necessary to manufacture the product could adversely impact the efficacy of the product and negatively affect the Company's reputation with its customers. In addition, many of the raw materials used in the Company's DNAG products, including its Oragene ® product line, and components used in these products are also purchased from third parties, some of which are purchased from a sole-source supplier. If the Company's sole-source suppliers were to be acquired by a competitor, they may elect not to provide it with the product, raw materials or other components, as applicable. If the Company's sole-source suppliers were to otherwise cease supplying it, go out of business, or were unable to meet their obligations in a timely fashion or at an acceptable price, or at all, the Company may be forced to incur higher costs to obtain the necessary raw materials elsewhere, if it could even source such materials at all. +Additionally, potential future pandemics or other public health emergencies may, in the future, disrupt the normal operations of the Company's third-party suppliers. Furthermore, the Company's third-party suppliers may not have the personnel, raw materials, capacity or capability to manufacture its products according to its schedule and specifications. To the extent any such production and distribution interruption or closures occur and continue for an extended period of time, the impact on the Company's supply chain could have a material adverse effect on its results of operations. If the Company's third-party suppliers are unable or unwilling to supply or manufacture a required component or product or if they make changes to a component, product or manufacturing process or do not supply materials meeting the Company's specifications, it may need to find another source and/or manufacturer. This could require that the Company perform additional development work and it may be difficult to find such an alternate supply source in a reasonable time period or on commercially reasonable terms, if at all. The Company may also need to obtain FDA or other regulatory approvals for the use of an alternative component or for changes to its products or manufacturing process. Completing that development and obtaining such approvals could require significant time and expense and such approvals may not occur at all. The availability of critical components and products from sole supply sources or other third parties could also reduce the Company's control over pricing, quality and timely delivery. These events could either disrupt the Company's ability to manufacture and sell certain of its products into one or more markets or completely prevent it from doing so, and could increase the Company's costs. Any such event could have a material adverse effect on the Company's results of operations, cash flow and business. +The Company's U.S. Government Contracts May Affect Its Intellectual Property Rights. +30 +Table of Contents +Provisions in the Company's U.S. government contracts may affect its intellectual property rights. Certain of the Company's activities have been funded, and may in the future be funded, by the U.S. government, including its contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose the Company's confidential information to third parties and to exercise “march-in” rights to use and allow third parties to use the Company's patented technology. The government can exercise its march-in rights if it determines that action is necessary because the Company fails to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, government-funded inventions must be reported to the government, government funding must be disclosed in any resulting patent applications, and the Company's rights in such inventions may be subject to certain requirements to manufacture products in the United States. In late 2023, the National Institute of Standards and Technology published for comment a Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights that would be voluntary for federal government agencies to follow when deciding whether to exercise march-in rights and which for the first time includes the price of a product as a factor a federal government agency can use when deciding to exercise march-in rights. While march-in rights have not previously been exercised, it is uncertain whether the federal government will actually exercise such march-in rights in connection with medical products or whether any such exercise will be subject to judicial review or challenge. +The Company's U.S. Government Contracts and Related Administrative Processes Are Subject to Audits and Cost Adjustments by the Federal Government. +Federal government agencies can audit and investigate government contracts and the administrative processes and systems of government contractors. These agencies can review the Company's performance on government contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. They can also review the Company's compliance with government regulations and policies and the adequacy of its internal control systems and policies, including its purchasing, accounting, estimating, compensation and management information processes and systems. Any costs found to be improperly allocated to a specific government contract, unallowable or unreasonable will not be reimbursed, and any such costs already reimbursed may be required to be refunded and certain penalties may be imposed. Adjustments arising from government audits and reviews could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. +Moreover, if any administrative process or system related to such contracts is found not to comply with governmental requirements, the Company may be subjected to government scrutiny that could delay or otherwise adversely affect its ability to compete for or perform government contracts or collect its revenue in a timely manner. An unfavorable outcome of an audit of the Company's government contracts could adversely affect its results of operations. +Risks Relating to the Company's Industry, Business and Strategy +Consolidation in the Healthcare Industry Could Adversely Affect the Company's Future Revenues and Operating Results. +The healthcare industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has also placed pricing pressure on medical device suppliers. The Company may not be able to compete successfully in such a consolidated industry. The Company believes industry consolidation may continue as companies attempt to strengthen or hold their market positions and as more companies are acquired or cease operating. Further consolidation in the industry could exert additional pressure on the prices of the Company's products. +The Company's Research, Development and Commercialization Efforts May Not Succeed and Its Competitors May Develop and Commercialize More Effective or Successful Offerings. +In order to remain competitive, the Company must regularly commit substantial resources to research and development and the commercialization of new or enhanced products and services. The research and development process generally takes a significant amount of time from inception to commercial launch. This process is conducted in various stages. During each stage there is a substantial risk that the Company will not achieve its goals on a timely basis, or at all, and it may have to abandon a new or enhanced product or service in which it has invested substantial time and money. +31 +Table of Contents +Successful products and services can require significant development and investment, including testing to demonstrate their performance capabilities, cost-effectiveness or other benefits prior to commercialization. Regulatory approval or clearance must be obtained before most products may be sold and additional development efforts on these products may be required before any regulatory authority will review them. As noted above, regulatory authorities may not issue such approvals, clearances or certifications or may substantially delay or condition such action. Even if a product is developed and all applicable regulatory approvals, clearance or certifications are obtained, there may be little or no market for the product and entry into or development of new markets for the Company's products and services may require an investment of substantial resources, such as new employees, offices and manufacturing facilities. Moreover, the Company may spend a significant amount of money on manufacturing facilities, advertising or other activities and fail to develop a market for the product or service. Other factors that could affect the success of the Company's efforts include its ability to manufacture products in a cost-effective manner and whether it can obtain necessary intellectual property rights and protection in the markets where the product or service is sold. +If the Company fails to develop and gain commercial acceptance for its products and services, or if competitors develop more effective products and services or a greater number of successful new products and services, customers may decide not to purchase the Company's products and services or may purchase and use products and services developed by its competitors. This would result in a loss of revenues and adversely affect the Company's results of operations, cash flow and business. +Customer Concentration Creates Risk for the Company's Business. +One of the Company's customers accounted for approximately 24% of its net consolidated revenues for the year ended December 31, 2024. Certain parts of the Company's business may continue to have a high customer concentration and depend disproportionately on a few large customers. To the extent that such a large customers fail to meet their purchase commitments, change their ordering patterns or business strategies, or otherwise reduce their purchases or stop purchasing the Company's products, or if it experiences difficulty in meeting the high demand by these larger customers for its products, the Company's revenues and results of operations could be adversely affected. +The Company is Subject to Risks Related to Government Funding and Customer Ordering. +A portion of our revenues is derived from sales to customers that rely on funding from the U.S. government, including federal agencies, state programs, and entities receiving grants and contracts from the HHS, the U.S. Agency for International Development (“USAID”), the Centers for Disease Control and Prevention (“CDC”), and other government programs. Any reduction, delay, or uncertainty in the availability of such funding could adversely affect the purchasing patterns of these customers, impacting our business, financial condition, and results of operations. +In recent months, the U.S. government has implemented funding freezes and delays that have directly affected healthcare and life sciences procurement. For example, on January 22, 2025, the Office of Management and Budget (“OMB”) issued a directive halting the disbursement of certain federal funds, pending review of budgetary priorities. Similarly, on February 10, 2025, the U.S. Department of State and USAID announced a 90-day suspension of new foreign assistance obligations, affecting global health initiatives and domestic procurement of essential healthcare supplies. +Customers that rely on these funding sources may reduce, delay, or cancel orders for our products and services, particularly during periods of political uncertainty. If our customers experience prolonged funding uncertainty or reductions in available government funds, we could face disruptions in our revenue streams, increased inventory costs due to unpredictable ordering patterns, and potential declines in profitability. While we actively monitor legislative and regulatory developments, we cannot predict the outcome of government policy shifts that may impact our customers’ ability to procure our products. +Acquisitions or Investments May Not Generate the Expected Benefits and Could Disrupt the Company's Ongoing Business, Distract Its Management, Increase Its Expenses and Adversely Affect Its Business. +Since the beginning of 2019, the Company has acquired or made investments in several companies through which it has gained access to new technologies, products and services which are complementary to its existing business and aligned with its long-term business strategy. For example, in January 2024, the Company announced its investment and entry into wide ranging strategic distribution agreements with KKR Sapphiros L.P. ("Sapphiros"), and in December 2024, the Company acquired Sherlock Biosciences, Inc. ("Sherlock"), expanding the Company's product pipeline with the addition of +32 +Table of Contents +Sherlock's molecular diagnostics platform. The Company will likely continue to pursue strategic acquisitions or investments as a way to expand its business. These activities, and their impact on the Company's business, are subject to many risks, including the following: +• Suitable acquisitions or investments may not be found or consummated on terms or schedules that are satisfactory to the Company or consistent with its objectives; +• The Company may be unsuccessful in competing for acquisitions with other entities, some of which have greater financial resources or may be better able to realize synergies with a potential target; +• The benefits expected to be derived from an acquisition or investment may not materialize and could be affected by numerous factors, such as regulatory developments, insurance reimbursement, the Company's inexperience with new businesses or markets, general economic conditions and increased competition; +• The Company may be unable to successfully integrate an acquired company’s personnel, assets, management, information technology systems, accounting policies and practices, products, services and/or technology into the Company's business; +• Worse than expected performance of an acquired business may result in the impairment of intangible assets; +• Acquisitions may require substantial expense and management time and could disrupt the Company's business; +• The Company may not be able to accurately forecast the performance or ultimate impact of an acquired business; +• The Company may have difficulties in coordinating geographically separate organizations; +• The Company may fail to successfully manage relationships with customers, distributors and suppliers of an acquired business; +• An acquisition may result in a diversion of resources from the Company's existing products, business and technologies; +• An acquisition and subsequent integration activities may require greater capital and other resources than originally anticipated at the time of acquisition; +• To the extent the Company agrees to pay contingent consideration for an acquisition, if and how much of such consideration it is required to pay may be subject to dispute, resulting in the distraction of the Company's management team and the incurrence of legal costs; +• An acquisition may result in employee anxiety, morale and/or engagement issues; +• An acquisition may result in disparate information technology, internal control, financial reporting and record-keeping systems; +• An acquisition may result in new partners or customers who may operate on terms and programs different than the Company's; +• An acquisition may result in employees not familiar with the Company's operations; +• An acquisition may result in new products and services, including the risk that any underlying intellectual property associated with such products and services may not have been adequately protected or that such products and services may infringe on the proprietary rights of others; +• An acquisition may result in the incurrence of unexpected expenses, stockholder lawsuits, the dilution of the Company's earnings or its existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; +• An acquisition may result in the loss of the Company's or the acquired company’s key personnel, customers, distributors or suppliers; and +• An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability or restrictions under foreign laws or regulations, and +33 +Table of Contents +the Company's inability to successfully assimilate differences in foreign business practices or overcome language or cultural barriers and other inherent risks of operating in unfamiliar legal and regulatory environments. +The occurrence of one or more of the above or other factors may prevent the Company from achieving all or a significant part of the benefits expected from an acquisition or investment. This may adversely affect the Company's financial condition, results of operations and ability to grow its business or otherwise achieve its financial and strategic objectives. +We May Fail to Realize the Anticipated Benefits of the Acquisition of Sherlock. +The success of the acquisition of Sherlock will depend on, among other things, our ability to combine our business with Sherlock in a manner that allows us to achieve developmental and operational synergies. The integration process could result in the loss of key employees, the disruption of our ongoing business or the ongoing business of Sherlock, or inconsistencies in standards, controls, procedures, or policies, in each case, that could adversely affect our ability to achieve the anticipated benefits of the acquisition. Integration efforts between the two companies will also divert management's attention from our core business and other opportunities that could have been beneficial to our stockholders. An inability to realize the full extent of, or any of, the anticipated benefits of the acquisition, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of our common stock. If we are unable to achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer or cost more to realize than expected. +The Company's Revenues Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints. +The end-users of certain of the Company's products include hospitals, physicians and other healthcare providers. Use of the Company's products could be adversely impacted if these end-users do not receive adequate reimbursement for the cost of its products from their patients’ healthcare insurers or payors. The Company's net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for the Company's products. +In the United States, hospitals, physicians and other healthcare providers who purchase diagnostic products generally rely on third-party payors, such as private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure. The overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for the Company's existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors, may reduce the demand for the Company's products or its ability to sell its products on a profitable basis. In addition, the reimbursement approval process may delay the market introduction of the Company's products. +Changes in Healthcare Regulation Could Affect the Company's Revenues, Costs and Financial Condition. +In recent years, there have been numerous initiatives at the federal and state level for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under government-funded programs, to minor modifications to existing programs. One example is the Patient Protection and Affordable Care Act, the federal healthcare reform law enacted in 2010 (the “Affordable Care Act”). Similar reforms may occur internationally. +Legislative and regulatory bodies are likely to continue to pursue healthcare reform initiatives in many forms and may continue to reduce funding in an effort to lower overall federal healthcare spending. The ultimate content and timing of changes to healthcare reform legislation and the resulting impact on the Company are impossible to predict. If significant reforms continue to be made to the healthcare system in the United States, or in other jurisdictions, those reforms may increase the Company's costs or otherwise have an adverse effect on its financial condition and results of operations. +34 +Table of Contents +New or Changed Testing Guidelines Could Affect Sales of the Company's Diagnostic Products. +From time to time, governmental agencies such as the CDC issue diagnostic testing guidelines or recommendations, which can affect the usage of the Company's HIV and HCV tests or other diagnostic products. For example, past sales of domestic professional OraQuick ® HIV tests have decreased in part due to customer migration to automated fourth generation HIV immunoassays performed in a laboratory, as recommended under testing guidelines issued by the CDC. In addition, some states have promulgated, or may in the future promulgate, laws and regulations that affect HIV or HCV testing. The issuance of new laws or guidelines, or changes in existing laws or guidelines, and the manner in which these new or changed laws and guidelines are interpreted and applied by healthcare practitioners, could impact the degree to which the Company's OraQuick ® rapid HIV and HCV testing products or other products are used. New or changed laws or guidelines could affect the number of people tested, the frequency of testing and whether testing products such as the Company's OraQuick ® HIV and HCV tests are used broadly for screening large populations or in a more limited capacity as a confirmatory test or otherwise. These factors could in turn affect the level of sales of the Company's products and its results of operations. +Reductions in Government Funding and Research Budgets Could Adversely Affect the Company's Business and Financial Results. +The Company sells its OraQuick ADVANCE ® HIV-1/2 and OraQuick ® HCV tests into the U.S. public health market which consists of state, county and other governmental public health agencies, community based organizations, service organizations and similar entities. It also sells these products into the hospital market. Many of these customers depend to a significant degree on grants or funding provided by governmental agencies to run their operations including programs that use the Company's products. In international markets, the Company often sell products such as its OraQuick ® HIV Self-Test to or through foreign governmental agencies or parties funded by such agencies. +Many of the Company's sample management solutions are sold to researchers at academic institutions, pharmaceutical and biotechnology companies, government laboratories and private foundations. Many research customers are dependent for their funding on grants from U.S. governmental agencies such as the NIH and agencies in other countries to pay for the products and services they purchase. These research customers also purchase the Company's single order fulfillment services. +Government funding is subject to the political process, which is inherently fluid and unpredictable. Under the Trump administration, the NIH announced on February 7, 2025, a policy significantly reducing research grants by limiting payments for indirect costs. Indirect costs represented more than 25% of total grant dollars awarded by the NIH in 2023. Our research customers may face increased financial pressure due to this change or any future caps on indirect costs. While, as of the date of this filing, the order has been temporarily stayed, there can be no assurance that it will not take effect or that other adverse actions will not be taken. Further, our revenue may be adversely affected if our research customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals, including reduced allocations to government agencies, such as the NIH. +The Company has also received government funding for certain research and development projects, including, most recently, through the Rapid Response Partnership Vehicle ("RRVP") for the development of a Marburg Virus Disease ("MVD") rapid antigen test. The level of available government grants or funding in the U.S. and elsewhere is unpredictable and may be affected by various factors including economic conditions, legislative and regulatory developments, political changes, civil unrest and changing priorities for research and development activities. Further, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to government agencies in the U.S. and other countries that fund life sciences research and development activities. Any reduction or delay in government or other funding as a result of legislative or regulatory changes or other factors, could cause the Company's customers to delay, reduce or forego purchases of its products and services. +Risks Relating to the Company's Reliance on Third Parties +The Company's Failure to Maintain Existing Distribution Channels, or Develop New Distribution Channels, May Result in Lower Revenues. +The Company has marketed many of its products by collaborating with laboratories, diagnostic companies and distributors. Its sales depend to a substantial degree on its ability to sell products to these customers and on the marketing and distribution abilities of the companies with which it collaborates. +35 +Table of Contents +Relying on distributors or others to market and sell the Company's products could harm its business for various reasons, including: +• The Company may not be able to find suitable distributors to distribute its products on satisfactory terms, or at all; +• The Company's distributors or other customers may not fulfill their contractual obligations to it or otherwise market and distribute its products in the manner or at the levels it expects; +• The Company does not control the incentives provided by its distributors to their sales personnel and the effectiveness of these incentives could affect sales of the Company's products; +• Agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the parties; +• The Company may not be able to renew existing distribution agreements on acceptable terms, or at all; +• The Company's distributors may not devote sufficient resources or priority to the sale of its products; +• The Company's distributors may prioritize their own private label products that compete with its products; +• The Company's existing distributor relationships or contracts may preclude or limit it from entering into arrangements with other distributors; and +• The Company may not be able to negotiate future distribution agreements on acceptable terms, or at all. +Although the Company will try to maintain and expand its business with distributors and customers and require that they fulfill their contractual obligations, there can be no assurance that such companies will do so or that new distribution channels will be available on satisfactory terms. As a result, the Company's revenues and business could be adversely affected. +The Company May Need Strategic Partners to Assist in Developing and Commercializing Some of Its Products. +Although the Company may elect to pursue some product opportunities independently, opportunities that require a technology controlled by a third party, a significant level of investment for development and commercialization or a distribution network beyond its existing sales force may necessitate involving one or more strategic partners. Further, the Company's ability to enter into agreements with additional strategic partners depends in part on convincing them that its products can help achieve and accelerate their goals and efforts. The Company's strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate parties, universities, research laboratories, government agencies, licensees and others. Relying on collaborative relationships could be risky to the Company's business for a number of reasons, including: +• The Company may be required to transfer material rights to such strategic collaborators, government agencies, licensees and others; +• The Company's collaborators may not devote sufficient resources or attach a sufficiently high priority to the success of its collaboration; +• The Company's collaborators may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; +• The Company has limited access to its collaborator’s confidential corporate information and sudden unexpected changes in ownership or strategy or other material events affecting a collaborator of which the Company is not made aware of in a timely manner, or at all, could adversely impact the Company's relationship; +• The Company's collaborators may be acquired by another company, sell the part of their business related to the Company's collaboration, decide to terminate the Company's collaborative arrangement or become insolvent; +36 +Table of Contents +• The Company's collaborators may develop technologies or components competitive with its products; +• The Company's collaborators may fail to deliver technologies or components that satisfy market requirements or such products may fail to perform properly; +• Disagreements with collaborators could result in the termination of the relationship or litigation; +• Collaborators may not have sufficient capital resources; and +• The Company may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms or at all. +While the Company generally expects that its collaborative partners will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so, either at the level required or at all, and the amount and timing of resources to be devoted to these activities will be controlled by others. Reliance on strategic agreements can also make it difficult to accurately forecast the Company's future revenues or operating results. There can be no assurance that the expected revenues or profits will be fully derived from such arrangements. +Risks Relating to Intellectual Property +The Company's Success Depends on Its Ability to Protect Its Proprietary Technology. +The Company's industry places considerable importance on obtaining patent, trademark and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. The Company's success depends, in part, on its ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents and technologies, both in the United States and in other countries. If the Company cannot continue to develop, obtain and protect intellectual property rights, its revenues and profits could be adversely affected. Moreover, the Company's current and future licenses or other rights to patents and other technologies may not be adequate for the operation of its business. +As appropriate, the Company intends to file patent applications and obtain patent protection for its proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for the Company's products, methods of making those products, methods of using those products and apparatuses relating to the use or manufacture of those products. +The Company also relies on trade secrets, know-how and continuing technological advancements to protect its proprietary technology. The Company has entered, and will continue to enter, into confidentiality agreements with its employees, consultants, advisors and collaborators. The Company's employees and third-party consultants also sign agreements requiring that they assign to it interests in inventions and original expressions and any patents or copyrights arising from their work. However, these parties may not honor these agreements. +The Company cannot guarantee that the process of filing patents, the laws governing trade secrets and proprietary information, or any agreements the Company enters into with employees, consultants, advisors or collaborators will provide adequate protection of its intellectual property rights. For example, the Company's competitors may develop similar products without infringing on any of its intellectual property rights or design around its proprietary technologies. Employees, consultants and others who participate in the development of the Company's products may breach their agreements with it regarding its intellectual property, and the Company may not have adequate remedies for the breach. The Company also may not be able to effectively protect its intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. +For a variety of reasons, the Company may decide not to file for patent, copyright or trademark protection outside of the U.S. The Company's trade secrets could become known through other unforeseen means. The absence of patent protection in certain parts of the Company's business may make it more difficult to protect its intellectual property. In addition, the Company's competitors may independently develop similar or alternative technologies or products that are equal or superior to its technology. +Moreover, issued patents remain in effect for a fixed period and after expiration will not provide protection of the inventions they cover. Once the Company's patents expire, it may be faced with increased competition, which could reduce its revenues. It may also not be able to successfully protect its rights to unpatented trade secrets and know-how. +37 +Table of Contents +Some of the Company's employees, including scientific and management personnel, were previously employed by competing companies. Although the Company encourages and expect all of its employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against the Company. In addition, some of these agreements may conflict with, or be subject to, the rights of third parties with whom the Company's employees, consultants or advisers have prior employment or consulting relationships. An adverse determination may limit or restrict the type of work that certain employees involved with such products may perform. +The Company may collaborate with universities and governmental research organizations or receive funding for its products from government agencies. As a result, one or more of these entities may acquire part of the rights to any inventions or technical information derived from the Company's collaboration or funding relationship with them. +To facilitate development and commercialization of a proprietary technology base, the Company may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if the Company is unable to obtain these types of licenses, its product development and commercialization efforts may be delayed or precluded. Moreover, some licenses may be nonexclusive, and therefore the Company's competitors may have access to the same technology also licensed to the Company. +The Company May Become Involved in Intellectual Property Disputes, Which Could Increase Its Costs and Limit or Eliminate Its Ability to Sell Products, Provide Services or Use Certain Technologies. +From time to time, the Company has sought, and may in the future seek, to enforce its patents or other intellectual property rights through litigation. In addition, there are a large number of patents and patent applications in the Company's product and service areas, and additional patents may be issued to third parties relating to its product and service areas. The Company, its customers or its suppliers may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of its products or services. Litigation in the Company's industry regarding patent and other intellectual property rights is prevalent and is expected to continue. The Company may also have disputes with parties that license patents to it if the Company believes the license is no longer needed for its products or services or the licensed patents are no longer valid or enforceable. +The Company's industry is characterized by a large number of patents, and the claims of these patents appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies the Company incorporates in its products or services. Accordingly, the Company may be subjected to substantial damages for past infringement or be required to modify its products or services or stop selling them if it is ultimately determined that its products or services infringe a third party’s proprietary rights. In addition, governmental agencies could commence investigations or criminal proceedings against the Company's employees or the Company itself relating to claims of misuse or misappropriation of another party’s proprietary rights. +Intellectual property litigation is costly. As such, the Company's involvement in litigation or other legal proceedings with respect to patents or other intellectual property and proprietary technology, either as a plaintiff or defendant, could adversely affect its revenues, market share, results of operations and business because: +• It could consume a substantial portion of managerial and financial resources; +• Its outcome would be uncertain and a court may find that the Company's patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by the Company's products or services; +• An adverse outcome could subject the Company to the loss of the protection of its patents or to liability in the form of past royalty payments, penalties, reimbursement of litigation costs and legal fees, special and punitive damages, or future royalty payments, any of which could significantly affect the Company's future earnings; +• Governmental agencies may commence investigations or criminal proceedings against the Company's employees, former employees and the Company itself relating to claims of misappropriation or misuse of another party’s proprietary rights; +• Failure to obtain a necessary license upon an adverse outcome could prevent the Company from selling its current products or services or other products or services it may develop or acquire; +38 +Table of Contents +• The Company may be required to alter its product or services, given the proprietary rights of others; +• The pendency of any litigation may in and of itself cause the Company's distributors and customers to reduce or terminate purchases of its products or services; and +• A court could award a preliminary and/or permanent injunction, which would prevent the Company from selling its current or future products or services. +The Company may indemnify some customers and strategic partners under its agreements with such parties if its products, services or activities have actually or allegedly infringed upon, misappropriated or misused another party’s proprietary rights. Further, the Company's products or services may contain technology provided to it by other parties, such as universities, contractors, suppliers, customers or collaborators, and it may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. These other parties may also not be required or financially able to indemnify the Company in the event that an infringement or misappropriation claim is asserted against the Company. +The Company may also become involved in other types of disputes regarding intellectual property rights, including state, federal or foreign court litigation, and patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office as well. Under federal law, various forms of post issuance patent review proceedings have been authorized, including inter-parties review processes. These proceedings permit certain persons to challenge the validity of a patent on the grounds that it was known from the prior art. As a result of such proceedings several of the Company's patents have been successfully challenged. The filing of such proceedings, or the issuance of an adverse decision in such proceedings, could result in the loss of valuable patent rights that could have a material adverse effect on the Company's business, financial condition, results of operations and growth prospects. For more information, see Item 3. Legal Proceedings. +Regulatory Risks +The Need to Obtain Regulatory Approvals, Clearances, Authorizations or Certifications Could Increase the Company's Costs and Adversely Affect Its Financial Performance. +Many of the Company's proposed and existing products and services are subject to regulation by the FDA and other governmental or public health agencies. In particular, the Company is subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of its products. The Company's practice is to train its employees on the legal requirements applicable to its business, including the requirements of the FDA and other relevant agencies. +The process of obtaining required approvals, clearances, other premarket authorizations or certifications can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. These approvals, clearances, other premarket authorizations or certifications can require the submission of a large amount of clinical data which can be expensive and may require significant time to obtain. It is also possible that a product will not perform at a level needed to generate the clinical data required to obtain such premarket authorizations or certifications. The submission of an application to the FDA or other regulatory authority does not guarantee that an authorization to market or import the product or a laboratory certification will be received. A regulatory authority may impose requirements as a condition to granting an approval, clearance, premarket authorization or certification that may include significant restrictions or limitations. The regulatory authority may delay or refuse to grant premarket authorization or certification, even though a product has been approved or registered without restrictions or limitations in another country or by another agency. Delays in receipt or failure to receive such approvals, clearances, premarket authorization or certification could have a material adverse effect on the Company's business, financial condition and results of operations. +All in vitro diagnostic products that are to be sold in the EU must bear the CE mark indicating conformance with the requirements of the relevant EU in vitro diagnostic medical devices legislation. The EU IVDR became applicable on May 26, 2022 and repealed the previous IVDD. There is a transitional period during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the EU IVDR, subject to compliance with certain requirements under the EU IVDR (see the section titled "Governmental Regulation - International" for further Information). The Company has obtained the CE mark for several of its existing products under the IVDD. It also intends to apply for CE marks for certain of its future +39 +Table of Contents +products and is not aware of any material reason why it would be unable to obtain those marks. However, there can be no assurance that compliance with all provisions of the EU IVDR will be demonstrated and the CE mark will be obtained or maintained for all products that the Company desires to sell in the EU. The failure to obtain or maintain the CE mark for one or more of the Company's products could lead to the termination of strategic alliances and agreements for sales of those products in the EU and mean that the Company is unable to sell such products in the EU. +In addition, the Company or its distributors are often required to obtain premarket authorization or product registration with foreign governments or regulatory bodies before it can import and sell its products in foreign countries. The Company may also be required to obtain WHO pre-qualification or endorsement in order to sell certain products in international markets or enable its customers to access interested funding sources for its products. The Company may have difficulty obtaining such authorizations, registrations, pre-qualifications or endorsements and, if obtained, such authorizations, registrations, pre-qualifications or endorsements may contain restrictions that limit the Company's ability to market and sell its products in the relevant country. In addition, any change in the Company's arrangement with a foreign distributor could result in the loss of or delay in transfer of any applicable product registrations, thereby interrupting the Company's ability to sell those products in the affected markets. +Failure to Comply With FDA or Other Regulatory Requirements May Require the Company to Suspend Production or Sale of Its Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues. +Regulation by the FDA and other federal, state and foreign regulatory agencies impacts many aspects of the Company's operations and the operations of its suppliers and distributors, including manufacturing, labeling, packaging, adverse event reporting, recalls, distribution, storage, advertising, promotion and recordkeeping. The Company is subject to routine inspection by the FDA and other agencies to determine compliance with QSR and FDA regulatory requirements in the United States and other applicable regulations worldwide, including but not limited to ISO standards. The Company believes that its facilities and procedures are in material compliance with the FDA requirements and ISO standards, but the regulations may be unclear and are subject to change, and the Company cannot be sure that the FDA or other regulators will agree with its compliance with these requirements. The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the performance of approved or cleared products or impose conditions on any product clearances or approvals that could restrict the distribution or commercial applications of those products. Regulatory agencies may impose restrictions on the Company or its distributors’ advertising and promotional activities or preclude these activities altogether if a noncompliance is believed to exist. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product or additional regulatory actions, including withdrawal of the product from the market. +Failure to comply with the applicable requirements of the FDA can result in, among other things, 483 notices, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant PMA approval for devices, withdrawal of product registrations, marketing clearances or approvals, or criminal prosecution. The ability of the Company's suppliers to supply critical components or materials and of its distributors to sell its products could also be adversely affected if their operations are determined to be out of compliance. Such actions by the FDA and other regulatory bodies could adversely affect the Company's revenues, costs and results of operations. +Some of the Company's products, particularly those sold by DNAG, are sold for research purposes in the U.S. The Company does not promote these products for clinical diagnostic use and they are labeled “For Research Use Only” ("RUO"). If the FDA were to disagree with the Company's RUO designation of a product, the Company could be forced to recall and/or stop selling the product until appropriate regulatory clearance or approval has been obtained. +In the ordinary course of business, the Company must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which the Company has sought to comply with these regulations, it could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of its products. The assessment of any civil and criminal penalties against the Company could severely impair its reputation within the industry and any limitation on its ability to manufacture and market its products could have a material adverse effect on the Company's business. +The Company's Inability to Respond to Changes in Regulatory Requirements Could Adversely Affect Its Business. +The Company believes that its products and procedures are in material compliance with all applicable FDA regulations, ISO requirements, and other applicable regulatory requirements, but the regulations regarding the manufacture and sale of +40 +Table of Contents +its products, the QSR and ISO requirements, and other requirements may be unclear and are subject to change. Newly promulgated regulations could require changes to the Company's products, necessitate additional clinical trials or procedures, or make it impractical or impossible for it to market its products for certain uses, in certain markets, or at all. The FDA and other regulatory authorities also have the ability to change the requirements for obtaining product approval or clearance and/or impose new or additional requirements as part of the approval or clearance process. These changes or new or additional requirements may occur after the completion of substantial clinical work and other costly development activities. The implementation of such changes or new or additional requirements may result in additional clinical trials and substantial additional costs and could delay or make it more difficult or complicated to obtain approvals and sell the Company's products. +In addition, from time to time, legislation is drafted, introduced, passed in Congress and signed into law that could significantly change the statutory provisions governing the approval, manufacturing, and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations, guidance and policies are often revised or reinterpreted by the FDA in ways that may significantly affect the manner in which our products are regulated and marketed. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +The Company Is Subject to Numerous Government Regulations in Addition to FDA Requirements, Which Could Increase the Company's Costs and Affect Its Operations. +In addition to the FDA and other regulations described previously, laws and regulations in some states may restrict the Company's ability to sell products in those states. While the Company intends to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee it will be successful in these efforts. +The Company must also comply with numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, disposal of hazardous substances, labor or employment practices and the configuration and operation of the websites through which it advertises its products. As a device manufacturer, the Company is required to report annually to the Centers for Medicare & Medicaid Services (“CMS”) any payments or transfers of value it has made to physicians and teaching hospitals and any physician ownership or investment interest in the Company's business. In the U.S., before the Company can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, it generally must first receive either 510(k) clearance or De Novo authorization or approval of a PMA from the FDA. Similarly, most major markets for medical devices outside the U.S. also require clearance, approval, authorization or compliance with certain standards before a product can be commercially marketed. Compliance with these laws or any new or changed laws regulating the Company's business could result in substantial costs. Because of the number and extent of the laws and regulations affecting the Company's industry, and the number of governmental agencies whose actions could affect its operations, it is impossible to reliably predict the full nature and impact of these requirements. To the extent the costs and procedures associated with complying with these laws and requirements are substantial or it is determined that the Company does not comply, its business and results of operations could be adversely affected. +Failure to Comply With Privacy, Security and Breach Notification Regulations May Increase the Company's Costs. +In the past, the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) has generally affected the Company indirectly, as the Company is generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities. The Company has in place certain administrative, technical and physical safeguards to protect the privacy and security of consumers’ personal information and endeavors to comply with all applicable state and federal laws with respect to the protection of consumers’ personal information. The Company is required to comply with varying state privacy, security and breach reporting laws. If it does not comply with existing or new laws and regulations related to properly transferring data containing consumers’ personal information, it could be subject to monetary fines, civil penalties or criminal sanctions. In addition to other federal and state laws that protect the privacy and security of consumers’ personal information, the Company may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. Moreover, the potential for enforcement action against the Company is now greater, as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while the Company believes it is and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of the Company's business. For example, it could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of consumers’ personal information. +41 +Table of Contents +Failure to Comply With Data Protection Requirements or Privacy Laws Could Increase the Company's Costs . +The Company is subject to European data protection regulations where it collects and uses personal data related to Europe. This includes the EU General Data Protection Regulation (“EU GDPR”) as well as other national data protection legislation in force in relevant European Economic Area (“EEA”) member states, and the EU GDPR in such form as incorporated into the laws of the UK ("UK GDPR", together with EU GDPR, "GDPR"), which govern the collection, use, storage, disclosure, transfer, or other processing of personal data: (i) regarding individuals in the EEA; and/or (ii) carried out in the context of the activities of the Company's establishment in any EEA member state. Failure to comply with the GDPR, and any supplemental European Economic Area (“EEA”) country’s national data protection laws which may apply by virtue of the location of the individuals whose personal data the Company collects, may result in fines and other administrative penalties, including fines of up to the greater of 4% of worldwide turnover and €20 million (or £17.5 million in the UK). The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. The GDPR imposes several mandatory requirements on companies that process personal data, including requirements relating to the processing of special category personal data (such as health sensitive data), ensuring a legal basis or condition applies to the processing of personal data, which may include obtaining the consent of the individuals to whom the personal data relates, providing notice to individuals about personal data processing activities, having data processing agreements with third parties who process personal data, notification of personal data breaches to data protection authorities and individuals, and the implementing of safeguards to protect the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EEA to third countries, including the United States in certain circumstances, unless a derogation exists or a valid GDPR transfer mechanism (for example, the European Commission approved Standard Contractual Clauses, or SCCs, or the EU-US Data Privacy Framework) applies. Any inability to transfer personal data from the EEA to the United States in compliance with data protection laws may impede the Company's ability to conduct trials and may adversely affect its business and financial position. Complying with the enhanced obligations imposed by the GDPR imposes additional obligations and risk upon the Company's business, and may result in significant costs to its business and require it to amend certain of its business practices. Further, the Company has no assurances that violations will not occur, particularly given the complexity of the GDPR. +In the U.S., there are numerous federal and state privacy and data security laws and regulations governing the collection, use, disclosure and protection of personal information, including health information privacy laws, security breach notification laws and consumer protection laws. Each of these laws is subject to varying interpretations and is constantly evolving. By way of example, HIPAA imposes privacy and security requirements and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health care providers), and their respective business associates (individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity). Entities that are found to be in violation of HIPAA may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations. Even when HIPAA does not apply, failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act (the FTCA), 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. +Regulators and legislators in the U.S. are increasingly scrutinizing and restricting certain personal data transfers and transactions involving foreign countries. For example, the Biden Administration’s executive order Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern as implemented by Department of Justice regulations issued in December 2024, prohibits data brokerage transactions involving certain sensitive personal data categories, including health data, genetic data, and biospecimens, to countries of concern, including China. The regulations also restrict certain investment agreements, employment agreements and vendor agreements involving such data and countries of concern, absent specified cybersecurity controls. Actual or alleged violations of these regulations may be punishable by criminal and/or civil sanctions, and may result in exclusion from participation in federal and state programs. +The Company is also subject to the California Consumer Privacy Act (“CCPA”), which creates individual privacy rights and places stringent privacy and security obligations on businesses covered by the law, including obligations to provide detailed disclosures to California consumers about their data collection, use and sharing practices and provide such +42 +Table of Contents +consumers with ways to opt out of certain uses of sensitive personal information, including health information. It also provides for civil penalties for violations and allows for a private right of action for data breaches that is expected to increase data breach litigation. The law also created a new state regulatory agency that was vested with authority to implement and enforce the CCPA. Failure to comply with the CCPA or other data processing or security laws, or any changes in these laws, could adversely impact the Company's business and its business plans. Similar laws have been passed and proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that would make compliance challenging.In addition to these comprehensive consumer privacy laws and proposals, a number of other states have passed or proposed more limited privacy laws that focus on specific privacy issues such as biometric data and the privacy of health and medical information, such as Washington state’s My Health My Data Act, which went into effect in March 2024. +In addition to privacy and data security laws, we may be contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. We are also bound by other contractual obligations related to privacy and data security, and our efforts to comply with such obligations may not be successful. +We publish privacy policies, and we may publish marketing materials, and other statements, such as compliance with certain certifications or self-regulatory principles, regarding privacy and data security. If these policies, materials or statements are found to be deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to investigation, enforcement actions by regulators, or other adverse consequences. +We are subject to laws and regulations that govern sending marketing and advertising by electronic means, such as email and telephone. For example, in the United States, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”), among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future commercial emails from the sender. In addition, the Telephone Consumer Protection Act (the “TCPA”) imposes certain notice, consent, and opt-out obligations on companies that send telephone or text communications using automatic telephone dialing systems, or artificial or prerecorded voice to consumers, and provides consumers with private rights of action for violations. The FCC and the FTC have responsibility for regulating various aspects of these laws. Among other requirements, the TCPA requires us to obtain prior express written consent for certain telemarketing calls. Many states have similar consumer protection laws regulating telemarketing. These laws limit our ability to communicate with potential customers and reduce the effectiveness of our marketing programs. For violations of the TCPA, the law provides for a private right of action under which a plaintiff may recover monetary damages of $500 for each call or text made in violation of the prohibitions on calls made using an “artificial or pre-recorded voice” or an automatic telephone dialing system. Various state law equivalents of the TCPA may also provide for monetary damages in amounts greater than those provided for under the TCPA. An action may be brought by the FCC, a state attorney general, an individual, or a class of individuals. If in the future we are found to have violated the TCPA, or a state law equivalent, the amount of damages and potential liability could be extensive and adversely impact our business. Accordingly, were such a class certified or if we are unable to successfully defend such a suit, then TCPA or other state law damages could have a material adverse effect on our results of operations and financial condition. +The Use of New And Evolving Technologies, Such As Artificial Intelligence (“AI”), In Our Offerings May Present Risks And Challenges That Can Impact Our Business Including by Posing Security Risks to Our Confidential Information, Proprietary Information, and Personal Data. +We may build and integrate AI into our business practices, and the evolving nature of AI technologies and the surrounding legal and regulatory environment presents risks and uncertainties that could affect our business. The use of AI technology can give rise to intellectual property risks, including compromises to proprietary intellectual property and intellectual property infringement. Additionally, we expect to see increasing government regulation related to artificial intelligence use and ethics, which may also significantly increase the burden and cost of research, development and compliance in this area. For example, in the U.S., a number of states have proposed and passed laws regulating various uses of AI. In Europe, the EU’s Artificial Intelligence Act (“AI Act”) — which entered into force on August 1, 2024 and, with some exceptions, will begin to apply as of August 2, 2026 — imposes significant obligations on providers and deployers of high-risk artificial intelligence systems, and encourages providers and deployers of artificial intelligence systems to account for EU ethical principles in their development and use of these systems. If we develop or deploy AI systems that are governed by these laws and regulations, we may be required to adopt higher standards of data quality, transparency, and human oversight, and adhere to specific and potentially burdensome and costly ethical, accountability, and administrative requirements. Even in the absence of dedicate AI laws and regulations, we may be subject to novel legal and business risks relating to our adoption of these new technologies. Our vendors may in turn incorporate AI tools into their own offerings, and the providers of these AI tools may not meet existing or rapidly evolving regulatory or industry standards, including with +43 +Table of Contents +respect to privacy and data security. Further, bad actors around the world use increasingly sophisticated methods, including the use of AI, to engage in illegal activities involving the theft and misuse of personal information, confidential information, and intellectual property. Any of these outcomes could damage our reputation, result in the loss of valuable property and information, and adversely impact our business. +FDA Regulation of Laboratory-Developed Tests and Genetic Testing Could Affect Demand For the Company's Products. +The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has taken the position that it has regulatory authority over laboratory-developed tests ("LDTs"), but has exercised enforcement discretion in not regulating most LDTs performed by high complexity CLIA-certified laboratories. LDTs are tests designed, developed, and performed in-house by a laboratory. Such laboratories are subject to regulation under CLIA but have not been subject to regulation by the FDA under the agency’s medical device requirements. A significant portion of the total volume of genetic or molecular testing is performed with LDTs. +In mid-2010, the FDA announced that it would begin regulating LDTs, including laboratory developed molecular tests, and in October 2014 issued proposed guidance on the regulation of LDTs for public comment. On January 13, 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. The FDA worked with regulatory advocacy groups to bring forward legislative approaches specifically for in vitro diagnostic tests including LDTs. For example, in 2021, the Verifying Accurate, Leading-edge, IVCT Development ("VALID") Act was introduced to Congress and provided a framework to change IVDs and LDTs to in vitro clinical tests ("IVCTs"). The proposed regulation would give the FDA oversight of LDTs once it becomes law. In 2022, the VALID Act was incorporated into the Senate user fee bill but was not included in the year-end Consolidated Appropriations Act of 2022. Subsequently, the VALID Act was introduced to Congress again in March 2023. +On April 29, 2024, the FDA published a final rule on LDTs, in which FDA outlines its plan to end enforcement discretion for many LDTs in five stages over a four-year period. +• In Phase 1 (effective May 6, 2025), clinical laboratories would be required to comply with medical device reporting, correction/removal reporting, and certain quality systems complaint handling requirements. +• In Phase 2 (effective May 6, 2026), clinical laboratories would be required to comply with all other device requirements (e.g., establishment registration and device listing, labeling, investigational use requirements), except for remaining quality systems requirements and premarket review requirements. +• In Phase 3 (effective May 6, 2027), clinical laboratories would be required to comply with all remaining quality systems requirements. +• In Phase 4 (effective November 6, 2027), clinical laboratories would be required to comply with premarket submission requirements for high-risk tests (i.e., tests subject to FDA's premarket approval (PMA) requirement). +• In Phase 5 (effective May 6, 2028), clinical laboratories would be required to comply with premarket submission requirements for moderate- and low- risk tests (i.e., tests subject to de novo classification or the 510(k) requirement). +On May 29, 2024, the American Clinical Laboratory Association filed a lawsuit challenging the FDA's authority to regulate LDTs as medical devices under the FDCA. Subsequently, on August 19, 2024, the Association for Molecular Pathology filed a lawsuit similarly challenging FDA's final rule on LDTs. The outcomes of these lawsuits is uncertain at this time. +The Company's subsidiary, DNAG, sells its DNA collection systems to certain laboratories and other customers for use with LDTs. The FDA’s increased regulation of LDTs could make it more difficult for laboratories and other customers to continue offering LDTs that involve genetic or molecular testing. This, in turn, could increase costs, delay the introduction of new LDTs and reduce demand for DNAG’s products and adversely impact the Company's revenues. +In recent years, the Department of Justice indicted a number of telemedicine companies and cancer genetic testing laboratories for allegedly submitting fraudulent insurance claims to Medicare. A number of these companies were customers of DNAG. As a result of these activities, the FDA has issued letters to genetic testing laboratories indicating that it plans to increase oversight of this market which has caused some of these companies to stop providing testing options or to change how they are reporting the information provided by the testing. The activities have negatively affected this market and there is a risk that these enforcement actions will continue to negatively affect this market by forcing +44 +Table of Contents +laboratories to either stop offering such services or restricting the use of such services. Such a reduction in testing could result in decreased sales of the Company's DNA collection devices. +The Company's International Sales Create Potential Exposure Under Anti-Corruption Laws . +The Company has a policy in place prohibiting its employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the FCPA and similar foreign laws. In 2024, approximately $13.9 million of the Company's consolidated net revenues were generated from sales in a variety of foreign countries. These international activities subject the Company to the FCPA, the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. The Company has operations, enters into agreements with third parties, and makes sales in countries known to experience corruption. Further international expansion, including the acquisition of foreign entities, may create increased exposure to such practices. The Company's activities in these countries creates the risk of unauthorized payments or offers of payments by one of the Company's employees, consultants, sales agents or distributors that could be in violation of various laws, including the FCPA, even though these parties are not always subject to the Company's control. It is the Company's policy to implement safeguards to discourage these practices by its employees and distributors, including employee training, contracts requiring compliance with the FCPA and similar rules, and standard reviews of its distributors. However, the Company's existing safeguards and any future improvements may not prove to be effective, and its employees, consultants, sales agents or distributors may engage in conduct for which the Company might be held responsible. Violations of the FCPA and other laws may result in criminal or civil sanctions, which could be severe and the Company may be subject to other liabilities, which could negatively affect its reputation, business, results of operations and financial condition. +Risks Relating to the Economy, the Company's Financial Results, Investments, and Need for Financing +The Company Has Experienced Losses in the Past and May Not Be Able to Again Achieve and Maintain Profitable Operations . +The Company has experienced annual net losses during the five years prior to 2015, between 2020 through 2022 and again recorded net losses for the year ended December 31, 2024 . In addition, as of December 31, 2024, the Company had an accumulated deficit of $103.4 million. Even though the Company achieved profitability in 2015 through 2019 and in 2023, there can be no assurance that it will be able to achieve or sustain profitability in the future. +The Company's ability to achieve and continue profitable operations in the future will be dependent upon a number of factors including, without limitation, the following: +• The Company's ability to continue growing sales of its sample management solutions and related genomic and microbiome laboratory services; +• The Company's ability to successfully commercialize its products in the United States and internationally; +• Changes in the markets in which the Company operates; +• Changes in customer buying patterns or a buildup of significant quantities in the Company's distributors’ inventories or distribution channels; +• The level of expenditures the Company is required to make in order to develop, obtain regulatory approvals for and successfully commercialize its new products; +• The Company's ability to expand its business through the acquisition of other companies or technologies or through internal development of new or improved products; +• The Company's ability to realize revenues and other anticipated benefits from its acquisitions and strategic transactions; +• The Company's ability to improve manufacturing efficiencies and reduce cost of goods sold; +• The Company's ability to successfully launch new products after receipt of required regulatory approvals or the acquisition of rights to those products; +• The degree to which the Company's major distributors and customers comply with their contractual obligations, including minimum purchase commitments; +45 +Table of Contents +• Whether the Company or entities in which it invests are successful in obtaining and maintaining required regulatory approvals and registrations for its new products; +• The level of competition, including the degree to which competitors sell lower priced products or more attractive offerings to compete with the Company's products; +• Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation, currency fluctuations and tariffs; +• Global economic and political instability and conflicts, such as terrorism, civil unrest, war and natural disasters in foreign countries; +• Failure to achieve the Company's revenue growth targets; and +• The costs and results of patent infringement, product liability and other litigation or claims asserted by or against the Company. +Recent Volatility In Capital Markets and Lower Market Prices For the Company's Securities May Affect Its Ability to Access New Capital Through Sales of Shares of Its Common Stock or Issuance Of Indebtedness, Which May Materially Harm Its Liquidity, Limit Its Ability to Grow Its Business, Pursue Acquisitions or Improve Its Operating Infrastructure and Restrict Its Ability to Compete in Its Markets . +The Company's operations consume substantial amounts of cash, and it intends to continue to make significant investments to support its business growth, respond to business challenges or opportunities, develop new solutions, retain or expand its current levels of personnel, improve its existing solutions, enhance its operating infrastructure, and potentially acquire complementary businesses and technologies. The Company's future capital requirements may be significantly different from its current estimates and will depend on many factors, including the need to: +• finance unanticipated working capital requirements; +• develop or enhance its technological infrastructure and its existing solutions; +• pursue acquisitions or other strategic relationships; and +• respond to competitive pressures. +Accordingly, the Company may need to pursue equity or debt financing to meet its capital needs. With uncertainty in the capital markets and other factors, such financing may not be available on terms favorable to the Company or at all. If the Company raises additional funds through further issuances of equity or convertible debt securities, its existing stockholders could suffer significant dilution, and any new equity securities the Company issues could have rights, preferences, and privileges superior to those of holders of its common stock. Any debt financing secured by the Company in the future could involve additional restrictive covenants relating to its capital-raising activities and other financial and operational matters, which may make it more difficult for it to obtain additional capital and to pursue business opportunities, including potential acquisitions. If the Company is unable to obtain adequate financing or financing on terms satisfactory to it, the Company could face significant limitations on its ability to invest in its operations and otherwise suffer harm to its business. +Rising Inflation Rates Could Negatively Impact the Company's Revenues and Profitability if Increases in the Prices of Its Products or a Decrease in Consumer Spending Results in Lower Sales. In Addition, if the Company's Costs Increase and the Company Is Not Able to Pass Along These Price Increases to Its Customers, Its Net Income Would Be Adversely Affected, and the Adverse Impact May Be Material. +Inflation rates, particularly in the United States, increased in recent years and continue to be subject to volatility. Increased inflation may result in decreased demand for the Company's products and services, increased operating costs (including the Company's labor costs), reduced liquidity, and limitations on its ability to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve previously raised, and may again raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, the Company may be unable to raise the sales prices of its products at or above the rate at which its costs increase, which could/would reduce its profit margins and have a material adverse effect on its financial results and net income. The Company may also experience lower than expected sales and potential adverse impacts on its competitive position if there is a decrease in consumer spending or a negative reaction to its pricing. A reduction in the Company's revenue would be detrimental to its profitability and financial condition and could also have an adverse impact on its future growth. +46 +Table of Contents +Increasing Geopolitical and Economic Risk and Tariffs Could Negatively Affect Our Ability to Maintain Sales at Existing Levels +The imposition of tariffs, non-tariff barriers, and other import and export restrictions have contributed to increased global economic uncertainty. The rise of economic nationalism could make it more difficult for us to attract new customers, retain existing customers, continue to produce and source in an optimal manner, maintain our supply chain, or maintain sales at existing levels, both in the United States and in other countries. Geopolitical and economic risks, together with trade protectionism have increased over the past few years in many regions of the world, including in the United States. Any of these risks, ensuing retaliation, or the further deterioration of trade relations between countries could make our offerings more expensive or non-competitive in the affected countries. Growing tensions, protectionist trade policies, and tariffs may also lead to a fragmentation of the global economy, a general reduction of international trade in goods and services, and a reduction in the integration of financial markets, any of which could materially and adversely affect our business results, cash flows, financial condition, or prospects. +An Impairment of Goodwill and Intangible Assets Could Reduce the Company's Earnings . +At December 31, 2024, the Company's consolidated balance sheet reflected approximately $40.3 million of goodwill and approximately $17.4 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles (“U.S. GAAP”) require the Company to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, such as intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment review often cannot be done at the level of the individual asset and it must instead be applied to a group of assets. For the purpose of the Company's annual goodwill impairment testing based on the current circumstances of how the Company manages or business, this group of assets is the Company as a whole. If the Company determines that any of its goodwill or intangible assets were impaired, it will be required to take an immediate charge to earnings and its results of operations could be adversely affected. The Company recognized a pre-tax impairment charge of $8.5 million related to intangible assets during the year ended December 31, 2023, which is reported in loss on impairments in the Company's consolidated statement of operations. +Changes in Foreign Currency Exchange Rates Could Negatively Affect the Company's Operating Results. +The Company's financial statements are stated in U.S. dollars and, historically, most of its international sales have also been denominated in U.S. dollars. As a result, in the past the Company's exposure to foreign currency exchange rate risk has not been material. Nonetheless, these sales are subject to currency risks since changes in the values of foreign currencies relative to the value of the U.S. dollar can render the Company's products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of the Company's products, as could changes in the general economic conditions in those markets. +In addition, the revenues and expenses of the Company's subsidiary, DNAG, are recorded in Canadian dollars and the revenues and expenses of its subsidiary Novosanis are recorded in Euros. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars for purposes of reporting consolidated financial results. The Company's expectation is that the businesses of its foreign subsidiaries will continue to grow and its exposure to foreign currency exchange rates may be more significant than in past years. +Exchange rate fluctuations may affect the revenues and expenses of the Company's foreign subsidiaries and the translation of those financial results into U.S. dollars. Favorable movement in exchange rates have benefited the Company in prior periods. However, where there are unfavorable currency exchange rate fluctuations, the Company's consolidated financial statements including its balance sheet, revenues and results of operations, could be negatively affected. In addition, fluctuations in exchange rates could affect year-to-year comparability of operating results. In the past, the Company has not generally entered into hedging instruments to manage its currency exchange rate risk, but it may need to do so in the future. However, the Company's attempts to hedge against these risks may not be successful. If the Company is unable to successfully hedge against unfavorable foreign currency exchange rate movements, its consolidated financial results may be adversely impacted. +47 +Table of Contents +Risks Relating to the Company's Common Stock +The Company's Stock Price Could Continue to be Volatile. +The Company's stock price has been volatile, has fluctuated substantially in the past, may be volatile in the future and could experience substantial declines. The following factors, among others, could have a significant impact on the market for the Company's Common Stock: +• The performance of the Company's business, including its efforts to increase sales of OraQuick ® HIV, HCV and sample management solutions and its OraQuick ® In-Home HIV test and HIV Self-Test; +• Future announcements concerning the Company and its products or services, including with respect to significant acquisitions, strategic collaborations and joint ventures; +• Ability to achieve the expected benefits, enhanced revenue growth and synergies from strategic acquisitions, including the Company's recent acquisition of Sherlock; +• Clinical results with respect to the Company's products or services or those of its competitors; +• The status of clinical studies and pending submissions for required regulatory approvals; +• The announcement of regulatory or enforcement actions by the FDA or other agencies against the Company, its products or services, or one or more of its customers; +• The gain or loss of significant contracts and availability of funding for the purchase of the Company's products and services; +• Delays in the development, regulatory approval or commercialization of new or enhanced products or services; +• Legislative developments and industry or competitive trends; +• Biological or medical discoveries; +• Disputes or developments with key customers, distributors or suppliers; +• Developments in patent or other proprietary rights; +• Litigation or threatened litigation; +• Complaints or concerns about the performance or safety of the Company's products and publicity about those issues, including publicity expressed through social media or otherwise over the internet; +• Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about the Company by securities analysts or major stockholders; +• Governmental regulation; +• Changes in the level of competition; +• Loss of or declines in sales to major distributors or customers or changes in the mix of products sold; +• Period-to-period fluctuations in the Company's operating results; +• Additions or departures of key personnel; +• General market and economic conditions; and +• Terrorist attacks, civil unrest, war and national disasters, including pandemics. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of the Company's Common Stock, as well as the stock of many companies in the diagnostics and life sciences industries. Often, price fluctuations are unrelated to the operating performance of the specific companies whose stock is affected. +48 +Table of Contents +In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against the issuing company. If the Company were subject to this type of litigation in the future, it could incur substantial costs and experience a subsequent diversion of management’s attention and resources, each of which could have a material adverse effect on the Company's revenue and earnings. Any adverse determination in this type of litigation could also subject the Company to significant liabilities. +Future Sales of the Company's Common Stock by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Its Common Stock and Make It More Difficult for the Company to Sell Stock in the Future. +Sales of the Company's Common Stock in the public market, or the perception that such sales may occur, could negatively impact the market price of its Common Stock. The Company is unable to estimate the number of shares of its Common Stock that may actually be resold in the public market since this will depend on the market price for its Common Stock, the individual circumstances of the sellers and other factors. +The Company has a number of institutional stockholders that own significant blocks of its Common Stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of the Company's Common Stock could be negatively affected. In addition, it is possible that one or more of the Company's executive officers or non-employee members of its Board of Directors could sell shares of its Common Stock during an open trading window or pursuant to a 10b5-1 sales plan under the Company's Insider Trading Policy. These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of the Company's Common Stock. +Because the Company Does Not Intend to Pay Cash Dividends on Its Common Stock, an Investor in the Company's Common Stock Will Benefit Only if the Its Common Stock Appreciates in Value. +The Company currently intends to retain its current earnings and future earnings, if any, to finance the expansion of its business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. As a result, the success of an investment in the Company's Common Stock will depend entirely upon any future appreciation. There is no guarantee that OraSure's Common Stock will appreciate in value or even maintain the price at which investors purchased their shares. +Certain Provisions in the Company's Certificate of Incorporation and Bylaws and Under Delaware Law Could Make a Third-Party Acquisition of the Company Difficult. +The Company's Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire it, even if doing so would be beneficial to the Company's stockholders. The Company is also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of it. These provisions could limit the price investors might be willing to pay in the future for shares of the Company's Common Stock. +General Risk Factors +The Company May Face Product Liability Claims for Injuries Resulting From the Use of Its Products. +The Company may be held liable if any of its products, or any product which is made with the use or incorporation of any of its technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage. There is no assurance that the Company would be successful in defending any product liability lawsuits brought against it. Moreover, there is no assurance that the Company's products will not be included in unethical, illegal or inappropriate research or applications, which may in turn put the Company at risk of litigation. Regardless of merit or eventual outcome, product liability claims could result in: +• Decreased demand for the Company's products; +• Lost revenues; +• Damage to the Company's image or reputation; +• Costs related to litigation; +• Increased product liability insurance costs; +49 +Table of Contents +• Diversion of management time and attention; and +• Incurrence of damages payable to plaintiffs. +The Company is selling the InteliSwab ® COVID-19 Rapid Test and the OraQuick ® In-Home HIV test in the United States OTC market, and it offers HIV Self-Tests to consumers internationally. The Company believes the sale of products for use by consumers increases its potential exposure to product liability and other claims. +Performance of the Company's Products May Affect Its Revenues, Stock Price and Reputation. +The Company's products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators. However, the Company's products may not perform as expected. For example, a defect in one of the Company's diagnostic or specimen collection products or a failure by a customer to follow proper testing procedures, may cause the product to report inaccurate information such as a false positive result or a false negative result. A false positive or negative result can also occur even when there is no apparent product defect and the customer has apparently used the Company's product properly. Identifying the root cause of a product performance or quality issue can be difficult and time consuming. +If the Company's products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of its customers, customers may switch to a competing product or otherwise stop using the Company's products, and the Company's revenues could be adversely affected. Under such circumstances, the Company may be required to implement shipment holds or product recalls and incur warranty obligations, which would increase its costs. In addition, poor performance by one or more of the Company's products and publicity surrounding such performance could have an adverse effect on the Company's reputation, its continuing ability to sell products and the prevailing market price of its Common Stock. +The Company's Ability to Sell Products Could be Adversely Affected by Competition From New and Existing Products and Services. +The markets the Company serves are highly competitive and rapidly changing and it expects competition to intensify as technological advances are made and become more widely known, and as new products and services reach the market. Many of the Company's principal competitors have considerably greater financial, technical and marketing resources than it does. As new products and services enter the market, the Company's products and services may become obsolete or a competitor’s products and services may be more effective or attractive or more effectively marketed and sold than the Company's. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for new products and services that would render the Company's technologies, products and services obsolete or otherwise commercially unattractive, or introduce or commercialize such products and services before the Company can do so. If the Company fails to convince its customers of the advantages and economic value of its products and services or otherwise maintain and enhance its competitive position, its customers may decide to use products and services developed by competitors which could result in a loss of revenues. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +The Company also faces competition from products that are sold at a lower price. Where this occurs, customers may choose to buy lower cost products from third parties or the Company may be forced to sell its products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of its products. The Company may also be required to increase its marketing efforts in order to compete effectively, which would increase its costs. +Failure to Achieve the Company's Financial and Strategic Objectives Could Have a Material Adverse Impact on Its Business Prospects. +As a result of any number of risk factors identified in this Annual Report, no assurance can be given that the Company will be successful in implementing its financial and strategic objectives, including its efforts to increase sales of its products and services or continue growing its business. In addition, the funds for research, clinical development and other projects have in the past come primarily from the Company's business operations. If the Company's business slows and it has less money available to fund research and development and clinical programs, it will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or other resources are not available, the Company may be required to delay or scale back its business. The Company's operations will be adversely affected if its total revenue and gross profits do not correspondingly increase or if its technology, product, service, clinical and market development +50 +Table of Contents +efforts are unsuccessful or delayed. Furthermore, the Company's failure to successfully introduce new or enhanced products and services and develop new markets could have a material adverse effect on its business and prospects. +If the Company Fails To Establish and Maintain Proper And Effective Internal Control Over Financial Reporting, Its Operating Results and Its Ability to Operate Its Business Could Be Harmed. +Ensuring that the Company has adequate internal financial and accounting controls and procedures in place so that it can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Company is required to comply with the requirements of the Sarbanes-Oxley Act of 2002, or SOX, which requires that it maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, the Company must perform system and process evaluation, document its controls and perform testing of its key controls over financial reporting to allow management and its independent public accounting firm to report on the effectiveness of its internal control over financial reporting, as required by Section 404 of SOX. The Company's testing, or the subsequent testing by its independent public accounting firm, may reveal deficiencies in its internal control over financial reporting that are deemed to be material weaknesses. For instance, management identified a material weakness in the Company's internal control over financial reporting related to customer pricing in the revenue recognition process and concluded that its disclosure controls and procedures were not effective due to the existence of the material weakness as of September 30, 2023, which has since been remediated. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. +If the Company Loses Key Personnel or Is Unable to Attract and Retain Qualified Personnel as Necessary, Its Business Could be Harmed. +The Company's success depends to a large extent upon the contributions of its executive officers, management and sales, marketing, operations and scientific staff. The Company's business may be harmed by the loss of a significant number of its executive officers or senior managers. It may not be able to attract or retain a sufficient number of qualified employees in the future due to the intense competition for qualified personnel among medical products, laboratory services and other life science businesses. The Company's ability to recruit such employees will depend on a number of factors, including compensation, benefits, work location, the prospects of the Company, and the possibility for advancement within the organization. The Company generally does not enter into employment agreements requiring its employees to work for it for any specified period. +If the Company is not able to attract and retain the necessary personnel to accomplish its business objectives, it may experience constraints that will adversely affect its ability to effectively produce, market and sell its products and services, to meet the demands of its strategic partners in a timely fashion, or to support research, development and clinical programs. Although the Company believes it will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other qualified personnel from numerous companies and academic and other research institutions may limit its ability to do so on acceptable terms. +The Company has experienced a number of significant changes in its senior leadership in recent years and faces risks related to losses of key personnel and to any such changes that occur in key senior leadership positions. Although the Company has endeavored to implement any management and director transition in a non-disruptive manner, such transitions might impact its business, and give rise to uncertainty among its customers, investors, vendors, employees and others concerning its future direction and performance, which may materially and adversely affect its business, financial condition, results of operations and cash flows, and its ability to execute its business model. The Company can provide no assurance that it will find suitable successors to key roles as transitions occur or that any identified successor will be successfully integrated into the management team. +In addition, because certain members of the Company's management and board of directors have served in their respective capacities for only limited durations, the Company faces the additional risks that these persons have limited familiarity with the Company's past practices, its business and its industry and lack established track records in managing its business strategy. +51 +Table of Contents +Increases in Demand for the Company's Products and Services Could Require It to Expend Considerable Resources or Harm Its Customer Relationships if It Is Unable to Meet That Demand. +If the Company experiences significant or unexpected increases in the demand for its products and services, the Company and its suppliers may not be able to meet that demand without expending additional capital resources. These capital resources could involve the cost of new products, machinery or new manufacturing or laboratory facilities. This would increase the Company's capital costs, which could adversely affect its earnings. The Company's suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity. In addition, new manufacturing or laboratory equipment and facilities may require FDA approval or government or industry certification before they can be used to manufacture the Company's products or provide laboratory services. To the extent the Company is unable to obtain or is delayed in obtaining such approvals, its ability to meet the demand for its products and services could be adversely affected. +If the Company is unable to develop necessary manufacturing or laboratory capabilities in a timely manner, its sales could be adversely affected. If the Company fails to increase these capabilities in a cost effective manner or if it experiences lower than anticipated yields or production or performance problems as a result of changes that it makes in its manufacturing or laboratory processes to meet increased demand, it could experience delays or interruptions and increased costs, which could also have a material adverse effect on its revenues and profitability. +Unexpected increases in demand for the Company's products may require it to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. The Company has long-term supply agreements with certain of these suppliers, but these long-term agreements involve risks for the Company, such as its potential inability to obtain an adequate supply of raw materials and components and its reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to the Company. Any shortfall in the Company's supply of raw materials and components, or its inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on its ability to meet increased demand for its products. This could negatively affect the Company's total revenues or cost of sales and related profits. +The Company's inability to meet customer demand for its products and services could also harm its customer relationships and impair its reputation within the industry. This, in turn, could have a material adverse effect on the Company's business and prospects. +The Company Relies on Information Technology in Its Operations and Any Material Failure, Inadequacy, Interruption or Security Breach of that Technology Could Harm Its Ability to Efficiently Operate Its Business. +The Company relies heavily on enterprise resource planning and other complex information technology systems across its operations and on the internet, including for management of inventory, purchase orders, invoices, shipping, revenue and expense accounting, online business, consumer call support, and various other processes and transactions. The Company's ability to effectively manage its business, coordinate the production, distribution and sale of its products, process and analyze specimens in its laboratories, respond to customer inquiries, and ensure the timely and accurate recording and disclosure of financial information depends significantly on the reliability and capacity of these systems and the internet. +The failure of any of the foregoing systems to operate effectively, problems with transitioning to upgraded or replacement systems, or disruptions in the operation of the internet, could cause delays in product sales and reduced efficiency of the Company's operations. Significant expenditures could be required to remediate any such problem. +Cybersecurity Incidents and Other Disruptions Could Compromise the Company's Information, Expose It to Liability and Harm Its Reputation and Business. +In the ordinary course of business, the Company collects and stores sensitive and confidential data, including intellectual property, personal information, its proprietary business information and that of its customers, suppliers and business partners, and personally identifiable information of its employees in its data centers and on its networks. Secure maintenance and transmission of this information is critical to the Company's operations business strategy. It generally relies on commercially available systems, software, tools and domestically available monitoring to provide security for processing, transmitting and storing this sensitive and confidential data. +52 +Table of Contents +Cyber-attacks and other cybersecurity incidents such as ransomware, phishing, and social engineering attacks could result in unauthorized access to the Company's computer systems or its third-party IT service providers' systems and, if successful, misappropriate personal, sensitive, or confidential information. As previously disclosed, the Company has in the past and may in the future experience cybersecurity incidents. If successful, these attacks could lead to service interruptions, extortion, theft of confidential, personal or proprietary information, the compromise of data integrity or unauthorized information disclosure. Any technology service interruption or breach of the Company's systems could adversely affect its business operations and/or result in the loss or compromise of personal, sensitive, or confidential information or intellectual property. The Company maintains cyber liability insurance; however, this insurance may not be sufficient to cover the financial, legal, business or reputational losses that may result from an interruption or breach of the Company's systems. +The Company has outsourced significant elements of its IT infrastructure and, as a result, it manages relationships with third-party providers who may or could have access to the Company's sensitive and confidential information. The Company relies on technology developed, supplied and/or maintained by third-parties that may make the Company vulnerable to “supply chain” style cyber-attacks. Further, technology and security vulnerabilities of acquisitions, business partners or third-party providers may not be identified during due diligence or soon enough to mitigate exploitation. The size and complexity of the Company's IT and information security systems, and those of its third-party providers (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security incidents from inadvertent or intentional actions by, but not limited to, Company employees, service providers, business partners, customers or malicious attackers. In addition, a contractor or other third party with whom the Company does business may attempt to circumvent its security measures or obtain such information, and may purposefully or inadvertently cause an incident involving sensitive information. While the Company will continue to evaluate and implement additional protective measures to reduce the risk and detect cybersecurity incidents, cyberattacks are becoming more sophisticated and frequent and the techniques used in such attacks change rapidly. Despite the Company's cybersecurity measures, its information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to cybersecurity incidents, compromises, or malfeasance. +Even the most well protected IT networks, systems and facilities remain potentially vulnerable because the techniques used in attempted cybersecurity incidents are continually evolving and generally are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may not be detected. Any such compromise of the Company's or its third party’s IT service providers’ data security and access, public disclosure, or loss of personal, sensitive, or confidential business information, could result in legal claims and proceedings, liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt the Company's operations, require significant management attention and resources to remedy any damages that result, and damage the Company's reputation and customers willingness to transact business with it, any of which could adversely affect its business. +As the Company's activities continue to evolve and expand, it may be subject to additional laws which impose further restrictions on the transfer, access, use, and disclosure of health and other personal information which may impact its business either directly or indirectly. The Company's failure to comply with applicable privacy or security laws or significant changes in these laws could significantly impact its business and future business plans. +Federal and State Laws Pertaining to Healthcare Fraud and Abuse Could Adversely Affect the Company's Business, Financial Condition and Results of Operations. +The Company is subject to various federal and state laws targeting fraud and abuse in the healthcare industry, including anti-kickback laws, false claims laws, laws constraining the sales, marketing and promotion of medical devices by limiting the kinds of financial arrangements that manufacturers of these products may enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices, and laws requiring the reporting of certain transactions between manufacturers and healthcare professionals. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. Many of the existing requirements have not been definitively interpreted by state authorities or courts, and available guidance is limited. Unless and until the Company is in full compliance with these laws, it could face enforcement action and fines and other penalties, and could receive adverse publicity, all of which could materially harm its business. In addition, changes in or evolving interpretations of these laws, regulations, or administrative or judicial interpretations, may require the Company to change its business practices or subject its business practices to legal challenges, which could have a material adverse effect on its business, financial condition and results of operations. +53 +Table of Contents +The Company May Experience Fluctuations in Its Financial Results or Fail to Meet Its Financial Projections. +The Company's operating results can fluctuate from quarter to quarter and year to year, which could cause its growth or financial performance to fall below the expectations of investors and securities analysts. The Company's financial projections for future periods are based on a number of assumptions, including estimated demand for its products. However, sales to its distributors and other customers may fall short of expectations because of lower than estimated demand or other factors, including continued volatility and disruption in economic conditions, increasing competition, seasonal fluctuations, changes in ordering patterns or business strategy, reduced governmental funding and other circumstances described elsewhere in this Annual Report. Infrequent, unusual or unexpected changes in revenues or costs could also contribute to the variability of the Company's financial results. +Customers in certain of the markets the Company serves often submit a high percentage of purchase orders in the third month of a calendar quarter. Although this can vary from quarter to quarter, many customers make purchase decisions late in a quarter due to budgetary or financial requirements. In addition, certain governmental customers must fully spend budgeted funds by the end of their fiscal year or risk losing these funds, which can contribute to fluctuations in the Company's sales from year-to-year. This can make it difficult to accurately forecast whether the Company will achieve its quarterly sales forecasts and can cause variability in its operating results. +In addition, the Company's products provide different contributions to its gross margin. Accordingly, its operating results could also fluctuate and be affected by the mix of products sold and the relative prices and gross margin contribution of those products. Failure to achieve operating results consistent with the expectations of investors and securities analysts could adversely affect the Company's reputation and the price of its Common Stock. +The Company May Require Future Additional Capital. +The Company's future liquidity and ability to meet its future capital requirements will depend on numerous factors, including, but not limited to, the following: +• The costs, scope and timing of strategic acquisitions; +• The costs and timing of expansion of sales and marketing activities; +• The timing and success of the commercial launch of new products or services; +• The extent to which the Company gains or expands market acceptance for existing, new or enhanced products and services; +• The costs and timing of the expansion of the Company's manufacturing and laboratory capacity; +• The success of the Company's research and product development efforts; +• The time, cost and degree of success of conducting clinical trials and obtaining regulatory approvals; +• The magnitude of capital expenditures; +• Changes in existing and potential relationships with distributors and other business partners; +• The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; +• The costs and liability associated with patent infringement or other types of litigation; and +• Competing technological and market developments. +If additional financing is needed, the Company may seek to raise funds through the sale of equity or other securities or through bank borrowings. There can be no assurance that financing through the sale of securities, bank borrowings or otherwise will be available to the Company on satisfactory terms, or at all. +54 +Table of Contents +Conditions in the Banking System and Financial Markets, Including the Failure of Banks and Financial Institutions, Could Have an Adverse Effect on the Company's Operations and Financial Results. +Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, in early 2023, several financial institutions closed and were taken in receivership by the Federal Deposit Insurance Corporation. Since then, additional financial institutions have experienced similar failures and have been placed into receivership. It is possible that other banks will face similar difficulty in the future. +Although the Company does not maintain any deposit accounts, credit agreements or letters of credit with any financial institution currently in receivership, it is unable to predict the extent or nature of the impacts of these evolving circumstances at this time. If, for example, other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, the Company's ability to access its existing cash, cash equivalents and investments may be threatened. While it is not possible at this time to predict the extent of the impact that the failure of these financial institutions or the high market volatility and instability of the banking sector could have on economic activity and the Company's business in particular, the failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact the Company's business, financial condition and results of operations. +Economic Volatility and Disruption Resulting from the COVID-19 Pandemic and any Future Pandemic and Health Crises Could Adversely Affect the Company’s Business, Financial Performance, Results of Operations, Cash Flow and Financial Condition or Those of Its Customers and Suppliers. +Global and U.S. markets and economies have experienced extreme volatility and disruption following the COVID-19 pandemic. Volatile economic conditions may occur again or continue in the future. Impacts of the COVID-19 pandemic that the Company has or may experience in the future include, but are not limited to: +• a slowdown or stoppage in the supply chain of the raw materials and components used to manufacture its products; +• interruptions or delays in domestic and/or international shipment of its products to its distributors and customers; +• interruptions in normal operations of certain end-use customers that could result in reductions in demand for its products; +• disruptions to the Company’s operations, including a shutdown of its facilities or product lines; restrictions on its operations and sales, marketing and distribution efforts; and interruptions to its research and development, manufacturing, clinical/regulatory and other important business activities; +• shutdown or interruption of the Company’s manufacturing facilities due to contamination and costs incurred to clean and disinfect a facility following contamination; +• inefficiencies and increased costs in the Company’s production and shipping processes due to premium pay for manufacturing and certain other employees as well as social distancing and personal protective equipment requirements; +• limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions; +• a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties; +• an increase in exposure to credit losses for customers adversely affected by the COVID-19 pandemic and any future health crises; and +• an increase in regulatory restrictions or continued market volatility could hinder the Company’s ability to execute strategic business activities, including acquisitions. +55 +Table of Contents +These conditions could adversely affect the Company’s financial performance and condition or those of its customers and suppliers. These circumstances could also adversely affect the Company’s access to liquidity needed to conduct or expand its business or conduct future acquisitions or make other discretionary investments. Many of the Company’s customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred as a result of economic conditions or other factors. These circumstances may adversely impact the Company’s customers and suppliers, which, in turn, could adversely affect their ability to purchase and/or distribute the Company’s products or supply it with necessary equipment, raw materials or components. Any or all of these effects would have an adverse effect on the Company’s operations, business, financial condition and results of operations. +Terrorist Attacks, Natural Disasters, Public Health Crises, Political Unrest or Other Catastrophic Events Outside of the Company's Control May Adversely Affect Its Business. +Terrorist attacks, natural disasters, including disasters attributable to climate change impacts, public health crises, political unrest or other catastrophic events outside of the Company's control, including pandemics, and subsequent governmental responses to these events, could cause economic instability. These actions could adversely affect economic conditions both within and outside the United States and reduce demand for the Company's products. For example, the COVID-19 pandemic has caused disruptions in local, regional, national and global markets and economies, including the United States. These events disrupted the Company's normal operation and the operations of its customers and suppliers. +In addition, the impacts of political unrest, including as a result geopolitical tension, such as a deterioration in the relationship between the United States and China, escalation of tensions between China and Taiwan, or escalation in conflict between Russia and Ukraine or the Israel-Hamas war, including any resulting sanctions, export controls or other restrictive actions that may be imposed by the United States and/or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability and volatility in the global markets, which may have an adverse impact on the Company's business or ability to access the capital markets. As a result of the ongoing military conflict between Russia and Ukraine, the United States and other countries have imposed significant sanctions on Russia and could impose even wider sanctions. Such sanctions could damage or disrupt international commerce and the global economy. The Company cannot predict the broader or longer-term consequences of the conflict in Ukraine or Israel, or of the sanctions imposed to date, which could include embargoes, regional instability, geopolitical shifts, exchange rate fluctuations, financial market disruptions and economic recession. Further, the conflict in Ukraine or Israel could exacerbate supply chain challenges, lead to an increase in cyberattacks, affect the global price and availability of key commodities, reduce the Company’s sales and earnings or otherwise have an adverse effect on its business and results of operations. +Various types of disasters, including earthquakes, fires, floods, riots, acts of terrorism and pandemics, may also affect the Company's manufacturing facilities and computer systems, and increase its cybersecurity risks. Although the Company has business interruption insurance, its facilities, including some pieces of manufacturing equipment and its computer systems, may be difficult to replace and could require substantial replacement lead-time. In the event the Company's existing manufacturing facilities or computer systems are affected by man-made or natural disasters, including pandemics, it may have difficulty operating its business and may be unable to manufacture products for sale or meet customer demands or sales projections. If the Company's manufacturing operations were curtailed or shut down entirely, it would seriously harm its business. Moreover, the Company may incur incremental costs following an unforeseen event which could adversely affect its results of operation. +The Increasing Prevalence of AI-based Software Presents New Risks and Could Adversely Affect Our Business and Reputation. +AI-based software and software making use of AI functionality, which the Company uses in certain parts of its business, is increasingly being used in the healthcare industry, such as for research, marketing, and commercialization, and we expect to use technology that uses AI in the future. As with many developing technologies, AI-based software presents risks and challenges. For example, algorithms may be flawed; data sets may be insufficient, of poor quality or contain biased information; and inappropriate or controversial data practices could impair results. If the analyses that AI-based software assist in producing are deficient or inaccurate, we could be subjected to competitive harm, potential legal liability and brand or reputational harm. Use of AI-based software may also lead to cybersecurity risks or the release of confidential proprietary information, including personal data, which may impact our ability to realize the benefit of our intellectual property or violate our internal policies, data protection laws or contractual requirements. The use of AI-based software may also result in unauthorized access of personal data or the intellectual property of third parties. Since the use of AI is +56 +Table of Contents +subject to new or evolving laws and regulations, compliance may impose operational costs and limit our ability to use AI-based software, and failure to comply may result in potential government actions, litigation, fines, penalties or adverse publicity. +Future Sales of Shares of the Company's Common Stock Could Adversely Affect the Trading Price of Its Common Stock and Its Ability to Raise Funds in New Equity Offerings. +Future sales of a substantial number of the Company's shares of Common Stock or equity-related securities in the public market or privately, or the perception that such sales may occur, could adversely affect prevailing trading prices of the Company's Common Stock, and could impair its ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of the Company's Common Stock. +ITEM 1B. Unresolved Staff Comments. +None. +ITEM IC. Cybersecurity. +Cybersecurity Risk Management and Strategy +Our management recognizes the impact that cybersecurity threats could have on our business operations, our compliance with regulations, and our reputation. We have identified cybersecurity as a critical business risk as part of our overall risk management strategy, which our board of directors oversees. +We have implemented an information security management system in accordance with our risk profile and business that is designed to protect the Company, our employees, and our customers from cybersecurity threats. This system, which is informed by the National Institute of Standards and Technology (NIST) Cybersecurity Framework, includes, among other things, written policies, technical controls, and employee training. We have also developed an incident response policy and procedure designed to facilitate the handling of cybersecurity incidents. +Our cybersecurity risk management program, which is part of our enterprise risk management program, aims to identify risks from cybersecurity threats. Our cybersecurity risk management program includes a number of components, including informal self-assessments, penetration testing, and vulnerability assessments. Our managed security services provider helps us implement additional security controls, including malware protection and network security tools. +We take a risk-based approach to the evaluation of third-party vendors, and apply mitigations and processes based on our evaluation of the sensitivity of the data accessed by the vendor and the maturity of the vendor’s programs. Where our risk-based evaluation indicates the need, we use a third-party tool to assess the degree of risk posed by the vendor and use a vendor security questionnaire as part of our assessment of third-parties. +We have been subject to cybersecurity incidents in the past, including the publicly disclosed April 2024 security incident. We do not believe that risks from cybersecurity threats, including as a result of any previous cybersecurity incidents have materially affected our operations, financial systems, or financial condition. However, there is no guarantee that past security incidents and any future incidents will not have a material impact on our operations, financial systems, or financial condition in the future. For more information, see Item 1A. Risk Factors. +Governance Related to Cybersecurity Risks +Our vice president of information technology (“VP of IT”) is responsible for the strategic leadership and direction of the Company’s information security management system. Our VP of IT has 25 years experience managing IT teams, including 10 years managing IT security teams. Led by the VP of IT, along with our Director of IT Security, the IT leadership team reviews the Company’s cybersecurity objectives at least annually, and more frequently as needed, and takes steps to further the suitability and effectiveness of the Company’s information security program. The output from these reviews are reported periodically to senior management. We have also established a cybersecurity management committee comprised of IT, communications, finance, legal and product personnel. +57 +Table of Contents +The board and Audit Committee oversee the management of risks by the Company’s executives. The Audit Committee, pursuant to its charter, is responsible for reviewing the Company’s cybersecurity program and risks, as identified by Company management, and the steps that Company management has taken to protect against threats to the Company’s assets including information systems and data security. The VP of IT provides updates to the Audit Committee approximately annually, which include, as appropriate, a description of risks from cybersecurity threats. +ITEM 2. Properties. +We own a 31,700 square foot facility that houses our primary corporate office, our sales and marketing, research and development, human resources, and regulatory and quality offices. We also own a 48,000 square foot facility and a 33,500 square foot facility which are used for manufacturing activities. We lease a 23,000 square foot storage facility as well as an additional 139,000 square foot manufacturing facility. Each of these facilities is located in Bethlehem, Pennsylvania. Our subsidiary, DNAG, also leases a 36,000 square foot facility in Ottawa, Canada, which is used as its primary corporate office and houses sales and marketing, manufacturing, distribution, research and development, and regulatory and quality operations. Our subsidiary, Sherlock, leases various facilities in the United Kingdom totaling approximately 37,600 square feet, as well as outside Boston, Massachusetts, totaling approximately 5,000 square feet. These facilities house its corporate offices, production, and research and development activities. Our other subsidiary, Diversigen, also leases facilities for its remaining operations. Novosanis's facility lease terminated on December 31, 2024. +The Company believes that the facilities described above are adequate for its current requirements. +ITEM 3. Legal Proceedings. +Discussion of legal matters is incorporated by reference from Note 15, Commitments and Contingencies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K. +ITEM 4. Mine Safety Disclosures. +Not Applicable. +58 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +The Company's Common Stock is listed for trading on the Global Select Market tier of The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “OSUR”. On February 24, 2025, there were 253 holders of record and approximately 22,476 holders in street name of the Company's Common Stock, and the closing price of its Common Stock was $3.99 per share. +Dividends +The Company has never paid any cash dividends and its Board of Directors does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any future earnings to provide funds for the operation and expansion of its business. +Purchases of Equity Security by the Issuer and Affiliated Purchasers +Period Total number of +shares purchased Average price +paid per Share Total number of +shares purchased +as part of publicly +announced plans +or programs +Maximum number (or +approximate dollar value) +of shares that may yet be +repurchased under the plans +or programs (1, 2) +October 1, 2024 - October 31, 2024 669 +(3) +$ 4.21 — $11,984,720 +November 1, 2024 - November 30, 2024 2,654 +(3) +$ 4.25 — $11,984,720 +December 1, 2024 - December 31, 2024 0 +(3) +$ — — $11,984,720 +3,323 — +(1) On August 5, 2008, the Board of Directors approved a share repurchase program pursuant to which the Company is permitted to acquire up to $25.0 million of outstanding shares. This share repurchase program may be discontinued at any time. +(2) This column represents the amount that remains available under the $25.0 million repurchase plan, as of the period indicated. The Company has made no commitment to purchase any shares under this plan. +(3) Pursuant to the OraSure Technologies, Inc. Stock Award Plan, and in connection with the vesting of restricted and performance shares, these shares were retired to satisfy minimum tax withholdings. +Performance Graph +The performance graph set forth below shall not be deemed “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that Section. This graph will not be deemed “incorporated by reference” into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing . +The following graph compares the cumulative total returns to investors in the Company’s Common Stock, the Nasdaq Composite Index, and the Nasdaq Health Care Index for the period from December 31, 2019 through December 31, 2024. The graph assumes that $100 was invested on December 31, 2019 in the Company’s Common Stock and in each of the above-mentioned indices, and that all dividends, if any, were reinvested. +The Nasdaq Composite Index was chosen because it is a broad index of companies whose equity securities are traded on Nasdaq. The Nasdaq Health Care Index was chosen as it includes companies relevant to the Company's current business, it utilizes this index as a benchmark for compensation decisions, and many healthcare investors look to this index as an appropriate benchmark for stock performance. Stockholders are cautioned that the graph shows the returns to investors only as of the dates noted and may not be representative of the returns for any other past or future period. +59 +Table of Contents +Fiscal Year Ending December 31, +2019 2020 2021 2022 2023 2024 +OraSure Technologies, Inc. 100.00 131.82 108.22 60.02 102.12 44.96 +NASDAQ Composite 100.00 144.92 177.06 119.45 172.77 223.87 +NASDAQ Health Care 100.00 127.18 114.41 86.04 86.74 84.53 +Securities Authorized for Issuance Under Equity Compensation Plans +For certain information concerning securities authorized for issuance under the Company's equity compensation plan, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +Item 6. Reserved +Not Applicable +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to +60 +Table of Contents +provide complete information about the Company, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The Company undertakes no duty to update any forward-looking statements made herein after the date of this Annual Report. +The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2024 (this "Annual Report") generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. +Business Overview +The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. These products include tests for diseases including COVID-19, HIV, Hepatitis C, and Syphilis that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. +Recent Developments +Diversigen +During the first quarter of 2024, the Company initiated steps to wind down and exit the molecular services business offered by its Diversigen subsidiary. This strategic action was largely completed in June 2024. Diversigen contributed $1.7 million and $4.5 million, to revenues during the years ended December 31, 2024 and 2023, respectively. +Novosanis +During the first quarter of 2024, the Company also made a strategic decision to commence wind-down of its operations at it Novosanis subsidiary located in Belgium. The Company intends to continue to sell and manufacture its Colli-Pee® product under the DNAG product line of collection devices. As of December 31, 2024, this strategic plan was largely completed. +Sapphiros +In January 2024, the Company announced that it led the Series B financing and entered into wide-ranging strategic distribution agreements with Sapphiros, a privately held consumer diagnostic portfolio company based in Boston, and certain of its related entities. Through this strategic relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic test and sample management solutions to the Company's customers globally. The Company has funded $30.0 million for its interest in Sapphiros. +Risk Assessment Testing +61 +Table of Contents +In October 2024, the Company announced the discontinuance of the sales of its risk assessment product line which is expected to be completed in the first half of 2025. Sales of its risk assessment products contributed $8.4 million and $9.7 million to revenues during the years ended December 31, 2024, and 2023, respectively. +Sherlock Acquisition +In December 2024, the Company acquired Sherlock and its subsidiaries. The Sherlock acquisition expands the Company's innovation pipeline with the addition of Sherlock’s molecular diagnostics platform, which is in Phase 3 clinical trials and is expected to provide rapid results with strong sensitivity and specificity in a disposable format that is well-suited for OTC usage. Sherlock has operations in the United States and the United Kingdom. +Results of Operations +The Company's consolidated net loss for the year ended December 31, 2024 was $19.5 million, or $0.26 per share on a fully diluted basis, compared to consolidated net income of $53.7 million, or $0.72 per share on a fully diluted basis, for the year ended December 31, 2023. +Year ended December 31, 2024 compared to December 31, 2023. +CONSOLIDATED NET REVENUES +The table below shows a summary of total consolidated net revenues (dollars in thousands) for the years ended December 31, 2024 and 2023. +For the Years Ended December 31, +Dollars % Change Percentage of Total Net Revenues +2024 2023 2024 2023 +Diagnostics (1) +$ 75,917 $ 73,694 3 % 41 % 18 % +Sample Management Solutions (2) +51,046 54,274 (6) 28 13 +COVID-19 Diagnostics 45,136 257,493 (82) 24 64 +Risk Assessment Testing (3) +8,354 9,736 (14) 4 2 +Other products and services 2,417 2,265 7 1 1 +Molecular Services 1,705 4,474 (62) 1 1 +COVID-19 Molecular Products 36 286 (87) — — +Net product and services revenues 184,611 402,222 (54) 99 99 +Non-product and services revenues (4) +1,216 3,250 (63) 1 1 +Net revenues $ 185,827 $ 405,472 (54) % 100 % 100 % +(1) Includes HIV, HCV and Syphilis product revenues. +(2) Includes Genomics, Microbiome and Colli-Pee product revenues. +(3) Includes substance abuse testing product revenues. +(4) Includes funded research and development contracts, royalty income and grant revenues. +Product and Services Revenues +Consolidated net revenues decreased 54% to $185.8 million for the year ended December 31, 2024 from $405.5 million for the year ended December 31, 2023. +Sales of the Company's Diagnostics products increased 3% to $75.9 million for the year ended December 31, 2024 from $73.7 million for the year ended December 31, 2023. This increase in revenues is largely due to higher international HIV revenues primarily driven by customer ordering patterns in Africa offset by lower sales into Asia. Also contributing to the diagnostic revenue increase is an increase in sales of the Company's HCV domestic product and higher Syphilis revenues. Offsetting these increases in revenues is a decline in HIV domestic revenue resulting from funding delays or reductions in funding for HIV products and customer ordering patterns. +62 +Table of Contents +Sample Management Solutions revenues decreased by 6% to $51.0 million for the year ended December 31, 2024 compared to $54.3 million for the year ended December 31, 2023. Sales of the Company's Sample Management Solutions are being impacted by reduced consumer demand for products in which the Company's genomics collection devices are used, economic pressures, and the overall decline in the microbiome market. +COVID-19 Diagnostics revenues decreased 82% to $45.1 million for the year ended December 31, 2024 from $257.5 million for the year ended December 31, 2023 due to decreased sales of the Company's InteliSwab ® tests through its U.S. government procurement contracts. The Company experienced a significant decline in COVID-19 revenues during 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing, and expects further declines in 2025. +Risk assessment testing revenues decreased 14% to $8.4 million for the year ended December 31, 2024 from $9.7 million for the year ended December 31, 2023 due to the loss of customers to competing products. The Company has announced the discontinuance this product line and expects minimal sales through the first half of 2025 as it fulfills existing customer orders. +Molecular Services revenues, which are largely derived from the Company's microbiome molecular sequencing services, decreased 62% to $1.7 million for the year ended December 31, 2024 from $4.5 million for the year ended December 31, 2023. The decrease in services revenues was due to the decision to exit this line of business. +Non-Product and Services Revenues +Non-product and services revenues decreased 63% to $1.2 million for the year ended December 31, 2024 from $3.3 million for the year ended December 31, 2023 as a result lower funding for research and development activities and lower royalty income. +CONSOLIDATED OPERATING RESULTS +Consolidated gross profit margin increased to 43% for the year ended December 31, 2024 from 42% for the year ended December 31, 2023. Gross margins increased in 2024 despite the significant decrease in revenues due to following factors. Results for the year ended December 31, 2024 included lower depreciation expense as a result of the inclusion in 2023 results of $6.9 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company on-shored and automated the manufacturing of this product at its Pennsylvania facilities and $0.5 million from the exit from one of its leased warehouse in an effort to consolidate facilities and further lower costs. Results for the year ended December 31, 2024 also included improved manufacturing overhead absorption largely resulting from reduced salary and benefits due to the reduction of workforce put in place in 2024 and 2023. 2024 also included lower product scrap expense as compared to the prior year. Offsetting these improvement to margins was lower gross margins generated from product mix primarily driven by the decline in InteliSwab® revenues and the mix of higher international sales of the Company's HIV products. Other non-product revenues which contribute 100% to gross margins also declined for the year ended December 31, 2024. +Consolidated operating loss for the year ended December 31, 2024 was $28.3 million, a $60.9 million decline from the $32.7 million operating income reported for the year ended December 31, 2023. Results for the year ended December 31, 2024 were negatively impacted by the decrease in revenues and were positively impacted by reduced operating expenses. Results for the year ended December 31, 2024 included $4.4 million of impairment losses compared to $10.8 million for the year ended December 31, 2023. +Operating expenses for the year ended December 31, 2024, excluding the impairment charges, decreased by $25.0 million to $103.2 million compared to $128.2 million the year ended December 31, 2023, reflecting the impact of the Company's cost saving measures and headcount reductions. +Research and development expenses decreased 23% to $26.0 million for the year ended December 31, 2024 from $33.7 million for the year ended December 31, 2023 largely due to lower staffing costs due to a decrease in headcount and no related project management fees for our $109 million manufacturing expansion contract which ended during the fourth quarter of 2023, and a decrease in spend on COVID-19 product development. This overall decrease in spend is partially offset by an increase in severance costs for those employees impacted by the Company's decisions to exit the molecular services business offered by its Diversigen subsidiary and wind-down of operations located in Belgium. The Company expects research and development expense to increase in 2025 as we invest in the development of Sherlock's test for CT/NG and other innovative projects. +63 +Table of Contents +Sales and marketing expenses decreased 15% to $31.0 million for the year ended December 31, 2024 from $36.3 million for the year ended December 31, 2023 primarily due to decreased employee costs associated with a reduction in headcount, and lower advertising and consulting spend. Amortization also decreased as $6.2 million of intangibles were impaired in 2023. These decreases are partially offset by increases in bad debt expense and severance charges related to the discontinuance of the risk assessment product line. +General and administrative expenses decreased 21% to $46.2 million for the year ended December 31, 2024 from $58.2 million for the year ended December 31, 2023 largely due to lower legal fees relating to the Spectrum litigation (discussed further in Note 15, Commitments and Contingencies, to the consolidated financial statements included herein) and lower employee costs associated with reduced headcount partially offset by increase in non-cash stock compensation expense and transaction expenses associated with the Company's acquisition of Sherlock in December. +All of the above contributed to the Company's operating loss of $28.3 million for the year ended December 31, 2024, which included non-cash impairment charges of $4.4 million, non-cash charges of $10.9 million for depreciation and amortization, and $11.9 million for stock-based compensation. The Company's operating income of $32.7 million for the year ended December 31, 2023 included a non-cash impairment charge of $10.8 million, non-cash charges of $20.9 million for depreciation and amortization, and $10.7 million for stock-based compensation. +CONSOLIDATED OTHER INCOME +Other income for the year ended December 31, 2024 was $12.2 million compared to $23.6 million for the year ended December 31, 2023. This decrease is largely due to the inclusion in 2023 results of $12.8 million of additional profit earned above the guaranteed profit earned under the $109 million DOD manufacturing expansion contract that was completed in the fourth quarter of 2023. This additional profit resulted from lower spend under the fixed firm contract than originally budgeted. Other income in 2023 also included $2.8 million of guaranteed profit which covered project management costs recognized straight-line over the term of the contract. These amounts included in 2023 other income, which were not repeated in 2024, were partially offset by higher interest income and foreign currency gains for the year ended December 31, 2024 as compared to 2023. +CONSOLIDATED INCOME TAXES +The Company continues to believe the full valuation allowance established against its total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. Although the Company has achieved U.S. cumulative pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in its judgement, support the release of the valuation allowance. For the year ended December 31, 2024, the Company recorded income tax expense of $1.8 million. 2024 income tax expense is comprised of $0.4 million of U.S. federal and state income tax expense, and foreign income tax expense of $1.4 million. For the year ended December 31, 2023, the Company recorded income tax expense of $2.6 million. 2023 income tax expense is comprised of U.S. state income tax expense of $1.9 million, and foreign income tax expense of $0.7 million. +Liquidity and Capital Resources +December 31, 2024 December 31, 2023 +(in thousands) +Cash and cash equivalents $ 267,763 $ 290,407 +Working capital 299,737 346,923 +The Company's cash and cash equivalents decreased to $267.8 million at December 31, 2024 from $290.4 million at December 31, 2023. $82.0 million, or 31%, of the Company's $267.8 million in cash, cash equivalents and available-for-sale securities is held by DNAG, the Company's Canadian subsidiary. +The Company's working capital decreased to $299.7 million at December 31, 2024 from $346.9 million at December 31, 2023. The decrease in cash and cash equivalents and working capital is primarily due to the investment in Sapphiros of $30.0 million and the initial payment for the acquisition of Sherlock for $5.0 million. Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms. +Analysis of the Company's Cash Flows +64 +Table of Contents +Operating Activities +During the year ended December 31, 2024, net cash provided by operating activities was $27.4 million. Cash flows from operations can be significantly impacted by factors such as timing of receipt from customers, inventory purchases, and payments to vendors. The Company's net loss of $19.5 million included non-cash charges of depreciation and amortization expense of $10.9 million, stock-based compensation expense of $11.9 million, impairment charges taken for idle equipment and right-of-use assets associated with Diversigen and Novosanis of $4.4 million, a loss on equity investment of 1.7 million and other non-cash charges aggregating to $0.8 million. +Cash provided by the Company's working capital accounts included a decrease in accounts receivable of $15.9 million largely associated with lower overall sales and collections of balances due, a decrease in inventory of $13.1 million as the Company fulfilled demand for its InteliSwab® product, and a decrease in prepaid and other assets of $4.1 million. Offsetting these increases in cash was a $7.6 million decrease in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $6.4 million. +Investing Activities +Net cash used in investing activities was $39.0 million for the year ended December 31, 2024, which reflects proceeds from the maturities and redemptions of investments of $53.1 million, offset by $53.2 million used to purchase investments and $30.0 million used to purchase an equity stake in Sapphiros. Investing activities also included $3.8 million to acquire property and equipment to support normal operations of the business and the acquisition of Sherlock of $5.0 million. +Financing Activities +Net cash used in financing activities was $4.2 million for the year ended December 31, 2024, which reflects $3.5 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted awarded to the Company's employees and payments for lease liabilities of $0.8 million. +Resources +The Company's contractual obligations are included in Note 15 of its consolidated financial statements. The Company expects existing cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements over the next twelve months. The Company's cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the progress of its research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. +Critical Accounting Policies and Estimates +This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that the Company make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. +The Company's significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. The Company considers the following accounting policies, which have been discussed with its Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition, and cash flows. +65 +Table of Contents +Revenue Recognition . +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates. +The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of its OraQuick ® In-Home HIV test to the retail trade, and InteliSwab ® products to the retail trade and certain customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred. +Service Revenues +Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when it satisfies its performance obligations for services rendered. +Arrangements with multiple-performance obligations +In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Inventories +The Company's inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of its inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. It also considers items identified through specific identification procedures in assessing the adequacy of its reserve. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results. +Goodwill +Goodwill is not amortized, but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit. +Business Combinations and Contingent Consideration +66 +Table of Contents +Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. +We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting guidance. As part of our consideration for the Sherlock acquisition, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates. +Examples of critical estimates used in valuing the intangible asset and contingent consideration include: +• future expected cash flows from sales and acquired in-process and research developed technologies; +• the probability of meeting the future events; and +• discount rates used to determine the present value of estimated future cash flows. +These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities. +ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. +The information with respect to forward-looking statements within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report is incorporated herein by reference. +The Company does not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, has no material derivative risk to report under this Item. +As of December 31, 2024, the Company did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 3% of the Company's total revenues for the year ended December 31, 2024. The Company does have foreign currency exchange risk related to its operating subsidiaries in Canada and Belgium. The principal foreign currencies in which it conducts business are the Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. The Company's foreign subsidiaries had net assets, subject to translation, of $113.4 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of December 31, 2024. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have increased the Company's comprehensive loss by approximately $11.3 million as of December 31, 2024. +ITEM 8. Financial Statements and Supplementary Data. +Information with respect to this Item is contained in the Company's Consolidated Financial Statements included under Item 15 of this Annual Report. +67 +Table of Contents +ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +Not applicable. +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Accounting Officer (CAO), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2024. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2024 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework, management concluded that the Company's internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2024. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The Company acquired Sherlock Biosciences, Inc. and its wholly owned subsidiaries om December 19, 2024, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2024, the acquired company representing approximately 4% of total assets, excluding intangible assets and goodwill related to the acquisition and 0% of total revenue of the Company as of and for the year ended December 31,2024. Management plans to fully integrate the operations of these businesses into the assessment of the effectiveness of the Company's internal control over financial reporting in 2025. +The effectiveness of the Company's internal control over financial reporting as of December 31, 2024 has been audited by GRANT THORNTON LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +Board of Directors and Stockholders +OraSure Technologies, Inc. +68 +Table of Contents +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2024, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2024, and our report dated March 7, 2025 expressed an unqualified opinion on those financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Sherlock Biosciences, Inc., a wholly-owned subsidiary, whose financial statements reflect total assets, excluding intangible assets and goodwill related to the acquisition, and revenues constituting 4 percent and 0 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2024. As indicated in Management’s Report, Sherlock Biosciences, Inc. was acquired during 2024. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Sherlock Biosciences, Inc. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. +Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Philadelphia, Pennsylvania +March 7, 2025 +ITEM 9B. Other Information. +a. None. +69 +Table of Contents +b. During the fourth quarter of the fiscal year ended December 31, 2024, no director of “officer” as defined in Rule 16a-1(f) under the Exchange Act adopted or terminated any Rule 10b5-1 trading plan or arrangements or any non-Rule 10b5-1 trading plan or arrangements, in both cases as defined in Item 408(a) of Regulation S-K. +ITEM 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +70 +Table of Contents +PART III +The Company has omitted from Part III the information that will appear in its Definitive Proxy Statement for its 2025 Annual Meeting of Stockholders (the “2025 Proxy Statement”), which will be filed within 120 days after the end of its fiscal year pursuant to Regulation 14A. +ITEM 10. Directors, Executive Officers and Corporate Governance. +The information required by this Item 10 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. +Code of Conduct +The Board of Directors has adopted a Code of Business Conduct and Ethics that applies to the Company's principal executive officer, principal financial officer and principal accounting officer, as well as to the members of its Board of Directors and its other officers and employees. This Code of Business Conduct and Ethics is available on the Company's website at www.orasure.com . The Company intends to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics on its website. +Insider Trading Arrangements and Policies +The Board of Directors has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of securities of OraSure by directors, officers, and employees that the Company believes are reasonably designed to promote compliance with insider trading laws, rules and regulations, and applicable Nasdaq listing standards. The Company’s insider trading policy states, among other things, that its directors, officers, and employees are prohibited from trading in such securities while in possession of material, nonpublic information. In addition, with regard to trading in the Company’s own securities, it is the Company’s policy to comply with the federal securities laws and the applicable exchange listing requirements. The foregoing summary of the Company’s insider trading policies and procedures does not purport to be complete and is qualified by reference to the insider trading policy attached hereto as Exhibit 19.1 and incorporated herein. +ITEM 11. Executive Compensation. +The information required by this Item 11 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this Item 12 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services. +The information required by this Item 14 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. +71 +Table of Contents +PART IV +ITEM 15. Exhibits and Consolidated Financial Statement Schedules. +(a)(1) and (a)(2). Consolidated Financial Statements and Schedules . For a list of the consolidated financial statements filed herewith, see the Index to Consolidated Financial Statements following the signature page to this Annual Report. No schedules are included with the consolidated financial statements because the required information is inapplicable or is presented in the consolidated financial statements or related notes thereto. +(a)(3). Exhibits . +Exhibit +Number Exhibit +2.1+†● +Agreement and Plan of Merger, dated December 19, 2024 by and among OraSure Technologies, Inc., Project Watson Merger Sub, Inc., Sherlock Biosciences, Inc. and Mr. Paul Meister, solely in his capacity as representative of the securityholders of Sherlock Biosciences, Inc. +3.1.1 +Certificate of Incorporation of OraSure Technologies, Inc. is incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.2 +Certificate of Amendment to Certificate of Incorporation dated May 23, 2000 is incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement on Form S-4 (No. 333-39210), filed June 14, 2000. +3.1.3 +Certificate of Amendment to Certificate of Incorporation of OraSure Technologies Inc. dated May 16, 2024 is incorporated by reference to Exhibit 3.1 to the Company’s Periodic Report on Form 8-K filed on May 17, 202 4 . +3.2 +Second Amended and Restated Bylaws of OraSure Technologies, as of May 9, 2023, is incorporated by referenced to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. +4.1 +Description of Securities is incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019 . +10.1 +Employment Agreement, dated as of January 1, 2019, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.* +10.2 +Amendment No. 1 to Employment Agreement, dated as of December 20, 2021, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to exhibit 10.10 to the Company's Annual Report on form 10-K for the year ended December 31, 2021* +10.3 +Amendment No. 2 to Employment Agreement, dated as of November 7, 2022, between Kathleen G. Weber, DNA Genotek, Inc. and OraSure Technologies, Inc. is incorporated by reference to Exhibit 10.5 of the Company's Annual Report on form 10-K for the year ended December 31, 2022* +10.4 +Employment Agreement, dated as of May 20, 2022, between OraSure Technologies, Inc. and Carrie Eglinton-Manner is incorporated by reference to exhibit 10.1 to the company's Current Report on Form 8-K filed on May 26, 2022. * +10.5 +Employment Agreement dated August 8, 2022, between OraSure Technologies, Inc. and Kenneth J. McGrath is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 12, 2022.* +10.6 +Severance Letter Agreement, dated August 25, 2021, between OraSure Technologies, Inc. and Michele M. Miller is incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.7 +Description of Non-Employee Director Compensation Policy, as amended, is incorporated by reference to Item 5.02 to the Company’s Current Report on form 8-K filed August 14, 2019.* +10.8 +Amended and Restated Epitope, Inc. 1991 Stock Award Plan is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.* +72 +Table of Contents +10.90 +OraSure Technologies, Inc. Employee Incentive and Non-Qualified Stock Option Plan, as amended and restated effective September 29, 2000, is incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.* +10.10 +Amended and Restated OraSure Technologies, Inc. Stock Award Plan, effective April 4, 2020, is incorporated by reference to Exhibit A to the Company’s Proxy Statement, filed April 9, 2020, for the 2020 Annual Meeting of Stockholders.* +10.11 +Amended and Restated OraSure Technologies, Inc. 2000 Stock Award Plan, Effective March 31, 2023, is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 16, 2023.* +10.12 +Amended and Restated OraSure Technologies, Inc. 2000 Stock Award Plan, Effective March 25, 2024, is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 17, 2024.* +10.13 +Form of Restricted Share Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* +10.14 +Form of Restricted Unit Award Agreement (Executive Officers – Employment Agreements) is incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. * +10.15 +Form of Restricted Unit Award Agreement (Executive Officers-Employment Agreements) for 2021 awards is incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.* +10.16 +Form of Restricted Share Grant Agreement (Non-Employee Directors) is incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.17 +Nonqualified Stock Option Award General Terms and Conditions (Executive Officers) is incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.18 +Nonqualified Stock Option Award General Terms and Conditions (Non-Employee Directors) is incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* +10.19 +OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.20 +Adoption Agreement related to OraSure Technologies, Inc. Deferred Compensation Plan is incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 21, 2011.* +10.21 +$109 Million Capital Funding Agreement with the U.S. Department of Defense, in coordination with the Department of Health and Human Services is incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the period ended September 30, 2021, filed November 4, 2021. +10.22 +Industrial Lease between Core5 at Laughman Farms Phase 1, LLC as Landlord and OraSure Technologies, Inc. as Tenant, dated January 3, 2022 is incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2021. +19.1+ +Insider Trading Policy +21.1+ +Subsidiaries of the Company +23.1 + +Consent of KPMG LLP. +23.2+ +Consent of Grant Thornton LLP +24.1 + +Powers of Attorney. +31.1 + +Certification of Carrie Eglinton Manner. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +31.2 + +Certification of Kenneth J. McGrath required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended. +73 +Table of Contents +32.1^ +Certification of Carrie Eglinton Manner. required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2^ +Certification of Kenneth J. McGrath required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . +97.10 +OraSure Technologies Inc. Compensation Recovery Policy is incorporated by reference to Exhibit 97.1 to the Co mpany's Annual Report on Form 10-K for the year ended December 31, 2023. +101.INS Inline XBRL Instance Document +101.SCH Inline XBRL Taxonomy Extension Schema Document +101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase document +104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL. +________________________________________________ ++ Filed herewith. +^ This certification is deemed not filed for purposes of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filings under the Securities Act or the Exchange Act. +* Management contract or compensatory plan or arrangement. +† Certain portions of this Exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company hereby agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon its request. +● Certain schedules, annexes or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K, but will be furnished supplementally to the SEC upon request. +ITEM 16. Form 10-K Summary. +None +74 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 7, 2025. +ORASURE TECHNOLOGIES, INC. +By: /s/ Carrie Eglinton Manner +Carrie Eglinton Manner +President and Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 7, 2025, by the following persons on behalf of the Registrant and in the capacities indicated. +SIGNATURE TITLE +/s/ Carrie Eglinton Manner +President, Chief Executive Officer and Director +(Principal Executive Officer) +Carrie Eglinton Manner +/s/ Kenneth J. McGrath +Chief Financial Officer +(Principal Financial Officer) +Kenneth J. McGrath +/s/ Michele Anthony +Senior Vice President, Controller & Chief Accounting Officer +(Principal Accounting Officer) +Michele Anthony +*MARA G. ASPINALL Director +Mara G. Aspinall +*NANCY J. GAGLIANO, M.D. Director +Nancy J. Gagliano, M.D. +*JOHN P. KENNY Director +John P. Kenny +*LELIO MARMORA Director +Lelio Marmora +*ROBERT W. MCMAHON Director +Robert W. McMahon +*DAVID J. SHULKIN, M.D. Director +David J. Shulkin, M.D. +*By: /s/Stefano Taucer +Stefano Taucer +(Attorney-in-Fact) +75 +Table of Contents +Index to Consolidated Financial Statements +Page +Report of Independent Registered Public Accounting Firm ( GRANT THORNTON LLP , Philadelphia, PA , Auditor Firm ID: 248 ) +F-2 +Report of Independent Registered Public Accounting Firm (KPMG LLP, Philadelphia, PA, Auditor Firm ID: 185) +F-4 +Consolidated Balance Sheets +F- 5 +Consolidated Statements of Operations +F- 6 +Consolidated Statements of Comprehensive Income (Loss) +F- 7 +Consolidated Statements of Stockholders’ Equity +F- 8 +Consolidated Statements of Cash Flows +F- 9 +Notes to the Consolidated Financial Statements +F- 10 +F-1 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Stockholders +OraSure Technologies, Inc. +Opinion on the financial statements +We have audited the accompanying consolidated balance sheet of OraSure Technologies, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2024, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 7, 2025 expressed an unqualified opinion. +Basis for opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. +Critical audit matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Fair value of the acquired in-process and research developed intangible asset and royalty contingent consideration in the Sherlock Biosciences, Inc. acquisition +As further described in Note 14 to the consolidated financial statements, on December 19, 2024, the Company acquired Sherlock Biosciences, Inc. ("Sherlock"), pursuant to the terms of a merger agreement. The purchase consideration transferred in this transaction included contingent consideration, as defined under the merger agreement, related to, 1) achievement of a regulatory milestone associated with the acquired in-process research and development technology (“IPR&D technology”) intangible asset, and 2) royalty payments through December 31, 2034, representing a mid-single digit percentage of future revenues associated with the IPR&D technology intangible asset. Approximately $17.0 million of the initial purchase consideration was allocated to the IPR&D technology intangible asset. The estimated fair value of the royalty based contingent consideration was $7.0 million. We identified the fair value determinations of the IPR&D technology intangible asset and royalty based contingent consideration as a critical audit matter. +F-2 +Table of Contents +The principal consideration for our determination that the fair value of the IPR&D technology intangible asset and royalty based contingent consideration is a critical audit matter is that the inputs and assumptions utilized by management require significant judgment and result in a high degree of estimation uncertainty. The subjectivity of the estimate increases the level of auditor judgment and effort to evaluate management’s significant assumptions, including (i) future expected revenues and cash flows and (ii) discount rates. Further, changes in these assumptions and judgments could have a significant impact on the recorded fair values. +Our audit procedures related to the fair value of the IPR&D technology and royalty based contingent consideration included the following, among others: +• Evaluated the design and operating effectiveness of key controls related to management’s processes over the development of the fair value estimates and related key inputs and assumptions, and over the evaluation of the competency and objectivity of management's third-party valuation specialist. +• Tested the mathematical accuracy of the valuation models utilized and the completeness, accuracy and relevance of underlying data used in the model. +• Assessed the reasonableness of management’s estimated revenues and cash flows by obtaining an understanding of management’s processes for developing projected financial information, including inspection of relevant market data and other supporting documentation. +• Utilized valuation specialists to evaluate the reasonableness of the methodology and discount rates used in the valuation. +• Conducted sensitivity analyses around the future expected revenues and discount rate assumptions utilized by management. +/s/ GRANT THORNTON LLP +We have served as the Company’s auditor since 2023. +Philadelphia, Pennsylvania +March 7, 2025 +F-3 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +OraSure Technologies, Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheet of OraSure Technologies, Inc. and subsidiaries (the Company) as of December 31, 2023, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We served as the Company’s auditor from 2002 to 2024. +Philadelphia, Pennsylvania +March 11, 2024, except for Note 13, as to which the date is March 7, 2025 +F-4 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(in thousands, except per share amounts) +December 31, 2024 December 31, 2023 +ASSETS +Current Assets: +Cash and cash equivalents $ 267,763 $ 290,407 +Accounts receivable, net of allowance for doubtful accounts of $ 774 and $ 1,216 +23,816 40,171 +Inventories 34,197 47,614 +Prepaid expenses 3,956 6,041 +Other current assets 3,488 2,226 +Total current assets 333,220 386,459 +Noncurrent Assets: +Property, plant and equipment, net of accumulated depreciation 45,105 45,420 +Operating right-of-use assets, net 13,442 12,270 +Finance right-of-use assets, net 145 576 +Intangible assets, net of accumulated amortization 17,435 1,206 +Goodwill 40,330 35,696 +Investment in equity method investee 28,300 — +Deferred tax asset 156 — +Other noncurrent assets 1,526 1,218 +Total noncurrent assets 146,439 96,386 +TOTAL ASSETS $ 479,659 $ 482,845 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current Liabilities: +Accounts payable $ 8,173 $ 13,151 +Deferred revenue 2,961 1,559 +Accrued expenses and other current liabilities 20,179 22,710 +Finance lease liability 41 539 +Operating lease liability 2,129 1,577 +Total current liabilities 33,483 39,536 +Noncurrent Liabilities: +Finance lease liability 113 226 +Operating lease liability 12,321 11,162 +Acquisition-related contingent consideration obligation 22,910 — +Other noncurrent liabilities 494 696 +Deferred income taxes — 554 +Total noncurrent liabilities 35,838 12,638 +TOTAL LIABILITIES 69,321 52,174 +Commitments and contingencies (Note 15) +STOCKHOLDERS' EQUITY +Preferred stock, par value $ .000001 , 25,000 shares authorized, none issued +— — +Common stock, par value $ .000001 , 120,000 shares authorized, 74,598 and 73,528 shares issued and outstanding +— — +Additional paid-in capital 538,129 529,543 +Accumulated other comprehensive loss ( 24,360 ) ( 14,941 ) +Accumulated deficit ( 103,431 ) ( 83,931 ) +Total stockholders' equity 410,338 430,671 +TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 479,659 $ 482,845 +See accompanying notes to the consolidated financial statements. +F-5 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share amounts) +For the Years Ended December 31, +2024 2023 2022 +NET REVENUES: +Products and services $ 184,611 $ 402,222 $ 378,047 +Other 1,216 3,250 9,432 +185,827 405,472 387,479 +COST OF PRODUCTS AND SERVICES SOLD 106,437 233,820 239,041 +Gross profit 79,390 171,652 148,438 +OPERATING EXPENSES: +Research and development 26,047 33,728 36,237 +Sales and marketing 30,986 36,319 49,238 +General and administrative 46,215 58,191 68,206 +Loss on impairments 4,392 10,829 17,101 +Change in the estimated fair value of acquisition-related contingent consideration — ( 99 ) ( 188 ) +107,640 138,968 170,594 +Operating (loss) income ( 28,250 ) 32,684 ( 22,156 ) +OTHER INCOME 12,249 23,574 6,481 +(Loss) Income before income taxes ( 16,001 ) 56,258 ( 15,675 ) +INCOME TAX EXPENSE 1,799 2,603 1,458 +LOSS ON EQUITY INVESTMENT ( 1,700 ) — — +NET (LOSS) INCOME $ ( 19,500 ) $ 53,655 $ ( 17,133 ) +(LOSS) INCOME PER SHARE: +BASIC $ ( 0.26 ) $ 0.73 $ ( 0.24 ) +DILUTED $ ( 0.26 ) $ 0.72 $ ( 0.24 ) +SHARES USED IN COMPUTING (LOSS) INCOME PER SHARE: +BASIC 74,434 73,348 72,505 +DILUTED 74,434 74,389 72,505 +See accompanying notes to the consolidated financial statements. +F-6 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) +(in thousands) +For the Years Ended December 31, +2024 2023 2022 +NET (LOSS) INCOME $ ( 19,500 ) $ 53,655 $ ( 17,133 ) +OTHER COMPREHENSIVE (LOSS) INCOME +Currency translation adjustments ( 9,419 ) 3,274 ( 8,572 ) +Unrealized gain on marketable securities — 220 214 +COMPREHENSIVE (LOSS) INCOME $ ( 28,919 ) $ 57,149 $ ( 25,491 ) +See accompanying notes to the consolidated financial statements. +F-7 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +For the Years Ended December 31, 2024, 2023 and 2022 +(in thousands) +Common Stock Additional +Paid-in +Capital Accumulated +Other +Comprehensive +Loss Accumulated +Deficit Total +Shares Amount +Balance at January 1, 2022 72,069 $ — $ 511,063 $ ( 10,077 ) $ ( 120,453 ) $ 380,533 +Common stock issued upon exercise of options 2 — 15 — — 15 +Vesting of restricted stock and performance stock units 992 — — — — — +Purchase and retirement of common shares ( 329 ) — ( 2,254 ) — — ( 2,254 ) +Stock-based compensation — — 11,622 — — 11,622 +Net loss — — — — ( 17,133 ) ( 17,133 ) +Currency translation adjustments — — — ( 8,572 ) — ( 8,572 ) +Unrealized gain on marketable securities — — — 214 — 214 +Balance at December 31, 2022 72,734 $ — $ 520,446 $ ( 18,435 ) $ ( 137,586 ) $ 364,425 +Common stock issued upon exercise of options 44 — 269 — — 269 +Vesting of restricted stock and performance stock units 1,098 — — — — — +Purchase and retirement of common shares ( 348 ) — ( 1,901 ) — — ( 1,901 ) +Stock-based compensation — — 10,729 — — 10,729 +Net income — — — — 53,655 53,655 +Currency translation adjustments — — — 3,274 — 3,274 +Unrealized gain on marketable securities — — — 220 — 220 +Balance at December 31, 2023 73,528 $ — $ 529,543 $ ( 14,941 ) $ ( 83,931 ) $ 430,671 +Common stock issued upon exercise of options 32 — 214 — — 214 +Vesting of restricted stock and performance stock units 1,678 — — — — — +Purchase and retirement of common shares ( 640 ) — ( 3,548 ) — — ( 3,548 ) +Stock-based compensation — — 11,920 — — 11,920 +Net loss — — — — ( 19,500 ) ( 19,500 ) +Currency translation adjustments — — — ( 9,419 ) — ( 9,419 ) +Balance at December 31, 2024 74,598 $ — $ 538,129 $ ( 24,360 ) $ ( 103,431 ) $ 410,338 +See accompanying notes to the consolidated financial statements. +F-8 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(in thousands) +For the Years Ended December 31, +2024 2023 2022 +OPERATING ACTIVITIES: +Net (loss) income $ ( 19,500 ) $ 53,655 $ ( 17,133 ) +Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities +Stock-based compensation 11,920 10,729 11,622 +Depreciation and amortization 10,872 20,936 15,308 +Loss on impairments 4,392 10,829 17,101 +Other non-cash amortization ( 564 ) 3 228 +Provision for credit losses 71 ( 462 ) ( 1,032 ) +Unrealized foreign currency (gain) loss ( 263 ) 103 ( 161 ) +Interest expense on finance leases 22 51 94 +Loss on equity investment 1,700 — — +Deferred income taxes ( 657 ) 102 ( 1,651 ) +Loss on sale of fixed assets 563 — 729 +Change in the estimated fair value of acquisition-related contingent consideration — ( 99 ) ( 188 ) +Payment of acquisition-related contingent consideration — ( 19 ) — +Changes in assets and liabilities: +Accounts receivable 15,872 31,116 ( 25,162 ) +Inventories 13,096 48,228 ( 43,274 ) +Prepaid expenses and other assets 4,089 ( 2,499 ) ( 7,091 ) +Accounts payable ( 7,577 ) ( 26,976 ) 2,634 +Deferred revenue ( 219 ) ( 730 ) ( 596 ) +Accrued expenses and other liabilities ( 6,443 ) ( 3,384 ) 1,370 +Net cash provided by (used in) operating activities 27,374 141,583 ( 47,202 ) +INVESTING ACTIVITIES: +Purchases of short-term investments ( 53,244 ) ( 74,652 ) ( 22,873 ) +Purchase of equity method investee ( 30,000 ) — — +Proceeds from maturities and redemptions of short-term investments 53,052 102,440 47,415 +Acquisition of business, net of cash acquired ( 5,037 ) — — +Proceeds from sale of assets — — 121 +Purchases of property and equipment ( 3,797 ) ( 5,802 ) ( 6,774 ) +Purchase of property and equipment under government contracts — ( 4,501 ) ( 57,135 ) +Proceeds from funding under government contract — 48,669 60,331 +Net cash (used in) provided by investing activities ( 39,026 ) 66,154 21,085 +FINANCING ACTIVITIES: +Cash payments for lease liabilities ( 842 ) ( 1,345 ) ( 1,381 ) +Proceeds from exercise of stock options 214 269 15 +Payment of acquisition-related contingent consideration — ( 46 ) ( 208 ) +Repurchase of common stock ( 3,548 ) ( 1,901 ) ( 2,254 ) +Net cash used in financing activities ( 4,176 ) ( 3,023 ) ( 3,828 ) +EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH ( 6,816 ) 1,713 ( 2,837 ) +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 22,644 ) 206,427 ( 32,782 ) +CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 290,407 83,980 116,762 +CASH AND CASH EQUIVALENTS, END OF PERIOD $ 267,763 $ 290,407 $ 83,980 +See accompanying notes to the consolidated financial statements. +F-9 +Table of Contents +ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES +NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS +(in thousands, except per share amounts, unless otherwise indicated) +1. THE COMPANY: +OraSure Technologies transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the “Diagnostics” segment and the “Molecular Solutions” segment, into one business unit with sales, marketing, product development, and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. +The Company's product portfolio is broadly divided into diagnostics products and sample management solutions. The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use specimen collection devices and diagnostic products designed to detect certain infectious diseases including COVID-19, HIV and Hepatitis C, and Syphilis that are performed on a rapid basis at the point of care. The Company's business also includes sample management solutions and molecular services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. During 2024, the Company exited the molecular services business. In October 2024, the Company announced the discontinuance of the sales of its risk assessment product line which is expected to be completed in the first half of 2025. +2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: +Principles of Consolidation and Basis of Presentation +The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNA Genotek, Inc. ("DNAG"), Diversigen, Inc. ("Diversigen"), Novosanis NV ("Novosanis"), and Sherlock Biosciences, Inc. ("Sherlock"). All intercompany transactions and balances have been eliminated. References herein to “we”, “us”, “our”, or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated. +Use of Estimates +The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the fair value of assets acquired and liabilities assumed for business combinations, the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for property, plant and equipment, intangible assets and goodwill, as well as estimates related to accruals, taxes, contingent consideration, and performance-based compensation expense. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. +Supplemental Cash Flow Information +The Company paid income tax of $ 1.8 million in 2024, and received income tax refunds of $ 4.9 million in 2023 and paid income tax of $ 9.4 million in 2022. +The Company had account receivable write-offs of $ 0.5 million, $ 0.7 million, and $ 2.3 million in 2024, 2023, and 2022, respectively. +As of December 31, 2024, 2023 and 2022, the Company had accruals for purchases of property and equipment of $ 0.5 million, $ 0.2 million and $ 0.2 million, respectively. +F-10 +Table of Contents +The Company acquired Sherlock in exchange for contingent consideration of $ 22,910 for the year ended December 31, 2024 . +Cash Equivalents & Short-Term Investments +The Company considers all investments in debt securities to be available-for-sale securities. These securities consist of guaranteed investment certificates purchased with maturities greater than ninety days. Securities with maturities ninety days or less are considered cash equivalents. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gain and losses, if any, reported in stockholders' equity as a component of other comprehensive loss. +The Company records an allowance for credit loss for the Company's available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value, and the probability that the scheduled cash payments will continue to be made. +The Company had no available-for-sale securities as of December 31, 2024 and 2023. +The Company maintains cash balances in the United States in excess of the federally insured limits +Fair Value of Financial Instruments +As of December 31, 2024 and 2023, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature. +Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories: +Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; +Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and +Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). +To the extent that valuation is based on models or inputs that are unobservable in the market, determining fair value requires more judgment. Because of the inherent uncertainty of valuation, estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Therefore, the degree of judgment exercised in determining fair value is greatest for assets or liabilities categorized in Level 3. +December 31, +Level 2024 2023 +Guaranteed investment certificates 1 $ 66,584 $ 71,698 +Contingent consideration 3 $ 22,910 $ — +Included in cash and cash equivalents at December 31, 2024 and 2023 was $ 66.6 million and $ 71.7 million, respectively, invested in guaranteed investment certificates. +Included in cash and cash equivalents at December 31, 2024 and 2023, was $ 118.5 million and $ 112.7 million, respectively, invested in government money market funds. These funds have investments in U.S. government securities and are measured as Level 1 instruments. +The Company offers a nonqualified deferred compensation plan for certain eligible employees and members of the Company's Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 2024 and 2023 was $ 0.7 million and $ 0.8 million, respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading +F-11 +Table of Contents +securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other noncurrent assets with the same amounts included in accrued expenses and other noncurrent liabilities in the accompanying consolidated balance sheets . +Contingent Consideration +As further discussed in Note 14, Business Combinations, the Company has identified its contingent consideration obligations as Level 3 liabilities due to significant inputs that are required to measure the fair value of these obligations. The contingent consideration is comprised of two different tranches: milestone payments and royalty payments. The significant quantitative unobservable inputs for the milestone payments are the discount rate and probability achievement of a milestone of a regulatory approval. +The fair value methodology for royalty payments are based on a discounted cash flow model. Significant quantitative unobservable inputs are internally developed future expected cash flows, discount rate and probability achievement of a milestone of a regulatory approval. The royalty payments represent a mid-single digit percentage of the net sales through 2034 associated with the acquired in-process and research developed intangible asset. +There were no changes in fair value from date of acquisition to December 31, 2024. +F-12 +Table of Contents +Equity Method Investee +In January 2024, the Company lead the Series B financing and entered into wide-ranging strategic distribution agreements with KKR Sapphiros L.P. ("Sapphiros"), a privately held consumer diagnostic portfolio company, and certain of its related entities. Through this relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic tests and sample management solutions to the Company's customers globally. As of December 31, 2024, the Company had funded $ 30.0 million for its interest in Sapphiros. The Company recorded the investment using the equity method in accordance with Accounting Standards Codification ("ASC") Topic 323, Investments—Equity Method and Joint Ventures—Overall. In accordance with the equity method, the Company's equity investment is presented net of its share of any gains or losses of the investee. The Company has elected as its accounting policy to recognize its share of any income or loss in Sapphiros on a three-month lag, which coincides with the availability of its financial information. The investment in Sapphiros of $ 28.3 million as of December 31, 2024 is included in the investment in equity method investee line of the Company's balance sheet and is measured as a Level 3 investment. The Company has no unconditional obligations or guarantees to, or in support of, its equity method investee and its operations. In conjunction with the preparation of the Company's December 31, 2024 financial statements, the Company considered whether the carrying value of the investment in Sapphiros was impaired and concluded that no such impairment existed. There was no similar investment as of December 31, 2023. +Accounts Receivable +Accounts receivable has been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of the Company's customers and the Company's historical experience related to write-offs. +December 31, +2024 2023 2022 +Accounts receivable $ 23,816 $ 40,171 $ 70,797 +Allowance for doubtful accounts $ 774 $ 1,216 $ 2,365 +Inventories +Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of the Company's inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. The Company also considers items identified through specific identification procedures in assessing the adequacy of the Company's reserve. Although the Company makes every effort to ensure the accuracy of expected changes in the business and of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results . +Property, Plant and Equipment +Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets as follows: +• buildings twenty years ; +• leasehold improvements, the lesser of the useful life of the improvement or the remaining life of the building or lease; +• computer equipment and software three years ; +• machinery and equipment five years ; and +• furniture and fixtures seven years +When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. +F-13 +Table of Contents +Intangible Assets +Intangible assets consist of customer relationships, patents and product rights, acquired technology, in-process research and development technology and trade names. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years . +Impairment of Long-Lived Assets +Long-lived assets, which include property, plant and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company assesses the recoverability of the Company's long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect the Company's assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. See Notes 5 and 6 for discussion of property, plant and equipment and intangible asset impairments, respectively, recorded for the years ended December 31, 2024 and 2023. +Goodwill +Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment. If the Company concludes that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then the Company would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. +The Company historically performed an annual goodwill impairment assessment as of July 31. During the three months ended December 31, 2023, the Company changed the date of its the annual impairment assessment to November 30, to better align with the Company's annual forecasting process. On November 30, 2024, the Company performed a quantitative goodwill impairment test which concluded that the carrying value of the Company's goodwill was below its fair value indicating there was no impairment. +A more frequent evaluation is performed if an event occurs or circumstances change between annual tests that could more likely than not reduce the fair value of a reporting unit below its carrying amount. +Revenue +Product sales . Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates. +The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of the Company's OraQuick ® In-Home HIV test to retail trade customers, and InteliSwab ® products to retail trade and certain other customers. +Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred. +The Company records shipping and handling charges billed to the Company's customers as product revenue and the related expense as cost of products sold. +Service revenues. Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when the Company satisfies its performance obligations for services rendered. +F-14 +Table of Contents +Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each performance obligation is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied. +Other revenues . Other revenues consist primarily of royalty income and funding from grants of research and development efforts. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Research and development grant revenue is recognized pursuant to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20") . The expenses are recorded in research and development expense and the reimbursements are recorded in other revenue. Funding of research and development efforts and charitable support reimbursements are recorded as the activities are performed in accordance with the respective agreements. +Deferred revenue. The Company records deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2024 and 2023 included customer prepayments of $ 3.0 million and $ 1.2 million, respectively. Deferred revenue as of December 31, 2023 also included $ 0.4 million associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue was recognized at that average price. The $ 0.4 million associated with the long-term contract at December 31, 2023 met the criteria to be recognized as revenue during the year ended December 31, 2024, and as such there was no equivalent balance remaining in deferred revenue at December 31, 2024. Revenue recognized during the years ended December 31, 2024 and 2023 was $ 3.7 million and $ 2.6 million, respectively, which was included in the beginning period deferred revenue. +December 31, +2024 2023 2022 +Deferred revenue $ 2,961 $ 1,559 $ 2,273 +Financing and payment . The Company's payment terms vary by the type and location of the customer and products or services offered. Payment terms differ by jurisdiction and customer, but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. +For certain products or services and customer types, the Company may require payment before the products are delivered or services are rendered to the customer. +Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. +Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, the Company defers the cost of the commission and expenses it over the life of the related sales contract. +F-15 +Table of Contents +Revenues by product . The following table represents total net revenues by product line: +For the Years Ended December 31, +2024 2023 2022 +HIV $ 60,804 $ 60,823 $ 38,812 +Sample Management Solutions (1) +51,046 54,274 63,342 +COVID-19 (2) +45,172 257,779 243,325 +HCV 14,024 12,871 13,369 +Risk Assessment Testing (3) +8,354 9,736 10,269 +Other product and services revenues (4) +3,506 2,265 1,634 +Molecular Services 1,705 4,474 7,296 +Net product and services revenues 184,611 402,222 378,047 +Non-product and services revenues (5) +1,216 3,250 9,432 +Net revenues $ 185,827 $ 405,472 $ 387,479 +(1) Includes Genomics, Microbiome and Colli-Pee product revenues. +(2) Includes COVID-19 Diagnostics and COVID-19 Molecular Products revenues. +(3) Includes substance abuse testing product revenues. +(4) Includes Syphilis revenues. +(5) Includes funded research and development contracts, royalty income and grant revenues. +Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer: +For the Years Ended December 31, +2024 2023 2022 +United States $ 139,161 $ 361,660 $ 350,206 +Africa 32,745 29,254 18,152 +Europe 8,424 8,111 11,536 +Other regions 5,497 6,447 7,585 +$ 185,827 $ 405,472 $ 387,479 +Customer concentrations. The following table represents customer concentration risk: +For the Years Ended December 31, +2024 2023 +Revenue Concentration +Non-commercial customer (1) +24 % 63 % +December 31, +Accounts Receivable 2024 2023 +Commercial customer 10 % N/A +Non-commercial customer (1) +N/A 40 % +(1) Same non-commercial customer. +Vendor concentrations. The Company currently purchases certain products and critical components of the Company's products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, the Company could be subject to increased costs and substantial delays in the delivery of the Company's products to its customers. Third-party suppliers also manufacture certain products. The Company's inability to have a timely supply of any of these components and products could have a material adverse effect on the Company's business, as well as the Company's financial condition and results of operations. +F-16 +Table of Contents +Research and Development +Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. +Advertising Expenses +Advertising costs are charged to expense as incurred. During 2024, 2023, and 2022, the Company incurred $ 0.5 million, $ 1.6 million, and $ 4.8 million, respectively, in advertising expenses. +Stock-Based Compensation +The Company accounts for stock-based compensation to employees and directors using the fair value method. The Company recognizes compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. The Company recognizes compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. To satisfy the exercise of stock options, issuance of restricted stock, or redemption of performance-based restricted stock units, the Company issues new shares rather than purchase shares in the open market. +Income Taxes +The Company follows the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. +The Company assesses the realizability of its net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, the Company reduces its net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the Company's net operating loss carryforwards. +Foreign Currency Translation +The assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. +Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in the Company's consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income in the Company's consolidated statements of operations were $ 1.2 million, $( 0.1 ) million, and $ 1.6 million for the years ended December 31, 2024, 2023, and 2022, respectively. +Earnings (Loss) Per Share +Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is anti-dilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price +F-17 +Table of Contents +during the reporting period. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive. +For the Years Ended December 31, +2024 2023 2022 +Net income (loss) $ ( 19,500 ) $ 53,655 $ ( 17,133 ) +Weighted average shares of common stock outstanding: +Basic 74,434 73,348 72,505 +Dilutive effect of stock options, restricted stock, and performance stock units — 1,041 — +Diluted 74,434 74,389 72,505 +Earnings per share: +Basic $ ( 0.26 ) $ 0.73 $ ( 0.24 ) +Diluted $ ( 0.26 ) $ 0.72 $ ( 0.24 ) +For the year ended December 31, 2024, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 896 shares were excluded from the computation of diluted loss per share. For the year ended December 31, 2023, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 1,778 shares were excluded from the computation of diluted earnings per share as their inclusion would have been antidilutive. For the year ended December 31, 2022, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 436 shares were excluded from the computation of diluted loss per share. +Accumulated Other Comprehensive Loss +The Company classifies items of other comprehensive income (loss) by their nature and discloses the accumulated balance of other comprehensive income (loss) separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of the Company's consolidated balance sheets. +The Company has defined the Canadian dollar as the functional currency of the Company's Canadian subsidiary, DNAG, and the Company has defined the Euro as the functional currency of the Company's Belgian subsidiary, Novosanis. The results of operations are translated into U.S. dollars, which is the reporting currency of the Company. Changes in accumulated other comprehensive loss by component is listed below: +Foreign Currency Total +Balance at December 31, 2023 $ ( 14,941 ) $ ( 14,941 ) +Other comprehensive loss ( 9,419 ) ( 9,419 ) +Balance at December 31, 2024 $ ( 24,360 ) $ ( 24,360 ) +Recent Accounting Pronouncements +In November 2024, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40), Disaggregation of Income Statement Expenses . The purpose of this update was to require disclosure, in the notes to financial statements, of specified information about certain costs and expenses on a disaggregated basis. The amendments in the ASU are effective for all public business entities for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The amendments are to be applied either prospectively to financial statements issued for reporting periods after the effective date of the update or retrospectively to any or all prior periods presented in the financial statements. Management is evaluating the impact on the Company's consolidated financial statements. +In March 2024, the FASB issued ASU No. 2024-01, Compensation—Stock Compensation (Topic 718), Scope Application of Profits Interest and Similar Awards . The purpose of this update was to provide illustrative examples to demonstrate how an entity should apply guidance to determine whether profits interests and similar awards should be accounted for in accordance with Topic 718. For public business entities, the amendments in this ASU are effective for fiscal years +F-18 +Table of Contents +beginning after December 15, 2024, and interim periods within those fiscal periods. The amendments may be applied prospectively or retrospectively, and early adoption is permitted. Management is evaluating the impact on the Company's consolidated financial statements. +In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures . The purpose of the update was to improve financial reporting by requiring disclosures of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and require retrospective application to all periods presented in the consolidated financial statements. The Company has adopted the amendments for the year ended December 31, 2024. +In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. The purpose of the update was to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and incomes taxes paid information. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. The amendments may be applied prospectively or retrospectively, and early adoption is permitted. Management is evaluating the impact on the Company's consolidated financial statements. +Immaterial Correction of Errors +In the first quarter of 2023, the Company identified an immaterial error that was corrected in its consolidated financial statements. Inventories, accounts payable and cost of products and services were reduced by $ 0.5 million, $ 1.3 million and $ 0.8 million, respectively, as of and for the year ended December 31, 2022 to correct for the accounting of a vendor rebate earned in 2022. Furthermore, stockholder's equity at December 31, 2022 increased $ 0.8 million to reflect the reduction in cost of products and services sold. The tax impact of the vendor rebate was negligible. This correction was deemed to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2022. The respective operating activities on the consolidated statement of cash flows for the year ended December 31, 2022 have also been adjusted. +3. GOVERNMENT CAPITAL CONTRACTS: +In September 2021, the Company entered into an agreement for $ 109.0 million in funding from the U.S. Department of Defense (the "DOD"), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. In accordance with the milestone payment schedule, 15 % of the total was not billed and funded until the completion of the final validation testing, which occurred in October 2023. The Company began receiving funds from the DOD in January 2022 and received $ 109.0 million as of December 31, 2023. In connection with the completion of the contract in the fourth quarter of 2023, all funds were received. +Activity for these capital contracts is accounted for pursuant to International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance . Funding received in relation to capital-related costs incurred for government contracts is recorded as a reduction to the cost of property, plant and equipment and reflected within investing activities in the consolidated statements of cash flows and associated unpaid liabilities and government proceeds receivable are considered non-cash changes in such balances within the operating section of the consolidated statements of cash flows. +Amounts earned for the Company's guaranteed profit which covered project management costs were recognized straight-line in other income over the term of the government contract. The Company recognized no such income during the year ended December 31, 2024. The Company recognized $ 2.8 million and $ 2.2 million of such income during the years ended December 31, 2023 and 2022, respectively . Additionally, in connection with the completion of the contract, the Company recognized $ 12.8 million in excess of the guaranteed profit in other income in the Company's consolidated statement of operations during the year ended December 31, 2023, which reflects the difference in overall spend compared to the firm fixed price contract amount of $ 109.0 million. +The DOD also reimbursed the Company for certain engineering consulting costs. These expenses are reflected in research and development expenses as incurred with the corresponding amount presented in other income. The Company +F-19 +Table of Contents +recognized no such costs during the year ended December 31, 2024. The Company recognized $ 2.0 million and $ 1.4 million of such costs during the years ended December 31, 2023 and 2022, respectively. +The activity corresponding to the government contracts included in the Company's consolidated statements of cash flows is as follows: +December 31, +2023 +Cost of assets, cumulative $ 86,993 +Reduction for funding earned to date, not yet received — +Reduction for funding received to date ( 86,993 ) +Total property, plant and equipment, net $ — +4. INVENTORIES: +December 31, +2024 2023 +Raw materials $ 17,001 $ 20,727 +Work in process 420 1,900 +Finished goods 16,775 24,987 +$ 34,197 $ 47,614 +During the years ended December 31, 2024, 2023, and 2022, the Company recorded adjustments to inventory which had a cost of $ 2.6 million, $ 8.9 million, and $ 15.6 million, respectively. Adjustments for the year ended December 31, 2024 were primarily driven by the write down of inventory based on an estimated amount of inventory that may not be sold as the Company exits the Risk Assessment Testing business and normal operating scrap. Adjustments for the year ended December 31, 2023 were primarily related to reduction in COVID-19 demand and the need to reserve for excess inventory levels. Additionally, a significant portion of the Company's 2022 adjustments were related to production and tech-transfer issues associated with the Company's COVID-19 rapid test. +5. PROPERTY, PLANT AND EQUIPMENT: +December 31, +2024 2023 +Land $ 1,118 $ 1,118 +Buildings and improvements 36,152 34,606 +Machinery and equipment 51,015 64,156 +Computer equipment and software 11,502 17,739 +Furniture and fixtures 1,621 3,748 +Construction in progress 9,615 9,196 +111,023 130,563 +Accumulated depreciation ( 65,918 ) ( 85,143 ) +$ 45,105 $ 45,420 +During the first quarter of 2024, the Company initiated a strategic plan to transition away from the microbiome molecular sequencing services business and to cease operations at its Belgium location. As a result of these decisions, the Company determined that the carrying values of all of Diversigen's and Novosanis's property, plant, and equipment were not recoverable and recorded an aggregate pre-tax asset impairment charge of $ 1.8 million during the year ended December 31, 2024. All of these assets were disposed of as of December 31, 2024. +F-20 +Table of Contents +During the second quarter of 2024, the Company determined a manufacturing line will no longer be utilized. As a result of this decision, the Company determined that the carrying value of the equipment was not recoverable and recorded an aggregate pre-tax impairment charge of $ 1.1 million during the year ended December 31, 2024. +During the year ended December 31, 2023 the Company determined several manufacturing lines would not utilized due to changes in forecasted demand for the products the lines are intended to produce. Additionally, the Company elected not to proceed with certain leasehold improvements to its research and development laboratories. As a result of these decisions, the Company determined that the carrying values of the equipment and leasehold improvements were not recoverable and recorded aggregate pre-tax asset impairment charges of $ 2.3 million for the year ended December 31, 2023. +During the year ended December 31, 2022, the Company determined several manufacturing lines and associated supporting assets would not be utilized due to changes in forecasted demand for the products the lines are intended to produce. As a result of this decision, the Company determined that the carrying values of the equipment and supporting assets were not recoverable and recorded aggregate pre-tax asset impairment charges of $ 13.5 million for the year ended December 31, 2022. Due to the extremely specialized nature of the equipment and various market data points, the estimated fair value was zero. These charges are reported within loss on impairments in the consolidated statement of operations. +During the year ended December 31, 2023, the Company shortened the useful lives of machinery and equipment utilized for InteliSwab® production in Thailand. This reduction in useful lives resulted in $ 6.9 million of accelerated depreciation during 2023, recorded in cost of products and services sold. Also during 2023, the Company shortened the useful lives of leasehold improvements and equipment due a lease termination. This reduction in useful lives resulted in an additional $ 0.5 million of accelerated depreciation recorded in cost of products and services sold. +Depreciation expense for 2024, 2023, and 2022 was $ 9.8 million, $ 17.9 million, and $ 11.7 million, respectively. +6. GOODWILL AND OTHER INTANGIBLE ASSETS: +Changes in goodwill are as follows: +December 31, +Collection Device Reporting Unit 2024 2023 +Balance as of January 1 $ 35,696 $ 35,104 +Change related to foreign currency translation ( 1,754 ) 592 +Balance as of December 31 33,942 35,696 +Diagnostics Reporting Unit +Balance as of January 1 — — +Acquisition 6,388 — +Balance as of December 31 6,388 — +$ 40,330 $ 35,696 +On November 30, 2024, the Company performed its quantitative annual goodwill impairment test. The Company utilizes a combination of the income approach and market approach in determining the fair value of its two reporting units. The test concluded that the carrying value of the Company's reporting units was below fair value indicating there was no impairment of goodwill. +During 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding decline in the Company's market capitalization. As a result, the Company performed an interim quantitative goodwill impairment test and concluded that the carrying value of the Company's Diagnostics reporting unit exceeded its estimated fair value and the goodwill balance for that segment was fully impaired. The Company recognized a pre-tax impairment charge of $ 3.6 million during the year ended December 31, 2022, which is reported in loss on impairments in the Company's consolidated statement of operations. +F-21 +Table of Contents +Intangible assets consist of the following: +December 31, 2024 +Amortization +Period (Years) Gross Accumulated Amortization Net +Definite Life Intangible Assets +Customer relationships 10 $ 10,858 $ ( 10,858 ) $ — +Patents and product rights 5 7,495 ( 7,399 ) 96 +Developed technology +7 - 10 +10,169 ( 10,169 ) — +Trade names +5 - 15 +4,327 ( 3,988 ) 339 +32,848 ( 32,413 ) 435 +Indefinite Life Intangible Assets +IPR&D technology (Note 14) N/A 17,000 — 17,000 +$ 49,848 ( 32,413 ) 17,435 +December 31, 2023 +Amortization +Period (Years) Gross Accumulated +Amortization Net +Definite Life Intangible Assets +Customer relationships 10 $ 11,629 $ ( 11,629 ) $ — +Patents and product rights 5 7,673 ( 7,102 ) 571 +Developed technology +7 - 10 +10,926 ( 10,926 ) — +Trade names +5 - 15 +4,626 ( 3,991 ) 635 +$ 34,854 $ ( 33,649 ) $ 1,206 +During 2023, the Company identified a triggering event to test for the recoverability of intangible assets given the decline in the Company's market capitalization leading up to and as of its annual goodwill impairment testing date. The Company performed an undiscounted cash flow analysis and determined the carrying value of the developed technology, trade names, and customer relationships intangible assets could not be recovered through the sum of the undiscounted future cash flows. The Company used an income approach to determine the fair value of the developed technology and customer relationships intangible assets and the relief from royalty method for the trade names. As a result of this analysis, the Company determined the intangible assets associated with Diversigen and Novosanis were impaired as the fair value of the developed technology, trade names, and customer relationships did not exceed their carrying value. The Company recognized a pre-tax impairment charge of $ 6.2 million during the year ended December 31, 2023 which is reported in loss on impairments in the Company's consolidated statement of operations. +Also in 2023, the Company determined that its remaining developed technology intangible asset was fully impaired. As a result of failed stability studies, the Company decided to no longer pursue the technology. The Company recognized a pre-tax impairment charge of $ 2.4 million during the year ended December 31, 2023 which is reported in loss on impairments in the Company's consolidated statement of operations. +Amortization expense for 2024, 2023, and 2022 was $ 0.7 million, $ 2.0 million, and $ 2.3 million, respectively. +F-22 +Table of Contents +Amortization expense for each of the five succeeding fiscal years and beyond is estimated as follows: +2025 $ 290 +2026 145 +2027 — +2028 — +2029 — +Beyond — +$ 435 +7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: +December 31, +2024 2023 +Payroll and related benefits $ 11,147 $ 14,654 +Professional fees 2,469 2,827 +Sales tax payable 1,339 1,245 +Other 5,224 3,984 +$ 20,179 $ 22,710 +8. TERMINATION BENEFITS: +2023 Reduction in Workforce +During the first and second quarters of 2023, the Company executed a reduction in workforce. This was accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations . The charges for termination benefits included in the Company's consolidated statements of operations are as follows (in thousands): +For the Year Ended December 31, +2023 +Cost of products and services sold $ 369 +Research and development 566 +Sales and marketing 1,543 +General and administrative 787 +$ 3,265 +As of December 31, 2024 the Company had fully paid the $ 3.3 million related to the reduction in workforce. No additional expense associated with the 2023 reduction in workforce was incurred during the year ended December 31, 2024. This reduction in workforce was completed by June 30, 2024. +F-23 +Table of Contents +Q1 2024 Reduction in Workforce +During the first quarter of 2024, the Company executed a reduction in workforce largely affecting its COVID-19 manufacturing workforce. This was accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations . The charges for termination benefits included in the Company's consolidated statement of operations are as follows (in thousands): +For the Year Ended December 31, +2024 +Cost of products and services sold $ 231 +Research and development 87 +Sales and marketing 69 +General and administrative 17 +$ 404 +As of December 31, 2024, the Company had fully paid the $ 0.4 million related to the reduction in workforce. This reduction in workforce was completed by December 31, 2024. +Q2 2024 Reduction in Workforce +During the second quarter of 2024, the Company executed an additional reduction in workforce as the Company notified employees of its intention to consolidate its Novosanis site in Belgium into other locations by the end of December 31, 2024, discontinue the Diversigen molecular services line of business by the end of June 30, 2024, and consolidate facilities by bringing third-party manufacturing activities into its Pennsylvania facilities by the end of the third quarter of 2025. This was accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations . The charges for termination benefits included in the Company's consolidated statements of operations are as follows (in thousands): +For the Year Ended December 31, +2024 +Cost of products and services sold $ 889 +Research and development 478 +Sales and marketing 125 +General and administrative 160 +$ 1,652 +As of December 31, 2024 the Company had $ 0.5 million accrued and had paid $ 1.2 million related to the reduction in workforce. The Company expects this reduction in workforce to be completed by September 2025. +Q3 2024 Reduction in Workforce +During the third quarter of 2024, the Company executed a reduction in workforce largely as the Company notified certain employees of its intention to discontinue its risk assessment business. Additional employees were notified in the fourth quarter of 2024. This was accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations . The charges for termination benefits included in the Company's consolidated statements of operations are as follows (in thousands): +For the Year Ended December 31, +2024 +Cost of products and services sold $ 246 +Research and development 33 +Sales and marketing 782 +General and administrative 141 +$ 1,202 +As of December 31, 2024 the Company had $ 1.1 million accrued and had paid $ 0.1 million related to the reduction in workforce. The Company expects this reduction in workforce to be completed by January 2026. +F-24 +Table of Contents +9. LEASES: +The Company determines whether an arrangement is a lease at inception. The Company has operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of December 31, 2024, the Company is the lessee in all lease agreements. The Company's leases have remaining lease terms of one to ten years , some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within one year . The Company presents the operating right-of-use asset amortization and the change in operating lease liabilities on the other non-cash amortization line item of the consolidated statements of cash flows. +As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. +The Company has lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, the Company accounts for lease components separately from non-lease components. +During the first quarter of 2024, the Company identified a triggering event to test for the recoverability of all the ROU assets of both the Diversigen and Novosanis subsidiaries, given the Company's decision to initiate a strategic plan to transition away from the microbiome molecular sequencing services business and close its Belgian operations. The Company performed an undiscounted cash flow analysis and determined the carrying values of the ROU assets could not be recovered through the sum of the undiscounted future cash flows and were impaired. During the year ended December 31, 2024 the Company recognized aggregate pre-tax impairment charges of $ 1.2 million and $ 0.3 million to its operating and finance ROU assets, respectively. These charges are reported in the Company's consolidated statement of operations. +The components of lease expense are as follows: +For the Years Ended December 31, +2024 2023 2022 +Operating lease cost $ 1,729 $ 2,407 $ 2,910 +Variable and short-term lease cost 549 381 521 +Finance lease cost: +Amortization of right-of use assets 331 1,091 1,299 +Interest on lease liabilities 22 51 94 +Total finance lease cost 353 1,142 1,393 +Total lease cost $ 2,631 $ 3,930 $ 4,824 +Supplemental cash flow information related to leases is as follows: +For the Years Ended December 31, +2024 2023 2022 +Cash paid for amounts included in the measurement of lease liabilities: +Operating cash flows from operating leases $ 1,901 $ 1,863 $ 2,209 +Operating cash flows from financing leases 22 51 94 +Financing cash flows from financing leases 842 1,345 1,381 +Non-cash activity: +Right-of-use assets obtained in exchange for operating lease obligations 4,086 4,363 3,963 +Right-of-use assets obtained in exchange for finance lease obligations 193 334 117 +F-25 +Table of Contents +Supplemental balance sheet information related to leases is as follows: +December 31, +2024 2023 +Weighted Average Remaining Lease Term +Weighted-average remaining lease term — operating leases 7.57 years 8.51 years +Weighted-average remaining lease term — finance leases 3.74 years 1.71 years +Weighted Average Discount Rate +Weighted-average discount rate — operating leases 4.44 % 3.71 % +Weighted-average discount rate — finance leases 4.82 % 3.45 % +As of December 31, 2024, minimum lease payments by period are expected to be as follows: +Finance Operating +2025 $ 48 $ 2,559 +2026 48 2,373 +2027 42 2,141 +2028 25 2,081 +2029 6 2,020 +Thereafter — 5,722 +Total minimum lease payments 169 16,896 +Less: imputed interest ( 15 ) ( 2,446 ) +Present value of lease liabilities $ 154 $ 14,450 +F-26 +Table of Contents +10. INCOME TAXES: +Income (loss) before income tax expense consists of the following: +For the Years Ended December 31, +2024 2023 2022 +United States $ ( 21,523 ) $ 61,671 $ ( 7,111 ) +Foreign 5,522 ( 5,413 ) ( 8,564 ) +$ ( 16,001 ) $ 56,258 $ ( 15,675 ) +The components of income tax expense (benefit) are as follows: +For the Years Ended December 31, +2024 2023 2022 +Current +Federal $ 229 $ — $ — +State 111 1,896 955 +Foreign 2,116 605 2,154 +2,456 2,501 3,109 +Deferred +Federal ( 2,962 ) 13,570 ( 2,250 ) +State 1,368 ( 382 ) ( 633 ) +Foreign 4,365 ( 1,867 ) ( 2,617 ) +2,771 11,321 ( 5,500 ) +Increase (decrease) in valuation allowance ( 3,428 ) ( 11,219 ) 3,849 +( 657 ) 102 ( 1,651 ) +Total income tax expense $ 1,799 $ 2,603 $ 1,458 +For the years ended December 31, 2024, 2023, and 2022 the Company recorded net foreign income tax expense of $ 1.4 million, $ 0.7 million, and $ 0.5 million, respectively. The Company's 2022 foreign income tax expense included $ 1.7 million of Canadian withholding taxes paid on the repatriation of Canadian earnings offset by a foreign income tax benefit of $ 1.2 million associated with the Company's Canadian subsidiary. For the years ended December 31, 2024, 2023, and 2022 the Company recorded U.S. federal tax expense of $ 0.2 million and state tax expense of $ 0.1 million, $ 1.9 million, and $ 1.0 million respectively. +F-27 +Table of Contents +The reconciliation of the statutory United States federal income tax rate to the Company's effective tax rate is as follows: +For the Years Ended December 31, +2024 2023 2022 +Statutory U.S. federal income tax rate 21.0 % 21.0 % 21.0 % +Nondeductible executive compensation ( 8.5 ) 0.5 ( 5.8 ) +Impact of stock-based payment awards ( 2.3 ) ( 0.3 ) ( 5.1 ) +Tax effect of foreign items ( 1.9 ) ( 0.4 ) ( 6.0 ) +State income taxes, net of federal benefit ( 9.1 ) 2.0 ( 0.8 ) +U.S. and foreign tax credits 1.2 1.3 3.7 +Nondeductible expenses and other ( 2.4 ) 0.9 8.7 +Nondeductible transaction costs ( 2.1 ) — — +NOL adjustment, foreign ( 31.4 ) — — +Non-controlling interests 2.2 — — +Change in valuation allowance, federal and state ( 10.0 ) — — +Change in valuation allowance, foreign 32.1 ( 20.4 ) ( 25.0 ) +Effective tax rate ( 11.2 ) % 4.6 % ( 9.3 ) % +Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes, and net operating loss and tax credit carryforwards. Significant components of the Company's deferred tax assets (liabilities) are as follows: +December 31, +2024 2023 +Deferred tax assets (liabilities): +Net operating loss carryforwards $ 55,583 $ 28,014 +Inventories 2,344 2,654 +Capitalized research and development costs 12,946 3,897 +Accruals and reserves currently not deductible 2,754 3,324 +Acquired intangible assets ( 3,981 ) ( 164 ) +Depreciation and amortization ( 2,017 ) ( 3,567 ) +Right-of-use assets ( 2,266 ) ( 3,010 ) +Lease liabilities 2,497 3,173 +Stock-based compensation 3,303 3,467 +Tax credit carryforwards 4,184 3,326 +Net deferred tax asset 75,347 41,114 +Valuation allowance ( 75,191 ) ( 41,668 ) +Net deferred tax asset (liability) $ 156 $ ( 554 ) +In assessing the realizability of the Company's deferred tax asset, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent upon several factors, including the generation of sufficient taxable income, to realize the NOL carryforwards. In 2008, the Company established a full valuation allowance against the Company's U.S. deferred tax asset, and although the Company has achieved cumulative of U.S. pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in the Company's judgement, support the release of the valuation allowance. Management believes the full valuation allowance is still appropriate as of December 31, 2024 and 2023. As a result, no U.S. federal income tax benefit was recorded for the years ended December 31, 2024, 2023, and 2022. +F-28 +Table of Contents +The Company's federal NOL carryforwards consist of $ 108.6 million from existing business along with $ 71.5 million of acquired NOL carryforwards. None of these NOL carryforwards have an expiration date. The Company's foreign NOL carryforwards consist of $ 63.0 million of acquired NOL carryforwards. These foreign NOL carryforwards do not have an expiration date. The Company's state NOL carryforwards consist of $ 33.9 million from existing business along with $ 4.0 million of acquired NOL carryforwards. The state NOL carryforwards have expirations as follows: +Year of Expiration NOLs +2026 - 2040 $ 14,122 +2041 - 2046 13,442 +Non-Expiring 10,294 +$ 37,858 +The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOL carryforwards that can be used in any given year in the event a significant change in ownership. The Company does not believe that there is a Section 382 limitation that will impair the Company's future ability to utilize NOLs to offset the Company's future taxable income. The Company continues to review ownership changes on an annual basis and the Company does not believe it has had a subsequent ownership change that would impact the NOLs. The Company acquired 382 limited NOL carryforwards as part of its acquisition of Sherlock. These NOL carryforwards have no expiration date. +In January 2022, approximately $ 65.0 million was repatriated from the Company's Canadian subsidiary as a one-time event. Associated with this repatriation the Company paid $ 1.7 million in Canadian withholding tax which is included in the Company's foreign income tax expense within the table further above. It is still the Company's intention to continue to permanently reinvest the historical undistributed earnings of the Company's foreign subsidiary to the extent that the Company will not incur any additional tax expense associated with foreign withholding or other local tax expense on the future cash transfers. As such, deferred taxes have not been recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2024. +As of December 31, 2024, the Company's gross unrecognized tax benefits totaled $ 0.3 million, and based upon the valuation allowance for the Company's U.S. operations, the recognition of any tax benefit would not impact the Company's effective tax rate. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Interest and penalties were immaterial in 2024, 2023, and 2022. As a result of the Company's NOL carryforward position, the Company has been subject to audit by the Internal Revenue Service since the Company's inception, as well as by several jurisdictions for the years ended September 30, 1998 through December 31, 2024. +The reconciliation of the Company's unrecognized tax benefits is as follows: +2024 2023 2022 +Balance at January 1 $ 304 $ 373 $ 805 +Additions for tax positions of prior periods 29 — 1 +Reductions for tax positions of prior periods — ( 69 ) ( 433 ) +Balance at December 31 $ 333 $ 304 $ 373 +11. STOCKHOLDERS’ EQUITY: +Stock-Based Awards +The Company grants stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. +As of December 31, 2024, 5,412 shares were available for future grants under the Stock Plan. +Under the terms of the Stock Plan, nonqualified stock options may be granted to eligible employees, including the Company's officers at a price not less than 75 percent of the fair market value of a share of common stock on the date of +F-29 +Table of Contents +grant. The option term and vesting schedule of such awards may be either unlimited or have a specified period in which to vest and be exercised. To date, options generally have been granted with ten-year exercise periods and an exercise price not less than the fair market value on the date of grant. Options generally vest over four years , with one quarter of the options vesting one year after grant and the remainder vesting on a monthly basis over the next three years. +The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: +For the Years Ended December 31, +Black-Scholes Option Valuation Assumptions 2024 2023 2022 +Risk-free interest rate (1) +4.14 % 4.23 % 1.65 % +Expected dividend yield — — — +Expected stock price volatility (2) +53 % 51 % 50 % +Expected life of stock options (in years) (2) +5 5 5 +(1) Based on the constant maturity interest rate of U.S. Treasury securities whose term is consistent with the expected life of the Company's stock options. +(2) Based upon historical experience. +The weighted-average grant date fair value of stock options granted during the years ended December 31, 2024, 2023, and 2022 was $ 3.68 , $ 3.24 and $ 4.15 , respectively. +Compensation expense recognized in the financial statements related to stock options was $ 1.4 million, $ 1.3 million, and $ 1.5 million for the years ended December 31, 2024, 2023, and 2022, respectively. +The aggregate intrinsic value of options exercised during the years ended December 31, 2024, 2023, and 2022 (the amount by which the market price of the stock on the date of exercise exceeded the exercise price) was $ 38.4 thousand, $ 43.0 thousand, and $ 4.0 thousand, respectively. +The following table summarizes the stock option activity under the Stock Plan: +Options Weighted- +Average +Exercise Price +Per Share Weighted- +Average +Remaining +Contractual +Term +(in years) Aggregate Intrinsic Value +Outstanding on January 1, 2024 2,070 $ 9.27 +Granted 595 6.99 +Exercised ( 32 ) 6.70 +Expired ( 188 ) 11.19 +Forfeited ( 208 ) 7.20 +Outstanding on December 31, 2024 2,237 $ 8.73 6.33 $ — +Vested or expected to vest as of December 31, 2024 2,198 $ 8.72 6.44 $ — +Exercisable on December 31, 2024 1,389 $ 9.79 4.91 $ — +As of December 31, 2024, there was $ 2.6 million of unrecognized compensation expense related to unvested option awards that is expected to be recognized over a weighted-average period of 2.6 years. +Net cash proceeds from the exercise of stock options were $ 0.2 million, $ 0.3 million and $ 0.02 million for the years ended December 31, 2024, 2023, and 2022, respectively. As a result of the Company's net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises for these periods. +F-30 +Table of Contents +The following table summarizes information about stock options outstanding as of December 31, 2024: +Options Outstanding Options Exercisable +Range of Exercise Prices Number +Outstanding Weighted- +Average +Remaining +Contractual +Term +(in years) Weighted- +Average +Exercise +Price Per +Share Number +Exercisable Weighted- +Average +Exercise +Price Per +Share +$ 4.26 - $ 6.82 +578 7.35 $ 5.98 285 $ 6.02 +$ 7.13 - $ 10.69 +1,277 6.51 7.89 728 8.21 +$ 12.90 - $ 19.34 +334 4.33 14.87 329 14.86 +$ 21.64 - $ 32.46 +48 2.78 $ 21.65 47 $ 21.65 +2,237 6.33 $ 8.73 1,389 $ 9.79 +The Stock Plan also permits the Company to grant restricted shares and restricted units of the Company's common stock to eligible employees, including officers, and the Company's outside directors. Generally, these shares or units are nontransferable until vested and are subject to vesting requirements and/or forfeiture, as determined by the Company's Compensation Committee or Board of Directors. The market value of these shares and units at the date of grant is recognized on a straight-line basis over the period during which the vesting restrictions lapse. Compensation cost of $ 6.9 million, $ 7.6 million and $ 9.2 million related to restricted shares was recognized during the years ended December 31, 2024, 2023, and 2022, respectively. +The following table summarizes restricted stock award and restricted stock units activity under the Stock Plan: +Units Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2024 2,521 $ 6.04 +Granted 875 6.84 +Vested ( 1,604 ) 5.81 +Forfeited ( 98 ) 7.37 +Issued and unvested, December 31, 2024 1,694 $ 6.60 +Issued and expected to vest, December 31, 2024 1,694 $ 6.60 +As of December 31, 2024, there was $ 6.0 million of unrecognized compensation expense related to unvested restricted stock awards and unvested restricted stock units that is expected to be recognized over a weighted average period of 1.7 years. +In connection with the vesting of restricted shares during the years ended December 31, 2024, 2023, and 2022, the Company purchased and immediately retired 617 , 262 and 241 shares with aggregate values of $ 3.4 million, $ 1.4 million and $ 1.6 million, respectively, in satisfaction of minimum tax withholding and exercise obligations. +The Company grants performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of certain performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain in the Company's service for three years from the grant date. Performance shares were granted based on the achievement of three-year cumulative revenue metrics with a market-based condition, or a total shareholder return modifier. PSUs are converted into shares of the Company's common stock once vested and the number of shares actually earned at the end of the performance period will vary, based on actual performance, from 0 % to 150 % of the target number of performance share units granted. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. +F-31 +Table of Contents +Compensation cost of $ 3.6 million, $ 1.8 million and $ 0.9 million related to the PSUs was recognized during the years ended December 31, 2024, 2023, and 2022, respectively. +The following table summarizes PSU activity under the Stock Plan: +Units Weighted- +Average Grant +Date Fair +Value +Issued and unvested, January 1, 2024 991 $ 6.52 +Granted (1) +519 8.87 +Performance adjustment (2) +18 N/A +Vested ( 74 ) 10.99 +Forfeited — — +Issued and unvested, December 31, 2024 1,454 $ 7.19 +Issued and expected to vest, December 31, 2024 1,454 $ 7.19 +(1) Grant activity for all PSUs disclosed at target. +(2) Reflects the performance adjustment based on actual performance measured at the end of the performance period. +As of December 31, 2024, there was $ 5.3 million of unrecognized compensation expense related to unvested performance stock units that is expected to be recognized over a weighted average period of 1.7 years. +In connection with the vesting of performance stock units during the year ended December 31, 2024, 2023 and 2022, the Company purchased and immediately retired 23 , 86 , and 88 shares with aggregate values of $ 0.2 million, $ 0.5 million and $ 0.6 million, respectively. +Share Repurchase Program +On August 5, 2008, the Company's Board of Directors approved a share repurchase program pursuant to which the Company is permitted to acquire up to $ 25.0 million of the Company's outstanding common shares. No shares were purchased and retired during the years ended December 31, 2024, 2023, and 2022. +12. TRANSITION COSTS +On December 31, 2021, the Company's Board of Directors approved the termination of Stephen S. Tang, the Company’s President and Chief Executive Officer, without cause under his existing employment agreement with the Company, with such termination effective as of March 31, 2022. On January 2, 2022, Dr. Tang and the Company entered into a Transition Agreement providing for the terms of the cessation of Dr. Tang’s employment with the Company, including the cessation of his service as President and Chief Executive Officer of the Company and as a member of the Board. Under the Transition Agreement, Dr. Tang’s service to the Company in all capacities ended on March 31, 2022. +Pursuant to the Transition Agreement, Dr. Tang received severance of $ 1.6 million, which was accrued in the consolidated financial statements at December 31, 2021 and paid in April 2022. Additionally, in accordance with his Transition Agreement, certain of his unvested time-vesting restricted stock awards and unvested PSUs that were outstanding at March 31, 2022 vested on April 8, 2022. His remaining unvested time-vesting restricted stock awards and PSUs were forfeited on March 31, 2022. These payments, rights and benefits are substantially similar to the severance benefits contemplated by his previous employment agreement in respect to a termination without cause thereunder. In aggregate, the Company recognized $ 1.5 million of expense in relation to Dr. Tang's stock compensation for the year ended December 31, 2022. +F-32 +Table of Contents +13. BUSINESS SEGMENT INFORMATION: +The Company is organized on the basis of products and services into a single reportable segment. All products and services reside under the same reporting hierarchy. Historically, there was separate management leading the Company's Diagnostics and Molecular Solutions businesses. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across the Diagnostics and Molecular Solutions businesses into one operating segment with sales, marketing, product development and research teams covering all product lines and reporting to a Chief Product Officer ("CPO"). +The Company's reportable segment derives its revenues from the sale of diagnostics products and sample management solutions, as described in Note 2 Summary of Significant Accounting Policies. As the Company has only one reportable segment, there are no inter-segment sales or transfers. +The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM uses consolidated net income (loss) as reported in the consolidated statement of operations as the primary measure of the reportable segment's profit or loss. The CODM uses consolidated net income (loss) to assess the performance of the segment and make decisions about resource allocation. Consolidated gross profit and consolidated operating income (loss), as reported in the consolidated statement of operations, are also used by the CODM as measures of segment profit or loss. The CODM uses gross profit to assess the impact of the Company's efforts to achieve manufacturing efficiencies and consolidate its production activities. The CODM uses operating income (loss) to assess the impact of the Company's recent restructurings, reduction in workforce, and efforts to streamline its operations to achieve cost savings. The CODM uses consolidated total assets as the measure of segment assets, as reported on the consolidated balance sheet. +The accounting policies of the Company's reportable segment are the same as those described in Note 2 Summary of Significant Accounting Policies. +The following table represents total long-lived assets by geographic area: +December 31, +2024 2023 +United States $ 40,286 $ 48,311 +United Kingdom 12,849 — +Canada 5,468 8,777 +Other regions 89 1,178 +$ 58,692 $ 58,266 +F-33 +Table of Contents +The following table represents reported segment revenues, segment profit (loss), and significant segment expenses: +For the Years Ended December 31, +2024 2023 2022 +Net revenues $ 185,827 $ 405,472 387,479 +Cost of products and services sold (3) +106,437 233,820 239,041 +Gross profit 79,390 171,652 148,438 +Research and development (3) +26,047 33,728 36,237 +Sales and marketing (3) +30,986 36,319 49,238 +General and administrative (3) +46,215 58,191 68,206 +Loss on impairments 4,392 10,829 17,101 +Change in the estimated fair value of acquisition-related contingent consideration — ( 99 ) ( 188 ) +Operating (loss) income ( 28,250 ) 32,684 ( 22,156 ) +Other (expense) income (1) +( 380 ) 17,836 3,453 +Interest revenue 11,469 5,862 1,569 +Other segment items (2) +1,160 ( 124 ) 1,459 +(Loss) income before income taxes ( 16,001 ) 56,258 ( 15,675 ) +Income tax expense 1,799 2,603 1,458 +Loss on equity investment ( 1,700 ) — — +Net (loss) income $ ( 19,500 ) $ 53,655 $ ( 17,133 ) +(1) Includes $ 12.8 million of excess profits recognized on government contracts in 2023. +(2) Includes interest expense and foreign currency gains (losses). +(3) The following tables represent additional significant segment expense categories: +For the Years Ended December 31, +2024 2023 2022 +Stock-based Compensation +Cost of products and services sold $ 734 $ 564 $ 334 +Research and development 839 1,159 1,128 +Sales and marketing 1,129 1,181 1,702 +General and administrative 9,219 7,826 8,458 +$ 11,920 $ 10,729 $ 11,622 +For the Years Ended December 31, +2024 2023 2022 +Depreciation and Amortization +Cost of products and services sold $ 6,343 $ 15,311 $ 9,230 +Research and development 1,029 1,208 1,098 +Sales and marketing 189 571 630 +General and administrative 3,311 3,846 4,350 +$ 10,872 $ 20,936 $ 15,308 +F-34 +Table of Contents +14. BUSINESS COMBINATIONS: +Sherlock Biosciences +On December 19, 2024, the Company acquired all of the outstanding stock of Sherlock, pursuant to the terms of a merger agreement (the "Merger Agreement"). The Company began operating this entity as of the December 19, 2024 closing date. +The primary reason for the acquisition is Sherlock's first test for Chlamydia Trachomatis (CT) and Neisseria Gonorrhoeae (NG) is in clinical studies and is expected to be submitted to the FDA for approval by the end of 2025. Subject to regulatory approvals, this test is expected to expand the Company's portfolio for rapid diagnostics for sexually transmitted infections. +The initial aggregate purchase price of this transaction was funded with cash on had as shown below: +Milestone contingent consideration $ 15,910 +Royalty based contingent consideration 7,000 +Cash paid to Sherlock 5,000 +Legal expenses 389 +Insurance policy expense 50 +Initial aggregate purchase price $ 28,349 +Pursuant to the Merger Agreement, the Company agreed to pay up to $ 20.0 million of contingent consideration based on the achievement of a regulatory milestone on or before December 31, 2026 as defined in the Merger Agreement. The fair value of this milestone metric contingent consideration was $ 15.9 million. The range of outcome for the milestone contingent consideration is $ 0.0 million to $ 20.0 million. Also, there is a mid-single digits quarterly royalty fee based on future sales until 2034 as defined in the Merger Agreement, which was fair valued as part of contingent consideration. The estimated acquisition-date fair value of the royalty fee acquisition-related contingent consideration was $ 7.0 million. The range of outcome for the royalty payment cannot be determined due to the fact its based on future sales associated with the acquired in-process research and development technology through 2034 and thus does not have an upper limit. +During the year ended December 31, 2024, the Company incurred a total of $ 1.0 million of acquisition related costs, including accounting, legal, and other professional fees, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2024. +F-35 +Table of Contents +The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date: +Assets Acquired +Other current assets $ 2,570 +Property, plant, and equipment, net 9,244 +Other noncurrent assets 462 +Operating right-of-use assets 4,080 +In-process research and development technology intangible asset 17,000 +Goodwill 6,382 +Total assets acquired 39,738 +Liabilities Assumed +Accounts payable 2,449 +Current liabilities 3,621 +Deferred revenue 1,641 +Operating lease liability 4,080 +Total liabilities assumed 11,791 +Net Assets Acquired 27,947 +Estimated fair value of contingent consideration ( 22,910 ) +Net Cash Paid (net of cash acquired of $ 402 ) +$ 5,037 +The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets included in-process research and development technology ("IPR&D Technology"), which is an indefinite lived asset. +The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets and contingent consideration of Sherlock. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. +The regulatory milestone scenario based model was used to value the assumed milestone contingent consideration, were primarily based on significant unobservable inputs and are considered Level 3 fair value measurements. The regulatory milestone scenario based model estimates fair value for contingent consideration based on the probability of on the achievement of a certain milestone as defined under the agreements and the discount rate. +The fair value of contingent payments approach was used to value the royalty based contingent consideration, were primarily based on significant unobservable inputs and are considered Level 3 fair value measurements. The fair value of contingent payments approach were primarily based on projected cash flows, probability of on the achievement of a regulatory milestone as defined under the agreements, and discount rate. +Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. The Company believes the goodwill related to the acquisition was a result of Sherlock providing a product offering that will enable the Company to leverage those products with existing and new customers. The goodwill is not deductible for income tax purposes. +The Company continues to evaluate the fair value of certain assets acquired and liabilities assumed. Additional information, which existed as of the acquisition date, but was at that time unknown to the Company, may become known during the remainder of the measurement period. Changes to amounts recorded as a result of the final determination may +F-36 +Table of Contents +result in a corresponding adjustment to these assets and liabilities, including goodwill. The determination of the estimated fair values of all assets acquired is expected to be completed within one year from the date of acquisition. +Revenues from Sherlock primarily consist of grant revenues for research and development purposes. Effective as of December 19, 2024, the financial results of Sherlock are included in the consolidated financial results of the Company. For the year ended December 31, 2024, consolidated net revenues include revenues associated with Sherlock of $ 78.0 thousand and consolidated results from operations include a net loss of $ 255.4 thousand generated since the acquisition date. +Unaudited Pro Forma Financial Information +The unaudited pro forma results presented below include the results of the Sherlock acquisition as if it had been consummated as of January 1, 2023. The unaudited pro forma results include, depreciation of the acquired property plant and equipment and the estimated tax effect of adjustments to income before income taxes but do not include changes in the fair value of the Company's contingent consideration obligations. Material nonrecurring charges, directly attributable to the transactions, including direct acquisition costs, are also excluded. In addition, the unaudited pro forma results do not include any expected benefits of the acquisitions. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2023. +For the Years Ended December 31, +2024 2023 +Net revenues $ 188,126 $ 406,381 +Net income (loss) $ ( 41,459 ) $ 7,992 +F-37 +Table of Contents +15. COMMITMENTS AND CONTINGENCIES: +Purchase Commitments +As of December 31, 2024, the Company had a manufacturing agreement with a third party vendor requiring a minimum purchase commitment. If the minimum commitment is not achieved, the Company will be required to make annual penalty payments over the next year. Based on current forecasts, these penalties aggregate to approximately $ 0.3 million and are accrued for in the consolidated balance sheet. These estimated penalties can fluctuate based on changes in forecasted demand. +The table below represents an estimate of future purchases under the agreement (in thousands): +2025 $ 1,443 +2026 — +2027 — +2028 — +2029 — +$ 1,443 +Collaborations +Sherlock has an active third-party license agreement entered into in order to advance and obtain technologies and services related to the business. Under this license, the Company is required to make up to $ 2.3 million of cash payments upon the achievement of certain scientific and commercial milestones as well as low single digit royalty payments on product sales. No milestone payments have been made as of December 31, 2024. The Company has the right to terminate the license for any reason. Unless otherwise terminated, the license terminates upon the expiration of the last to expire valid claim. +Litigation +From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, based upon the advice of counsel, the outcomes of such actions are not expected, individually or in the aggregate, to have a material adverse effect on the Company's future financial position or results of operations. +Spectrum Patent Litigation +In March 2021, the Company filed a complaint against Spectrum Solutions, LLC (“Spectrum”) in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG. Spectrum filed an answer asserting that its device does not infringe the Company’s patent and that the Company’s patent is invalid. In August 2021, the Company amended its complaint to add a second patent to this litigation. Spectrum responded to the Company's amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office (“PTO”), which was granted by the PTO. The District Court issued multiple pretrial orders, resolving the infringement, antitrust, and inequitable conduct claims without trial. First, the District Court granted Spectrum’s motion for summary judgment of noninfringement. Second, the Court denied Spectrum’s motion to supplement its allegations of alleged antitrust violations, finding that if such an amendment were allowed, Spectrum’s claims would not survive a motion for summary judgment. Spectrum thereafter withdrew its antitrust and inequitable conduct counterclaims. Spectrum did not appeal the District Court's denial of its motion to amend. The Company appealed the grant of summary judgment to the Court of Appeals on June 8, 2023. On February 14, 2025, the Court of Appeal affirmed the District Court’s judgment. The Company is considering its appellate options. On February 7, 2024, the PTO issued a Final Written Decision regarding the second patent in the litigation, holding that claims 1, 3–8, 11, and 12 of U.S. Patent No. 11,002,646 B2 are unpatentable. On March 8, 2024, the Company filed a Request for Rehearing by the Director of the PTO of the Final Written Decision. On March 27, 2024, the Company’s Request for Rehearing was denied. On September 15, 2023, Spectrum filed a separate petition for inter partes review of a third patent, which DNAG did not assert in the District Court. On March 26, 2024, the PTO issued a Decision Granting Institution of Inter Partes Review. On July 2, 2024, the Company filed a Motion to Amend the claims of the third patent and oral argument in this IPR took place on January 24, 2025. On February 19, 2025, the PTO issued a Final Written Decision regarding the third patent in the litigation, granting the Company's Motion to Amend as to cancelling the original claims, +F-38 +Table of Contents +but denying the Company's Motion to Amend as to adding proposed substitute claims. The Company is considering its appellate options. +NowDiagnostics Litigation +On November 14, 2024 the Company filed a complaint against NowDiagnostics, Inc. ("NowDx"), Jody Berry ("Berry") and Janean Young ("Young") in the United States District Court for the Eastern District of Pennsylvania alleging misappropriation and misuse of the Company's proprietary information and trade secrets by NowDx, Berry and Young in violation of the Federal Defend Trade Secrets Act and the Pennsylvania Uniform Trade Secrets Act. The complaint also alleges breach of contract and duty of loyalty by Young, unfair competition by NowDx, and tortious interference with contractual relations by Berry and NowDx. NowDx filed Counterclaims against the Company on January 13, 2025 and the Company filed its Answer to the Counterclaims on February 3, 2025. Young filed a Motion to Dismiss the claims against her, which was denied by the court on February 4, 2025. NowDx, Berry, and Young agreed to a preliminary injunction which the Court entered on February 27, 2025. +16. RETIREMENT PLANS: +Substantially all of the Company's U.S. employees are eligible to participate in the OraSure Technologies, Inc. 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits voluntary employee contributions to be excluded from an employee’s current taxable income under provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. The 401(k) Plan also provides for the Company to match employee contributions up to $ 4.0 thousand per year. The Company contributed $ 1.2 million, $ 1.6 million and $ 1.8 million to the 401(k) Plan, net of forfeitures, in 2024, 2023, and 2022, respectively. +In addition to the Company's 401(k) plan, the Company offers a nonqualified deferred compensation plan to permit eligible directors and highly compensated employees of the Company to defer receipt and taxation of their compensation each year. The Company also may make discretionary contributions to the accounts of the participating employees in any amount either in cash or stock. Participants in the plan may not purchase OraSure stock as an investment vehicle. As of December 31, 2024 and 2023, the value of the assets associated with this plan was $ 0.7 million and $ 0.8 million, respectively, and is included in other current assets and other noncurrent assets in the Company's consolidated balance sheets. The Company's obligation related to the deferred compensation plan is included in accrued expenses and other noncurrent liabilities in the Company's consolidated balance sheets. As of December 31, 2024 and 2023, the Company's total obligation under this plan was $ 0.7 million and $ 0.8 million, respectively. +Substantially all regular full-time Canadian employees are eligible to participate in the DNA Genotek Registered Retirement Savings Plan (the “RRSP”). The RRSP permits voluntary employee contributions to be excluded from an employee’s current taxable income and receive tax preferred treatment with Canada Revenue Agency. The RRSP also provides for DNAG to match employee contributions up to $ 4.0 thousand CAD per year. The Company contributed $ 0.4 million, $ 0.4 million and $ 0.5 million to the RRSP in 2024, 2023, and 2022, respectively. +F-39 \ No newline at end of file diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/filing_metadata.csv b/raw/filings/0001116463/2024/0001116463-25-000010/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d91394e36c3d135bc7815eb754fb348288ec71f9 --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001116463,OSUR,ORASURE TECHNOLOGIES INC,10-K,2025-03-07,2024-12-31,2025-03-07T21:59:59.000Z,0001116463-25-000010,osur-20241231.htm,10-K,12970141,1,1,https://www.sec.gov/Archives/edgar/data/1116463/000111646325000010/osur-20241231.htm,https://www.sec.gov/Archives/edgar/data/1116463/000111646325000010/,2024,2024,1 diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/item1.txt b/raw/filings/0001116463/2024/0001116463-25-000010/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e765aa69b942ce023ea839b007c8a8b9c8ac91bf --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/item1.txt @@ -0,0 +1,256 @@ +ITEM 1. Business. +OTI transforms health through actionable insight by powering the shift that connects people to healthcare wherever they are. +Our products and services reside under one reporting hierarchy, with commercial and innovation teams, which are part of a single business unit covering multiple product lines. Our business is principally comprised of the development, manufacture, marketing, sale and distribution of (i) diagnostics products, and (ii) sample management solutions. +In January 2024, the Company completed an equity investment in KKR Sapphiros L.P. ("Sapphiros"), leading its Series B financing and entering into a wide-ranging strategic distribution relationship with Sapphiros, which secures exclusive distribution rights to certain products in Sapphiros' development pipeline, including self-collected blood test and diagnostic tests. Sapphiros is a privately held consumer diagnostics portfolio company based in Boston. +In December 2024, the Company acquired Sherlock Biosciences, Inc. and its subsidiaries ("Sherlock"). Sherlock is a global health company focused on next generation diagnostics. Sherlock's molecular diagnostics platform aims to provide rapid results with strong sensitivity and specificity in a disposable format. Sherlock's first test for Chlamydia Trachomatis (CT) and Neisseria Gonorrhoeae (NG) is currently in Phase 3 clinical studies and is expected to be submitted to the FDA for approval by the end of 2025. Subject to regulatory approvals, this test is expected to expand the Company's portfolio for rapid diagnostics for sexually transmitted infections. +Products and Services +The Company's business consists of the development, manufacture, marketing, sale and distribution of simple, easy to use diagnostic products and specimen collection devices using its proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests. Our diagnostic products include tests for diseases including HIV, Hepatitis C, Syphilis and COVID-19 that are performed on a rapid basis at the point of care. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's HIV, HCV and COVID-19 products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV and HCV products, as a self-test to individuals in a number of other countries, including, for the HIV products, as an oral swab in-home test for HIV-1 and HIV-2 in Europe. +The Company's business also includes sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental market segments. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. +In 2020, the Company expanded its market focus by selling existing collection products for use with COVID-19 tests. Beginning in 2022 and continuing through 2024, demand for COVID-19 PCR testing declined significantly, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines that negatively impacted the sales of the collection products. +Products +The following is a summary of the Company's principal products for the infectious disease and risk management markets as well as its sample management products: +OraQuick ® Rapid HIV Test +The OraQuick® Rapid HIV Test is the Company's rapid point-of-care test product designed to test for the presence of HIV-1 and HIV-2 antibodies. This product is sold under the OraQuick ADVANCE® name in North America, Europe and certain other countries, and under the OraQuick® name in other developing countries. The OraQuick ADVANCE® test has received premarket approval (“PMA”) from the FDA for the detection of antibodies to both HIV-1 and HIV-2 in oral fluid, finger-stick whole blood, venous whole blood and plasma. The OraQuick® test has received World Health +2 +Table of Contents +Organization ("WHO") pre-qualification and registration in other countries for the detection of HIV-1 and HIV-2 antibodies in oral fluid, whole blood (fingerstick and venous), serum and plasma. The device uses a porous flat pad to collect an oral fluid specimen. After collection, the pad is inserted into a vial containing a pre-measured amount of developer solution and allowed to develop. When blood-based specimens are to be tested, a loop collection device is used to collect a drop of the specimen and mix it in the developer solution, after which the collection pad is inserted into the solution and the test is allowed to develop. The specimen and developer solution then flow through the testing device where test results are observable between 20 and 40 minutes. The OraQuick® device is a screening test and requires a confirmation test where an initial positive result is obtained. This test is available for use by laboratories located in the United States certified under CLIA, to perform moderately complex tests. The Company has also received a CLIA waiver for use of the test with oral fluid and finger-stick and venous whole blood. As a result, the test can be used by numerous additional sites in the United States not certified under CLIA to perform moderately complex tests, such as outreach clinics, community-based organizations and physicians’ offices. +The OraQuick ADVANCE ® test is also CE marked for sale in Europe and other countries accepting the CE mark for commercialization. This product is also registered for sale in other countries. The Company has distributors in place for several countries and is seeking to increase awareness and expand its distribution network for this product throughout the world. The Company has also received WHO pre-qualification for its export-only version of this product. +OraQuick ® In-Home HIV Test +The OraQuick ® In-Home HIV test is an OTC oral-fluid only version of the Company's OraQuick ADVANCE ® HIV 1/2 Antibody Test. The Company received PMA approval to sell this test in the U.S. OTC market. The In-Home test is performed in the same manner as the OraQuick ADVANCE ® test, except that it has product labeling and instructions designed for consumers. In addition, the Company has established toll-free, 365-day per year customer telephone support to provide additional information and referral services for consumers that use this product. On January 7, 2025, the Company announced that the FDA had approved a premarket approval application supplement for a labeling change to include individuals 14 years of age and older. The previous approval was available for individuals 17 years of age and older. +OraQuick ® HIV Self-Test +The OraQuick ® HIV Self-Test is an in-vitro diagnostic home-use test for HIV (HIV-1 and HIV-2) in oral fluid, and is sold for use by individuals. OraQuick ® HIV Self-Test is sold for use by individuals in certain foreign countries, including under the CE mark in certain European countries, to meet the needs of those markets. This product has received WHO pre-qualification and is eligible for procurement by purchasing entities entitled to access funding and other resources from the Global Fund, PEPFAR and other agencies. +OraQuick ® HCV Rapid Antibody Test and Self-Test +Another test available on the OraQuick ® platform is the OraQuick ® HCV rapid antibody test. This product is a qualitative test that can detect antibodies to the hepatitis C virus (“HCV”), in a variety of sample types. The OraQuick ® HCV test operates in substantially the same manner as the OraQuick ADVANCE ® HIV test. +The Company has received FDA PMA approval and CLIA waiver for use of the test in detecting HCV antibodies in venous whole blood and finger-stick whole blood specimens, making it the first and only rapid HCV test approved by the FDA for use in the United States. The OraQuick ® HCV test has received a CE mark for use with oral fluid, venous whole blood, finger-stick whole blood, plasma and serum and is sold in Europe. This CE-marked product is also registered and sold in other foreign countries and has received WHO pre-qualification. +Additionally, the OraQuick ® HCV Self-Test is an over the counter self-test that operates in substantially the same way as the OraQuick ® HCV rapid antibody test. The OraQuick ® HCV self-test received WHO pre-qualification in 2024 and is the first hepatitis C self-test to earn this designation. +Diagnostics Direct Syphilis Health Check ™ +In February 2024, the Company entered into a strategic agreement with Diagnostics Direct to distribute its Syphilis Health Check ™ rapid diagnostic test. Syphilis Health Check ™ is the first CLIA-waived treponemal test. The test, which uses fingerstick whole blood and delivers point of care results in 10 minutes, offers the ability to test in non-traditional +3 +Table of Contents +environments, such as outreach programs and mobile testing clinics. Syphilis Health Check ™ is approved for use with people aged 13 years and older. +OraQuick ® Ebola Rapid Antigen Test +The Company has received De Novo authorization from the FDA for its rapid Ebola test, making it the first and only rapid Ebola test cleared for sale in the U.S. This product utilizes the OraQuick ® technology platform for the detection of Ebola antigen and can be used with finger-stick and whole blood samples from live patients and oral fluid samples from recently deceased individuals. The uses for this test are limited to individuals that meet certain criteria indicating they may be infected with the Ebola virus, so the test is not available for general screening of individuals that do not meet this criteria. +In September 2022, the Company entered into an agreement with the Biomedical Advanced Research and Development Authority ("BARDA"), pursuant to which BARDA will provide up to $8.6 million in funding to the Company to develop a 2nd generation Ebola test on the OraQuick ® testing platform with the objective of developing increased sensitivity, utilizing sustainable raw materials and increasing shelf life, with new chemistry and higher degrees of automation in the test’s manufacturing process. In September 2023, the agreement was modified to add an additional $6.8 million in funding to be used to obtain the appropriate regulatory approvals for the product. +InteliSwab ® COVID-19 Rapid Test +The InteliSwab ® COVID-19 rapid test ("InteliSwab") is the Company's rapid immunoassay product designed to test nasal samples for the presence of antigen from SARS-CoV-2. The device uses an integrated swab to collect a specimen from the lower nostril. After collection, the integrated swab is inserted into a vial containing a pre-measured amount of developer solution to facilitate flow of the sample into the device. The specimen and developer solution flow through the test device and test results are observable in 30 minutes. The InteliSwab ® test has received an Emergency Use Authorization ("EUA") from the FDA for non-prescription, OTC home use in individuals aged two years or older, with symptoms within the first seven (7) days of onset when tested at least twice over a three-day period with at least 48 hours between tests and without symptoms or epidemiological reasons to suspect COVID-19 when tested at least three times over a five-day period with at least 48 hours between tests. +Through 2024, the Company maintained its expanded United States production capacity for InteliSwab ® tests to meet capacity targets set out in its 2021 contract with the U.S. Department of Defense ("DOD") (in coordination with the U.S. Department of Health and Human Services ("HHS")), of more than 100 million tests annually. +InteliSwab ® COVID-19 Rapid Test Pro +The InteliSwab ® COVID-19 Rapid Test Pro is a version of InteliSwab ® intended for use by healthcare providers at the point of care. The test is performed in the same manner as the OTC version, except that the test is run and interpreted by a healthcare provider. This test has received EUA from the FDA for use by laboratories located in the United States certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). The Company has also received a CLIA waiver for use of the test, which enables the test to be used by numerous additional sites in the United States, which are not certified under CLIA, to perform high and moderately complex tests. These additional sites include outreach clinics, community-based organizations and physicians’ offices. This test is also indicated for individuals aged 2 years and older, with and without symptoms of COVID-19. +InteliSwab ® COVID-19 Rapid Test Rx +The InteliSwab ® COVID-19 Rapid Test Rx is the version of InteliSwab ® that has received EUA from the FDA for prescription home use with individuals aged 2 years or older who are suspected of COVID-19 infection by their healthcare provider within the first seven days of symptom onset. +Intercept ® Drug Testing System +A collection device that is substantially similar to the OraSure ® collection device is sold under the name Intercept ® , and is used to collect oral mucosal transudate for oral fluid drug testing. The Company has received FDA 510(k) clearance to use the Intercept ® collection device with laboratory-based EIAs to test for drugs-of-abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e., tetrahydrocannabinol (“THC” or marijuana), cocaine, opiates, amphetamines/methamphetamines and phencyclidine (“PCP”)), and for barbiturates, methadone and benzodiazepines. +4 +Table of Contents +Each of these EIAs is also FDA 510(k) cleared for use with the Intercept ® device. The Intercept ® device and oral fluid assays are sold in the U.S. primarily through laboratory distributors. +The Company has also developed a next-generation collection device, which it is marketing under the trade name “Intercept i2 ® he ”. This device offers several important advantages over the original Intercept ® device, including a sample adequacy indicator that provides a visual prompt when the appropriate volume of oral fluid has been collected, the ability to collect a larger sample required by current laboratory testing protocols and a more optimized chemistry that results in improved recovery of the targeted drug analytes. The Intercept i2 ® he device is sold as a forensic use only device within the criminal justice and drug treatment markets along with a panel of fully-automated high-throughput oral fluid drug assays that the Company distributes under an agreement with Thermo Fisher Scientific. +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its Intercept ® Drug Testing System products through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Immunoassay Tests and Reagents +The Company develops and sell immunoassay tests in formats, known as MICRO-PLATE and AUTO-LYTE ® , to meet the specific needs of its customers. The Company also sell fully-automated high-throughput oral fluid drug assays developed under its agreement with Thermo Fisher Scientific. +The Company's MICRO-PLATE tests can be performed on commonly used instruments and can detect drugs in oral fluid, urine, serum and sweat specimens. MICRO-PLATE tests are also used as part of the Intercept ® product line to detect drugs-of-abuse in oral fluid specimens and the Company is selling a panel of high-throughput assays supplied by Thermo Fisher Scientific to the U.S. forensic market under the agreement described above. AUTO-LYTE ® tests are sold in the form of bottles of liquid reagents, are run on commercially available laboratory-based automated analytical instruments, and are typically used in high volume, automated, commercial reference insurance laboratories to detect certain drugs or chemicals in urine. +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its immunoassay products through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Genomic Products +The Company sells genomic products that provide all-in-one systems for the collection, stabilization, transportation, and storage of DNA, RNA, as well as both DNA and RNA together from human and animal biological samples. The Company's lead products are sold under the Oragene ® and ORAcollect ® brands and are used to collect genetic material from human saliva. These products are currently sold to thousands of academic research and commercial customers in many countries worldwide. The Company has obtained FDA clearance for its ORAcollect ® and its Oragene ® saliva collection device for general use, including professional and OTC clearances, which allows the Company's commercial partners to use and legally market the device with their assays when used in conjunction with their intended uses. +The Company's genomic products are available in several configurations and contain proprietary chemical solutions optimized for the specific application for which each product is designed. Product physical design is focused on ease-of-use and reliability for self or assisted collection of samples. For example, several of the Oragene ® products require users to hold the product close to their mouth and spit into the collection device. When the container is closed, the reagents stored in the container’s lid are mixed with the captured saliva and stabilize and preserve the nucleic acids in the sample. This non-invasive collection method yields nucleic acid that remains stable at ambient temperature for extended periods. The stabilizing technology ensures the preservation of high quality and high quantity nucleic acids required for many genetic testing and analysis methods. +The Company believes these products provide significant advantages over competing DNA and RNA collection methods such as blood collection or buccal swabs, particularly in human genetic applications. +Benefits include: +• Reliable high-quality and stable genetic samples. +5 +Table of Contents +• Simple, non-invasive collection methods. +• The ability to store and transport collected samples for extended periods at ambient temperatures. +• Compatibility with fully automated laboratory testing systems. +The Company also sells the Colli-Pee ® collection device for the volumetric collection of first void urine samples. This product is used in liquid biopsy applications for the prostate and bladder cancer markets and in the sexually transmitted infection screening market. The Colli-Pee ® collection device is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Microbiome Products +The Company also markets several microbiome collection products designed to collect, stabilize, and transport the microbial profile from multiple sample types. When unstabilized, a microbiome sample can change when exposed to environmental fluctuations, such as temperature changes. The Company's microbiome collection products support collecting and stabilizing metabolites found in fecal samples by capturing and preserving the microbiome after collection until the desired analysis can be performed. +The Company's OMNIgene ® • GUT product is an all-in-one system designed to enable an individual to easily self-collect high-quality microbial DNA from feces or stool samples for gut microbiome profiling for use in the clinical laboratory and research settings. The Company's OMNIgene ® • GUT DNA and RNA collection device is available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. Most current methodologies for gut microbiome profiling have distinct shortcomings due to the introduction of bias, leading to a lack of reproducibility in the field. The Company believes its product ensures that the microbial DNA and RNA in the fecal sample are fully stabilized immediately upon collection and maintains an accurate and reliable bacterial profile for weeks at room temperature. In 2023, the Company's OMNIgene ® • SALIVA DNA and RNA collection device became available to researchers for self-collection of saliva with stabilization of total nucleic acids. The Company's microbiome products also include devices that apply the principles of sample stabilization to other sample types, including oral, skin, and vaginal samples. +The Company's OMNIgene ® •GUT Dx collection device received de novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene ® ·GUT Dx device. +Laboratory and Data Analytical Services +During the third quarter of 2024, the Company exited its microbiome laboratory testing and data analytical services, with the Company continuing to close out limited and modest final service orders. These services focused on accelerating microbiome discovery for customers in the pharmaceutical, agriculture, and research communities. +Other Products +In addition to the products described above, the Company offers the following products: +OraSure ® Collection Device +The Company's OraSure® oral fluid collection device is used in conjunction with screening and confirmatory tests for HIV-1 antibodies and is FDA approved for use in the detection of HIV-1 antibodies. The Company also sells a generic version, which can be used for other analytes. This generic version is a Class I medical device for the detection of cocaine and cotinine in oral fluid specimens for risk assessment testing. +Q.E.D. ® Saliva Alcohol Test +The Company's Q.E.D.® saliva alcohol test is a point-of-care test device that is a cost-effective alternative to breath or blood alcohol testing. The test is a quantitative, saliva-based method for the detection of ethanol, has been cleared for sale by the FDA and has received a CLIA waiver. The U.S. Department of Transportation (“DOT”) has also approved the test. +6 +Table of Contents +In November 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its Q.E.D.® saliva alcohol test through the first half of 2025, it substantially ceased the production and sale of substance abuse testing products as of the end of 2024. +Products Under Development +Diagnostic Products +The Company's research and development efforts include programs targeted at expanding and enhancing its diagnostics business. These programs typically focus on products related rapid tests for various diseases. +The Company is developing a 2 nd generation Ebola test on the OraQuick® testing platform with funds obtained under its contract with BARDA. +The Company is developing a single-use lateral flow immunoassay intended for the qualitative detection of antigens from viruses within the Marburg virus genus. The Company is developing this test and hopes to achieve FDA 510(k) clearance in whole or in part with federal funds obtained from the HHS Administration for Strategic Preparedness and Response (ASPR); BARDA under Other Transaction Number: 75A50123D00005. +Through its Sherlock subsidiary, the Company is developing a molecular self-test for Chlamydia Trachomatis (CT) and Neisseria Gonorrhoeae (NG), which is currently in clinical studies. The Company acquired this program in connection with its acquisition of Sherlock. +Through its Sherlock subsidiary, the Company is also developing of a Covid/Flu molecular test, funded in part with Federal funds obtained from the HHS Administration for Strategic Preparedness and Response (ASPR) under contract number: 75A50124C00055. The Company acquired this program in connection with its Sherlock acquisition. +Sample Management Solutions +In order to intersect evolving customer needs within the academic and commercial markets, the Company's sample management solutions business product development pipeline is focused on extending offerings across different sample types and analytes within both the genomics and microbiome areas. Genomic customers are demonstrating an increasing demand for collection and stabilization of cell-free nucleic acids, exosomes, DNA and RNA. On the microbiome front, the Company continues to focus research and development work on collecting and stabilizing microbial DNA, RNA and metabolites from multiple sample types including gut, skin, vagina and saliva. +The Company is working to develop a blood proteomics product, which, if approved, the Company expects will be used in emerging applications, like liquid biopsy, oncology and neurology, and in connection with chronic illnesses like Alzheimer's and diabetes. +Sales and Marketing +The Company markets its products in the United States and internationally. It attempts to reach major target markets through a combination of direct sales, strategic arrangements and independent distributors. The Company's marketing strategy is to create or raise awareness through a full array of marketing activities, which include trade shows, print advertising, special programs, distributor promotions, telemarketing and the use of digital and social media in order to stimulate sales in each target market. The Company's revenues by geographic area are described in Note 2 of the notes to the consolidated financial statements included in Item 15 of this Annual Report. +Diagnostics - Professional +The Company's InteliSwab ® COVID-19 Rapid Test Pro and Rx products are primarily sold through distributors to U.S. hospitals, physician offices and clinics. These products are also marketed directly to customers in the public health market including clinics and laboratories of state, county and other governmental agencies. +The Company markets the OraQuick ADVANCE ® HIV-1/2 antibody test directly to customers in the public health market for HIV testing. This market consists of a broad range of clinics and laboratories and includes states, counties, and other +7 +Table of Contents +governmental agencies, family planning clinics, colleges and universities, correctional facilities and the military. There are also a number of organizations in the public health market, such as AIDS service organizations and various community-based organizations, that are set up primarily for the purpose of encouraging and enabling HIV testing. The Company sells its OraQuick ADVANCE ® test to hospitals and physician offices in the U.S. primarily through distributors. In addition, the Company distributes its OraQuick ® HIV test in certain foreign countries through distributors. +The OraQuick ® HCV test is sold primarily to the same markets where the OraQuick ADVANCE ® HIV test is sold, including public health organizations, hospitals, physicians and retail clinics. The Company also sells this test in other countries through distributors. +The Syphilis Health Check ™ is a CLIA-waived professional test sold for use by clinicians, community health providers and public health agencies and can be used as an initial screening test or in conjunction with a nontreponemal laboratory test and clinical findings to aid in the diagnosis of syphilis infection. +Diagnostics - OTC and Self-Test +The Company sells its InteliSwab ® COVID-19 Rapid Test product in the U.S. retail and consumer markets, including for purchase by U.S. customers on Walmart's and Amazon’s online stores. The OTC InteliSwab ® test is also sold directly and through distributors into a broad range of business-to-business (B2B) markets including employer testing, colleges and universities, local, state and federal governmental agencies and the U.S. military. +The Company sells its OraQuick ® In-Home HIV test in the U.S. retail or consumer market as well as to the same markets as the OraQuick ADVANCE ® test for use in public health-oriented programs. The product is also available for purchase online through certain retailers and from the Company's website, www.oraquick.com. The Company also sells its OraQuick ® HIV Self-Test in certain international markets. +The Company's OraQuick ® HIV Self-Test is the only oral fluid HIV test prequalified by the WHO and the Company's OraQuick ® HCV Self-Test is the first Hepatitis C self-test prequalified by the WHO. WHO prequalification helps ensure that diagnostic tests for high burden diseases meet global standards of quality, safety, and efficacy in order to optimize use of health resources and improve health outcomes. WHO prequalification enables governmental organizations implementing self-test pilots and programs to access international funding to purchase the Company's test. +Substance Abuse Testing +On November 6, 2024, the Company announced that it intended to exit the substance abuse testing business. Though the Company will continue to fulfill final orders for certain of its substance abuse testing products, it substantially ceased the production and sale of such products as of the end of 2024. The Company's substance abuse testing products are marketed to laboratories serving the workplace testing, forensic toxicology, criminal justice and drug rehabilitation markets in the U.S. and certain international markets. +Sample Management Solutions and Molecular Services +The Company's sample management products are sold directly to customers, primarily through its internal sales force in U.S. markets. However, in many international markets, distributors are used. +Most of the Company's revenues from sample management products are derived from sales to commercial customers and sales into the academic and research markets. The Company's commercial customers provide consumer genetics and clinical diagnostic services and account for a majority of these revenues. A significant portion of total sales are derived from repeat customers in both markets. The Company also has customers in the livestock, companion animal and pharmaceutical markets. +The Company has expanded the market focus of its sample management products by selling certain existing collection products for use in infectious disease testing, including by developing new collection devices for the emerging microbiome market, which is focused on the study of microbial communities and their effect on human health. The Company's primary product offering in the microbiome market, OMNIgene ® •GUT, is focused on the human gut microbiome (microbes living in human stool). The Company is leveraging its existing sales force and global research connections to engage microbiome customers around the world and establish itself as among the leaders in ease-of-collection, stabilization and transport of microbiome communities in a variety of challenging sample types such as stool, skin, vaginal and oral. +8 +Table of Contents +The Company's products include the Colli-Pee ® collection device for the volumetric collection of first void urine. This product is in its early stages and initial sales are occurring primarily through distributors and collaborations for use in the liquid biopsy and sexually transmitted disease markets. The Colli-Pee ® collection device is registered as a class I urine collection device without a claim for preservative. The Colli-Pee ® collection device with preservative solution does not have FDA clearance and is labeled “For Research Use Only” in the U.S. +Significant Products and Customers +Several different product lines have contributed significantly to the Company's financial performance, accounting for 10% or more of its total revenues during the past three years. The table below shows a breakdown of those product lines (dollars in thousands): +For the Years Ended December 31, +2024 2023 2022 +OraQuick® HIV $ 60,804 $ 60,823 $ 38,812 +InteliSwab® 45,136 257,493 233,666 +Genomics 44,861 47,005 54,335 +One non-commercial customer accounted for approximately 24% of the Company's consolidated net revenues for the year ended December 31, 2024 and 63% and 58% for the years ended December 31, 2023 and 2022, respectively. The Company had no other customers that accounted for more than 10% of consolidated net revenues for the years ended December 31, 2024, 2023 and 2022. +Supply and Manufacturing +The Company manufactures its InteliSwab ® COVID-19 Rapid Test, OraQuick ADVANCE ® Rapid HIV test, OraQuick ® In-Home HIV test, OraQuick ® HCV test, OraQuick ® Ebola test, OraSure ® , Intercept ® and Intercept i2 ® he collection devices, AUTO-LYTE ® and MICRO-PLATE assays and Q.E.D. ® saliva alcohol test in its Bethlehem, Pennsylvania facilities. With the exception of its substance abuse testing products, the Company expects to continue to manufacture these products at this location for the foreseeable future. +The Company has contracted with a third party in Thailand for the assembly of the OraQuick ® Rapid HIV test and the OraQuick ® HIV Self-Test in order to supply certain international markets. The Company believes that other firms would be able to assemble these OraQuick ® tests on terms no less favorable than those set forth in the agreement if the Thailand contractor would be unable or unwilling to continue assembling this product. The Company has long-term agreements in place for the contract manufacturing in Thailand and one of its suppliers, which has been pre-qualified by the WHO, has been manufacturing for the Company for the past 20 years. +The Company can purchase the HIV antigens, the nitrocellulose and certain other critical components, and the HCV and Ebola antigens used in its OraQuick ® product lines only from a limited number of sources. If for any reason these suppliers are unwilling or no longer able to supply the Company's antigen or nitrocellulose needs, the Company believes that alternative supplies could be obtained at a competitive cost. However, a change in any of the antigens, the nitrocellulose or other critical components used in the Company's products would require FDA approval and some additional development work. This in turn could require significant time to complete, increase costs and disrupt the Company's ability to manufacture and sell the affected products. +The Company manufactures all of the proprietary chemistry and assay cards for its InteliSwab ® COVID-19 Rapid Tests in its Bethlehem, Pennsylvania facilities. The Company significantly scaled up manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests and achieved manufacturing capacity targets under its 2021 contract with the U.S. DOD, in coordination with the HHS. The Company's Opus Way facility was customized to accommodate increased manufacturing capacity. Throughout 2024, the Company made progress on consolidating its manufacturing footprint by using the Opus Way facility for a more significant portion of its manufacturing and distribution needs, including re-shoring of capacity to the United States. +The Company's MICRO-PLATE and AUTO-LYTE ® assays require the production of highly specific and sensitive antibodies corresponding to the analyte of interest. Substantially all the Company's antibody raw materials are provided by +9 +Table of Contents +contract suppliers. The Company believes that it has adequate reserves of antibody supplies and that it has access to sufficient raw materials for these products. +DNAG has three long-term contract manufacturing relationships to supply virtually all of its products, including the Oragene ® product line. Many of the raw materials and components used in these products are also purchased from third parties, some of which are purchased from a single source supplier. The Company is actively seeking to qualify other suppliers that can manufacture and supply the raw materials and components for the DNAG products. All DNAG products are produced in Canada and the United States. +The Company's Colli-Pee ® device is currently being manufactured in Canada by its existing contract manufacturers with components supplied by third party vendors. +Human Capital Resources +In order to achieve the Company's goals and expectations, it is crucial that it continues to attract and retain top talent. To facilitate talent attraction and retention, the Company strives to be a safe and rewarding workplace with opportunities for its employees to grow and develop in their careers. +As of December 31, 2024, the Company had 501 full-time employees, which compares to 638 employees as of December 31, 2023. The decrease in employees during 2024 was the result of the need to reduce manufacturing capacity for the Company's InteliSwab ® COVID-19 Rapid Test, transition away from the microbiome molecular sequencing services business and close its Belgian operations. In addition, the Company exited its risk assessment business. The Company's employees are not currently represented by a U.S. collective bargaining agreement. +The Company believes its employees are among its most important resources and are critical to its continued success. The Company focuses significant attention on attracting and retaining talented and experienced individuals to manage and support its operations, and its management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. +The health and safety of the Company's workforce is fundamental to the success of its business. The Company safeguards its people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering its work responsibly and sustainably. The Company provides its employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function. +As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive compensation and benefits programs for its employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan or other savings plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs. +The OraSure family of companies is committed to creating and fostering an inclusive workplace that reflects and contributes to the global communities in which it does business and the customers and partners it serves. This includes all communities impacted by its corporate presence. The Company's management team and all of its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of the Company's employees must adhere to a Code of Business Conduct and Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination. The Company strives to recruit the best people for the job regardless of gender, ethnicity or other protected trait and it is Company policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. The Company has an active "All Means You" council that strives to drive inclusion and belonging within the workplace. OraSure believes a variety of perspectives are critical to achieving success, and that inclusion and belonging are key drivers to growth-based innovation and profitability. The Company aims to create a culture where all people feel valued, supported, and inspired to be themselves authentically and fearlessly. The Company believes that when all voices are heard, it honors and exemplifies its core values and best serves its communities. +10 +Table of Contents +Competition +The diagnostic industry is a multi-billion dollar international industry and is intensely competitive. Many of the Company's competitors are substantially larger than the Company, and have greater financial, research, manufacturing and marketing resources. The Company has many rapid tests with proprietary features enabling them to compete effectively in select market segments. Broadly, the Company differentiates based on its tests’ ease of use, which has enabled it to expand its self-testing offering. +The primary competitive factors for the Company's products include price, quality, performance, ease of use, customer service and reputation. Industry competition is based on these and the following additional factors: +• Scientific and technological capability; +• Proprietary know-how; +• The ability to develop and market products and processes; +• The ability to obtain FDA or other regulatory approvals; +• The ability to manufacture products that meet applicable FDA or other applicable regulatory requirements; +• Commercial execution and strength of distribution; +• Access to adequate capital; +• The ability to attract and retain qualified personnel; and +• The availability of patent protection. +A few large corporations produce a wide variety of diagnostic tests and other medical devices and equipment. A larger number of mid-size companies generally compete only in the diagnostic industry and a significant number of small companies produce only a few diagnostic products. As a result, the diagnostic test industry is highly fragmented and segmented. This enables the Company to serve specific segments where the products provide a unique benefit. +The future market for diagnostic products is expected to be characterized by greater cost consciousness, the development of new technologies, tighter reimbursement policies and consolidation. The purchasers of diagnostic products are expected to place increased emphasis on lowering costs, reducing inventory levels, obtaining better performing products, automation, service and volume discounts. +The Company expects competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render the Company's products impractical, uneconomical or obsolete. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective than those it develops or that would render its technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that the Company's competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them, before the Company can do so. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. +Competition in the U.S. market for infectious disease testing in medical settings is intense and is expected to increase. The Company's principal competition for HIV testing in the professional market comes from existing and new professional point-of-care rapid blood tests and automated laboratory-based blood tests. The Company's OraQuick ADVANCE ® rapid HIV test is the only OTC oral fluid test for HIV in the United States, and as such, enables outreach testing outside of clinics. The Company's OraQuick ® rapid HCV test competes against laboratory-based blood tests in the U.S., as there currently are no other rapid HCV testing products approved by the FDA. +The Company's OraQuick ® In-Home HIV oral fluid test is the only rapid HIV test approved by the FDA for sale in the U.S. OTC market. +Outside the U.S., the Company's rapid HIV and HCV tests compete against other rapid and laboratory-based tests, which require blood as a sample. The majority of these blood-based tests are priced at or below OraSure's HIV and HCV rapid oral fluid tests. There are no other oral fluid tests for HCV outside the U.S. with WHO Prequalification status and the CE mark. The majority of the Company's sales outside the U.S. are in Africa due to the greater incidence of HIV in that region. +11 +Table of Contents +The Company's OraQuick ® HIV Self-Test is CE marked, which enables it to participate in the European OTC market for HIV. +The United States COVID-19 rapid testing market consists of tests used by medical professionals at the point-of-care as well as OTC tests purchased and used by consumers. There are numerous professional point-of-care tests, OTC Antigen rapid tests and OTC rapid molecular tests authorized under EUA by the FDA. The Company's InteliSwab ® test competes in both the professional point-of-care and OTC segments with these products. +The Company's Oragene ® and ORAcollect ® collection systems compete against other types of collection devices used for molecular testing, such as blood collection devices and buccal swabs, which often are sold for prices lower than the prices charged for the Oragene ® and ORAcollect ® products. Although the Company believes the Oragene ® and ORAcollect ® devices offer a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in pricing and profit margin. The Company's Oragene ® and ORAcollect ® products are also facing increasing competition from similarly designed collection systems which have entered the market. +OMNIgene ® • GUT is being sold in the emerging microbiome market and competes with a variety of non-standard in-house solutions developed by various researchers, including simply freezing the sample after collection. The microbiome market is expected to require standardization in the methods used for collection and stabilization in order to derive more accurate and repeatable results. To date, the Company is one of the few vendors to offer a solution that fully meets these requirements. +The Company's genomic, microbiome and metatranscriptomics laboratory service offerings primarily compete against a number of commercial reference laboratories, specialty laboratories and hospital laboratories in the U.S. +Patents and Proprietary Information +The Company seeks patents and other intellectual property rights to protect and preserve its proprietary technology and its right to capitalize on the results of its research and development activities. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for its products in its markets and to accelerate new product introductions. The Company regularly searches for third-party patents in fields related to its business to shape its own patent and product commercialization strategies as effectively as possible and to identify licensing opportunities. United States patents generally have a maximum term of 20 years from the date an application is filed. +The Company has patents throughout its product lines. Its patent portfolio includes pending applications and issued patents in diagnostics and testing, sampling tools and sample preservatives. The Company's portfolio protects its innovative sampling tools, sample preservatives, and diagnostics that provide access to accurate, essential information that advances global health and well-being. +The Company has numerous foreign patents for its collection devices and technology relating to oral fluid collection, containers for oral fluids, methods to test oral fluids, and methods to control the volume of oral fluids collected and dispersed. +Sampling tools are the subject of several other patents and pending applications, including U.S. and international utility patent applications directed to a new oral fluid collection device. The international applications entered their national phase in countries throughout the world beginning in October 2023. Patents issuing from these applications are expected to expire in March 2042. +The Company has U.S. and international PCT patent applications that are directed to a new developer solution vial for use with sampling and assay devices. The international application entered its national phase in countries throughout the world in May 2023 and patents issuing from these applications are expected to expire in December 2041. One related design patent is issued in the U.S. and will expire in November 2038, and other related design patent applications are pending in the U.S., Canada, and Europe. +The Company has additional pending applications directed to new direct sample collection pads for its InteliSwab ® COVID-19 Rapid Test. These applications entered their national phase in countries throughout the world in October 2023, and patents issuing from these applications will expire in December 2042. Two related design patents issued in 2022 in the +12 +Table of Contents +U.S. and corresponding design applications were registered in Canada, China, India, and Europe. These design patents will expire 2038 and 2039. +The Company has registered design patents for a collection funnel and corresponding plunger device in Europe, Canada China, India, and the U.S. +The Company has two international families of patent applications filed in the United States and in numerous countries worldwide. These applications are directed to novel nucleoside reverse transcriptase inhibitor-specific antibodies for use in assays to detect the presence of nucleoside reverse transcriptase inhibitor drug derivatives, including tenofovir, in fluid samples. Patents issuing from these applications will expire in October 2038 and December 2040. +The Company holds, through its subsidiary, DNAG, nineteen granted United States patents and numerous foreign patents issued for compositions, methods and apparatuses for the collection, stabilization, transportation, and storage of nucleic acids (DNA and RNA) from oral fluid and other bodily fluids and tissues. Certain patents expired in June 2023, and others will expire through November 2040. +The Company holds one granted United States patent and numerous foreign patents covering a medical device for capturing a predetermined volume of first void urine. This patent expires in April 2034. The Company has also applied for additional patents and designs, in both the United States and certain foreign countries, in novel urine collection devices. +The Company requires its employees, consultants, outside collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain consultants, the agreements also provide that all inventions conceived by the individual during his or her tenure with the Company or the performance by the consultant of services for the Company will be OraSure's exclusive property. +The Company owns rights to trademarks and service marks that it believes are necessary to conduct its business as currently operated. In the United States, the Company owns a number of trademarks, including the OraSure ® , Intercept ® , Intercept i2 ® he, Intercept i2 he ® , OraQuick ® , OraQuick ADVANCE ® , ORASURE QUICKFLU ® , SUREQUICK ® , Q.E.D. ® , InteliSwab ® , Oragene ® , DNA Genotek ® , OMNImet ® , ORAcollect ® , OMNIgene ® , Diversigen ® , CoreBiome ® , Boostershot ® , MetaGene ® , Benchmark ® , Novosanis ® , Colli-Pee ® , UCM ® , UAS™, THINK OUTSIDE THE CUP ® , AUTO-LYTE ® , prepIT ® , and HEMAgene ® trademarks. The Company also licenses the SHERLOCK™ mark from The Broad Institute, Inc. The Company also owns many of these marks and others in several foreign countries and it is pursuing registration of several other trademarks. +Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of the Company's business. Competitors may be able to produce products competing with the Company's patented products without infringing its patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent or trademark can be challenged by litigation after its issuance or registration. If the outcome of such litigation is adverse to the owner of the patent, the owner’s rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. +Government Regulation +General +Most of the Company's products are regulated by the FDA, along with other federal, state and local agencies and comparable regulatory bodies in other countries. This regulated environment governs almost all aspects of development, production and marketing, including product design and testing, authorizations to market, labeling, advertising and promotion, manufacturing, distribution, post-market surveillance and reporting, and recordkeeping. The Company believes that its products and procedures are in material compliance with all applicable regulations, but the regulations regarding the manufacture and sale of its products may be unclear and are subject to change. The Company cannot predict the effect, if any, that these changes might have on its business, financial condition or results of operations. +13 +Table of Contents +Many of the Company's FDA-regulated products require some form of review and action by the FDA before they can be marketed in the United States. After approval or clearance by the FDA, the Company must continue to comply with other FDA requirements applicable to marketed products and is subject to periodic inspections by the FDA and other regulatory bodies. Both before and after approval or clearance, failure to comply with the FDA’s requirements can lead to significant penalties or could disrupt the Company's ability to manufacture and sell these products. In addition, the FDA could refuse permission to obtain certificates needed to export the Company's products if the agency determines that it is not in compliance. +Domestic Regulation +Most of the Company's products are regulated in the United States as in vitro diagnostic and medical devices. In the United States, devices are classified into three groups based on risk: class I (lowest risk), class II (moderate risk), and class III (highest risk). The classification of a device determines the level of regulation applicable to the device: class I devices are subject only to the general controls that are applicable to all regulated devices; class II devices are subject to both general controls and special controls, which are specific to the type of device; and class III devices are subject to general controls and any other controls that are needed to provide reasonable assurance of the safety and effectiveness of the specific device. +The classification of the device also influences the type of premarket submission that is required before the device can be marketed. Some low risk devices (including many class I and some class II devices) may be placed on the market without any premarket submission. Such devices often are referred to as “exempt” or “510(k)-exempt.” Most devices, however, require some form of premarket submission prior to marketing. There are several mechanisms by which such devices can be placed on the market in the United States, including 510(k)-clearance, De Novo classification, premarket approval, or EUA. +Many class II devices and some class I devices may qualify for clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the "FDCA"). To obtain this clearance from the FDA, the manufacturer must submit to the FDA a premarket notification that it intends to begin marketing the product, and show that the product is substantially equivalent to another legally marketed predicate device (i.e., a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been reclassified by the FDA; or a device that the FDA previously has determined to be exempt from the 510(k) process). To be substantially equivalent, an applicant must show that when compared to a predicate, the new device has the same intended use and same technology, or if different technology, that the new device is as safe and effective as the predicate and does not raise different questions of safety and effectiveness. In all cases, data from some form of performance testing is required and in some cases, the submission must include data from human clinical studies. An applicant must submit a 510(k) notification at least 90 days before commercial distribution of the product commences. Marketing may only commence when the FDA issues a clearance letter finding that the new device is substantially equivalent to the predicate device. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. Although FDA clearance usually takes from four to twelve months, in some cases more than a year may be required before clearance is obtained, if at all. +If the device does not qualify for the 510(k) procedure, either because there is no existing predicate device, it is not substantially equivalent to a legally marketed predicate device or because it is classified by the FDA as a class III device, the FDA must approve either a PMA application or for devices that are low to moderate risk, grant a request for De Novo classification before marketing can begin. A De Novo classification is an alternate pathway to classify novel devices of low to moderate risk for which no substantially equivalent predicate device exists into class I or class II. The FDA’s goal is to decide a De Novo request in 150 days from the time the request is received, although it can take longer. +PMAs generally are required for class III devices, i.e., high risk devices, and must demonstrate, among other matters, that the medical device provides a reasonable assurance of safety and effectiveness for the intended use(s) of the device. A PMA is typically a complex submission, supported by valid scientific evidence, including the results of preclinical and clinical studies, usability data, detailed information about the manufacturing process for the device, and other data and information. Preparing a PMA is a resource-intensive and time-consuming process. Once a PMA has been submitted, the FDA is required to review the submission within 180 days. However, the FDA’s review may be, and often is, much longer, in many cases requiring one to three years or more, and may include requests for additional data, review by an independent panel of experts, and facility inspections before approval is granted, if at all. +If the FDA approves the PMA, it may place restrictions on the device. If the FDA’s evaluation of the PMA or the manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” +14 +Table of Contents +letter. The FDA may also require additional clinical trials, which can delay the PMA approval process by several years or prevent a PMA approval from being obtained. +If the FDA discovers that an applicant has submitted false or misleading information in any application or notification, the FDA may take action against the applicant and its employees or refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. +Another option for marketing a product in the U.S. is through an EUA. The FDA may grant an EUA for a product if the Secretary of Health and Human Services declares that circumstances exist justifying the authorization of emergency use of certain products. Such declaration may be made, amongst other reasons, following a determination by the Secretary of Health and Human Services that there is a public health emergency or a significant potential for a public health emergency, by the Secretary of Homeland Security that there is a domestic emergency, or by the Secretary of Defense that there is a military emergency, or the declaration may be made if a material threat is identified under a particular provision of the Public Health Service Act. Typically, a diagnostic device may receive EUA-authorization on the basis of analytical and clinical studies that do not satisfy the requirements for full clearance or approval. Devices also may be exempt from design controls and other quality requirements. An EUA for a device remains in effect until the Secretary of Health and Human Services, in consultation with the Secretary of Defense, determines that the circumstances justifying emergency use of the device no longer exist, or until the authorized device is approved or cleared. +If there are any modifications made to the Company's marketed devices, a new premarket notification, PMA supplement, or request to change an EUA may be required to be submitted to, and cleared, approved, or authorized by, the FDA, before the modified device may be marketed. +A new PMA or a PMA supplement is required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s intended use(s), manufacturing process, manufacturing facility, critical components, labeling and design. Likewise, a new 510(k) clearance is required for any modification that could significantly affect the safety or effectiveness of the device, e.g. a significant change or modification in design, material, chemical composition, energy source, or manufacturing process or a major change or modification in the intended use(s) of the device. +A clinical trial may be required in support of a 510(k) submission and generally is required for a De Novo request or PMA application. These trials generally require an approved application for an Investigational Device Exemption (“IDE”) and compliance with other IDE requirements, unless the proposed study is deemed to be exempt from the IDE requirements. An IDE application must be supported by appropriate data, such as laboratory testing results, protocols for the proposed investigation, and other information demonstrating that the device is appropriate for use with humans in a clinical study. Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trial(s) support the ultimate approval or clearance of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the requirement that informed consent be obtained from each subject, and with clinical trial reporting regulations that require submission of information on certain clinical trials to a database maintained by the National Institutes of Health. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the United States. If a study meets the requirements for a non-significant risk study, however, it may be eligible for compliance with “abbreviated” IDE requirements, which include a subset of the requirements applicable to significant risk medical device studies. A non-significant risk study also will be considered to have an approved IDE application without such application actually being submitted to FDA. +Some of the Company's products are used for research only or for other nonclinical or non-diagnostic purposes. The Company's sample management solutions are sold to many academic and research institutions for research purposes and the Company's drugs-of-abuse products are sold to laboratories and clinics for forensic or other non-medical uses. The FDA does not currently regulate products used for these purposes, although other state and federal regulatory requirements may apply. +15 +Table of Contents +Most devices distributed in the United States must comply with the FDA’s Quality System Regulations (“QSRs”), including current good manufacturing practices. These regulations govern the entire life cycle of a medical device, including design, manufacture, testing, release, packaging, distribution, documentation and purchasing as well as complaint handling, corrective and preventative actions, and internal auditing. In complying with the QSRs, manufacturers must continue to expend time, money and effort in the area of production, quality, and post-market surveillance to ensure full compliance. +Companies that market devices are also subject to other post-market and general requirements, including product listing and establishment licenses, which help facilitate FDA inspections and other regulatory action, post-market surveillance requests, restrictions imposed on marketed products, promotional standards and requirements for recordkeeping and reporting of certain adverse reactions and device malfunctions. Device reporting regulations require that manufacturers report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. +The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. +In February 2024, the FDA issued the Quality Management System Regulation (“QMSR”) Final Rule to amend the QSR, incorporating by reference the international standard for medical device quality management systems set by the International Organization for Standardization (“ISO”), ISO 13485:2016. The rule will become effective on February 2, 2026. Until then, manufacturers are required to comply with the QSR. The Company believes that its facilities and procedures are in material compliance with the FDA’s QSR requirements, the European Union's Quality Management Systems requirements, ISO 13485:2016, and other post-market requirements, but the regulations are subject to change or may be unclear, and the Company cannot be sure that FDA investigators will agree with the Company's compliance with the FDA’s post-market requirements. +CLIA prohibits any facility that conducts laboratory testing on specimens derived from humans from providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of, the health of human beings, unless there is in effect for such facility a certificate issued by the U.S. Department of Health and Human Services or an accredited organization, and such certificate is applicable to the category of examination or procedure performed. Tests may be categorized as “waived,” enabling them to be used by laboratories with the lowest level of CLIA oversight if the tests meet certain requirements established under CLIA. The Company considers the applicability of CLIA requirements in the design and development of its products. The Company has obtained a waiver of the CLIA requirements for its OraQuick ADVANCE ® rapid HIV-1/2 antibody test, its OraQuick ® HCV rapid antibody test and its Q.E.D. ® alcohol saliva test and may seek similar waivers for certain other products. The InteliSwab ® COVID-19 Rapid Test Pro is authorized for use in patient care settings operating under CLIA Certificate, Certificate of Compliance and Certificate of Accreditation. +Certain of the Company's products may also be affected by state regulations in the United States, which can restrict the use and sale of certain diagnostic products. +Advertising and Promotion +Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by other federal and state regulatory and enforcement authorities, including the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, and various state attorneys general. Although physicians are permitted to exercise medical judgment to use medical devices for indications other than those cleared or approved by the FDA, the Company may not promote its products for such “off-label” uses and can only market its products for cleared or approved uses. Promotional activities for FDA-regulated products of other companies have also been the subject of enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that the Company's promotional materials or training constitute promotion of an uncleared or unapproved use, it could request that the Company modify its training or promotional materials or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a notice +16 +Table of Contents +of violation, a warning letter, injunction, seizure, civil fine or criminal penalties. Federal Trade Commission enforcement actions often result in consent decrees that constrain future actions. Department of Justice prosecutions can result in significant criminal and civil penalties, including exclusion from the Medicare and Medicaid programs. If an enforcement action is brought by the FDA or Federal Trade Commission, the Company's reputation could be damaged and sales of its products could be impaired. +Import and Export Requirements +Products for export from the United States are subject to foreign countries’ import requirements and the exporting requirements of the FDA, as applicable. In particular, international sales of medical devices manufactured in the United States that are not approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. +Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate for Foreign Government (“CFG”). To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that the manufacturing facilities were in compliance with QSR regulations at the time of the last FDA inspection. If the FDA determines that the Company's facilities or procedures do not comply with the QSR regulations, it may refuse to provide such certificates until the Company resolves the issues to the FDA’s satisfaction. Failure to obtain a CFG could inhibit the Company's ability to export its products to countries that require such certificates. +International +The Company is also subject to regulations in foreign countries governing products, human clinical trials and marketing, and may need to obtain approval (or pre-qualification or endorsement) from local regulators in such countries or international public health agencies, such as the World Health Organization, in order to sell products in certain countries. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. The Company generally pursues approval only in those countries that the Company believes have a significant market opportunity. +The International Organization for Standardization (“ISO”) is a worldwide federation of national standards bodies. ISO 13485 certification indicates that the Company's quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution. +The EU Medical Devices Regulation (EU) 2017/745 (the “EU MDR”) and the In Vitro Diagnostic Medical Devices Regulation (EU) 2017/746 (the “EU IVDR”), which repealed and replaced the Medical Devices Directive 93/42/EEC (“MDD”) and the In Vitro Diagnostic Medical Devices Directive 98/79/EC (“IVDD”) respectively, govern the regulation of medical devices and in vitro diagnostic devices in the European Union (“EU”). The EU MDR and EU IVDR impose stricter pre-market and post-market requirements for the marketing and sale of medical devices and in vitro diagnostic medical devices than the previous Directives, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The EU IVDR became fully applicable on May 26, 2022. There is a transitional period (which was extended in July 2024) during which products that have a declaration of conformity issued under the IVDD prior to May 26, 2022 may continue to be placed on the EU market for a certain period before requiring certification under the EU IVDR (subject to compliance with certain requirements under the EU IVDR, including in respect of post-market surveillance); however, class A non-sterile products do not benefit from such transitional provisions and have been required to be EU IVDR compliant since May 26, 2022. The transition deadline for other classes of devices ranges between December 21, 2027 and December 31, 2029, provided certain transitional activities are performed by earlier deadlines (e.g. the manufacturer must sign a formal written agreement with a notified boy for assessment under the EU IVDR). +In the EU, products that fall under the scope of the MDR and the EU IVDR may not be placed on the EU market without a valid CE mark. Approval of a regulatory authority is not required to obtain CE certification, but, depending on the class of product, conformity assessment by a notified body may be required. Notified bodies are accredited and supervised by national regulatory authorities to conduct conformity assessment procedures of medical devices or other products. The conformity assessment procedure for medical devices and in vitro diagnostic devices is to assess whether the device is compliant with the general safety and performance requirements set forth in the EU MDR or EU IVDR (as applicable), and includes an examination of the product’s technical dossier and the manufacturer’s quality system. ISO certification of the quality system in accordance with the relevant standard for medical devices or in vitro diagnostic devices creates a rebuttable presumption that the product satisfies the applicable requirements of the EU MDR or EU IVDR (as applicable) +17 +Table of Contents +with respect to the quality management system. Compliance with these general safety and performance requirements allows the Company to complete the applicable conformity assessment procedure, involving a notified body where necessary, and to affix the CE mark to its products, without which they may not be placed on the market in the EU. The Company also notes that from January 1, 2021, the United Kingdom (“UK”) has introduced a UK-specific route to market for medical devices. Compliance with these requirements may add further complexities to the Company's international strategy. +The Company must also comply with certain registration and licensing requirements as dictated by Health Canada, prior to commencing sales in Canada. The Company has completed this process for several of its current products and may do so with respect to other products in the future. In addition, Canadian law requires manufacturers of medical devices to have a quality management system that meets various ISO requirements in order to obtain a license to sell their devices in Canada. Health Canada also requires all companies that market Class II, Class III and Class IV products in Canada to be certified as part of the Medical Device Single Audit Program ("MDSAP"). +The Company has obtained WHO pre-qualification for its OraQuick ® HIV-1/2 Antibody Test, OraQuick® HIV Self-Test, OraQuick ® HCV Rapid Antibody Test, and OraQuick ® HCV Self-Test. +Anti-Kickback and Other Fraud and Abuse Laws +The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce: +• The referral of an individual to a person for the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental healthcare programs; or +• The purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental healthcare programs. +The Company's products are or may be purchased by customers that will seek or receive reimbursement under Medicare, Medicaid or other governmental healthcare programs. Noncompliance with the Federal Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental healthcare programs, and/or restrictions on the Company's ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on the Company's business and results of operations. +The False Claims Act (“FCA”) imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program, including Medicaid and Medicare. A violation of the Federal Anti-Kickback Statute is considered a violation of the FCA. Some suits filed under the FCA, known as “qui tam” actions, can be brought by a “whistleblower” or “relator” on behalf of the government, and such individuals may share in any amounts paid by the entity to the government in fines or settlement. Manufacturers can be held liable under false claims laws, even if they do not submit. +The Beneficiary Inducement provisions of the Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil monetary penalties for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs. +Many states have also adopted some form of anti-kickback laws and false claims laws. A determination of liability under such laws could result in fines and penalties, restrictions on the Company's ability to operate in these jurisdictions and significant damage to its reputation. +The Company is also subject to other federal and state laws targeting fraud and abuse in the healthcare industry, including marketing conduct laws, transparency laws, and laws that require the Company to adopt a compliance program. Taken together, these fraud and abuse laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, such manufacturers can enter into with physicians, hospitals, laboratories and other potential purchasers of medical devices. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in government healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application. In recent years, there has been greater scrutiny of marketing practices in the +18 +Table of Contents +medical device industry which has resulted in several government investigations by various government authorities and the introduction and/or passage of federal and state legislation regulating interactions between medical device manufacturers and healthcare professionals and providers and requiring the disclosure by medical device manufacturers of payments to certain healthcare providers. For example, under the Physician Payments Sunshine Act provisions of the Affordable Care Act, device manufacturers are subject to federal reporting and disclosure requirements with regard to payments or other transfers of value made to U.S. physicians, certain other licensed health care practitioners, and teaching hospitals. Reports submitted under the Sunshine Act are placed in a public database. Device manufacturers are required to submit annual reports by March 31 which cover the prior calendar year. To be in compliance with such disclosure laws, the Company has implemented necessary systems to accurately track gifts and other payments. +The Company has implemented a written Policy on Interactions with Health Care Professionals, which is based on the Code of Ethics for Interactions with Health Care Professionals promulgated by the Advanced Medical Technology Association, (the "AdvaMed"), a leading trade association representing medical device manufacturers. The Policy applies to all employees and is intended to comply with applicable state and federal laws, regulations and government guidance. The Policy addresses interactions related to sales and marketing practices, research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. While the Company believes that its practices are in compliance with the Anti-Kickback and other fraud and abuse laws, the standards for compliance with such statutes can be unclear and subject to change. +Foreign Corrupt Practices Act and Other Anti-Corruption Laws +The U.S. Foreign Corrupt Practices Act (“FCPA”), to which the Company is subject, prohibits corporations and individuals from engaging in bribery and corruption when dealing with foreign government officials and foreign political parties. It is illegal to corruptly offer, pay, promise, or authorize the giving of anything of value to any officer or employee of a foreign government or public international organization, political party, political party official, or political candidate, in an attempt to obtain or retain business or to otherwise improperly influence a person working in an official capacity on behalf of a foreign government or public international organization. The Company's present and future business has and will continue to be subject to the FCPA and various other laws, rules and/or regulations applicable to the Company as a result of its international sales. The Company is also subject to the FCPA’s accounting provisions, which require it to keep accurate books and records and to maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the Company's assets. The failure to comply with the FCPA and similar laws could result in civil or criminal sanctions or other adverse consequences. +The laws to which the Company is subject as a result of its international sales also includes the U.K. Bribery Act 2010 (the “Bribery Act”), which proscribes giving and receiving bribes in the public and private sectors, bribing a foreign public official, and failing to have adequate procedures to prevent employees and other agents from giving bribes. U.S. companies that conduct business in the United Kingdom generally will be subject to the Bribery Act. Penalties under the Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers under certain circumstances. +Environmental Regulation +Because of the nature of the Company's current and proposed research, development, and manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge and handling and disposal of solid wastes, hazardous materials and hazardous wastes. Products that the Company sells in Europe are subject to regulation in EU markets under the Directive on the Restriction of the Use of Certain Hazardous Substances (“RoHS”). RoHS prohibits companies from selling electrical and electronic equipment, such as electronic medical devices, that contain certain hazardous materials, including lead, mercury, cadmium, chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in the EU Member States. In addition, the EU’s Regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) imposes severe restrictions and requirements on companies marketing devices in the EU. Among other things, REACH requires companies to obtain prior authorization to use substances of very high concern that are listed for authorization, and imposes bans on the marketing of products that contain specifically listed hazardous substances. Companies marketing medical devices in the EU may also be subject to expensive waste take back obligations under the EU Directive on Waste Electrical and Electronic Directive, the Packaging and Packaging Waste Directive, and the Batteries Directive. +Future environmental laws, rules, regulations or policies may require the Company to alter its manufacturing processes, thereby increasing its manufacturing costs, or may impose other additional obligations on the Company or its products. The Company believes that its products and manufacturing processes at its facilities comply in all material respects with +19 +Table of Contents +applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated. +The foregoing discussion of the Company's business should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 15 of this Annual Report. +Information Available on the Internet +The Company's filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available on the Company's website (www.orasure.com) free of charge as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the SEC at its website (https://www.sec.gov). The information contained on the Company's website is not a part of this Annual Report. +20 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/item13.txt b/raw/filings/0001116463/2024/0001116463-25-000010/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..ee814c6bf425bf63d9b91a8c208fe78eb53933ab --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this Item 13 will be included in the Company's 2025 Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/item9a.txt b/raw/filings/0001116463/2024/0001116463-25-000010/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a2b671ba32bc962f390c0ea3aba38e8588c601a5 --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/item9a.txt @@ -0,0 +1,29 @@ +ITEM 9A. Controls and Procedures. +(a) Evaluation of Disclosure Controls and Procedures . +The Company’s management, with the participation of the Company’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Accounting Officer (CAO), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2024. Based on that evaluation, the Company’s management, including such officers, concluded that as of December 31, 2024 the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. +(b) Management’s Report on Internal Control Over Financial Reporting. +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the Company’s management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework, management concluded that the Company's internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2024. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +The Company acquired Sherlock Biosciences, Inc. and its wholly owned subsidiaries om December 19, 2024, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2024, the acquired company representing approximately 4% of total assets, excluding intangible assets and goodwill related to the acquisition and 0% of total revenue of the Company as of and for the year ended December 31,2024. Management plans to fully integrate the operations of these businesses into the assessment of the effectiveness of the Company's internal control over financial reporting in 2025. +The effectiveness of the Company's internal control over financial reporting as of December 31, 2024 has been audited by GRANT THORNTON LLP, an independent registered public accounting firm, as stated in their report, which is included below. +(c) Changes in Internal Control Over Financial Reporting . +There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +(d) Report of Independent Registered Public Accounting Firm . +Board of Directors and Stockholders +OraSure Technologies, Inc. +68 +Table of Contents +Opinion on Internal Control Over Financial Reporting +We have audited OraSure Technologies, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2024, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2024, and our report dated March 7, 2025 expressed an unqualified opinion on those financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Sherlock Biosciences, Inc., a wholly-owned subsidiary, whose financial statements reflect total assets, excluding intangible assets and goodwill related to the acquisition, and revenues constituting 4 percent and 0 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2024. As indicated in Management’s Report, Sherlock Biosciences, Inc. was acquired during 2024. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Sherlock Biosciences, Inc. +Definition and Limitations of Internal Control Over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. +Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ GRANT THORNTON LLP +Philadelphia, Pennsylvania +March 7, 2025 \ No newline at end of file diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/rp_note.txt b/raw/filings/0001116463/2024/0001116463-25-000010/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001116463/2024/0001116463-25-000010/rpt_disclosure.txt b/raw/filings/0001116463/2024/0001116463-25-000010/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4edda63cf8e6ad82916e37cea32a5b552588030b --- /dev/null +++ b/raw/filings/0001116463/2024/0001116463-25-000010/rpt_disclosure.txt @@ -0,0 +1,5 @@ +TRANSACTIONS WITH RELATED PERSONS +Since January 1, 2024, there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com . +Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. +28 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/filing.txt b/raw/filings/0001641614/2019/0001558370-20-002144/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..47c2764835cabdfdf8625ab3d5a8d05ccf2ebf5c --- /dev/null +++ b/raw/filings/0001641614/2019/0001558370-20-002144/filing.txt @@ -0,0 +1,3048 @@ +10-K +1 +pmts-20191231x10k.htm +10-K +pmts_Current_Folio_10K +Table of Contents +UNITED STATES SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +☑ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 +For the Fiscal Year Ended December 31, 2019 +Or +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the Transition Period from to +Commission File Number 001-37584 +CPI Card Group Inc. +(Exact name of the registrant as specified in its charter) +Delaware +26-0344657 +(State or other jurisdiction of incorporation or organization) +(I.R.S. employer identification no.) +10026 West San Juan Way +Littleton, CO +80127 +( Address of principal executive offices ) +( Zip Code ) +Registrant’s telephone number, including area code (720) 681-6304 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading Symbol(s) +Name of each exchange on which registered +Common Stock, $0.001 par value +PMTS +OTC Markets Group Inc. +NASDAQ Capital Market +Securities registered pursuant to section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes ☐   No ☑ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes ☐   No ☑ +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer ◻ +Accelerated filer ◻ +Non-accelerated filer ☑ +Smaller reporting company ☑ +Emerging growth company ☑ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑ +The aggregate market value of the Registrant’s common stock held by non-affiliates was $11.0 million on June 30, 2019 computed based on the closing sale price of the Registrant’s common stock of $2.50 on NASDAQ on that date. +As of February 20, 2020, the number of shares outstanding of the Registrant’s common stock was 11,224,191. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K . +Table of Contents +TABLE OF CONTENTS +Page +Cautionary Statement Regarding Forward-Looking Information +2 +PART I +Item 1 +Business +3 +Item 1A +Risk Factors +11 +Item 1B +Unresolved Staff Comments +25 +Item 2 +Properties +26 +Item 3 +Legal Proceedings +26 +Item 4 +Mine Safety Disclosures +27 +PART II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +27 +Item 6 +Selected Financial Data +27 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +27 +Item 7A +Quantitative and Qualitative Disclosures About Market Risk +42 +Item 8 +Financial Statements and Supplementary Data +F-1 +Item 9 +Changes In and Disagreements With Accountants on Accounting and Financial Disclosure +43 +Item 9A +Controls and Procedures +43 +Item 9B +Other Information +44 +PART III +Item 10 +Directors, Executive Officers and Corporate Governance +45 +Item 11 +Executive Compensation +45 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +45 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +45 +Item 14 +Principal Accountant Fees and Services +45 +PART IV +Item 15 +Exhibits and Financial Statement Schedules +46 +Index To Exhibits +46 +Signatures +49 +1 +Table of Contents +Cautionary Statement Regarding Forward-Looking Information +Certain statements and information in this Form 10-K (as well as information included in our written or oral statements) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “guides,” “provides guidance,” “provides outlook,” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us, and other information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. +These risks and uncertainties include, but are not limited to: our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facilities and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our limited ability to raise capital in the future; system security risks, data protection breaches and cyber-attacks; failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security, including with respect to possible exposure to litigation and/or regulatory penalties under applicable data privacy and other laws for failure to so comply; interruptions in our operations, including our IT systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; disruptions in production at one or more of our facilities; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement, claims that our technology is infringing on the intellectual property of others, and risks related to open source software; defects in our software; problems in production quality, materials and process; a disruption or other failure in our supply chain; our failure to retain our existing customers or identify and attract new customers; a loss of market share or a decline in profitability resulting from competition; our inability to recruit, retain and develop qualified personnel, including key personnel; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our inability to develop, introduce and commercialize new products; the effect of legal and regulatory proceedings; failure to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market; a continued decrease in the value of our common stock combined with our common stock no longer being traded on a United States national securities exchange, which may prevent investors from investing or achieving a meaningful degree of liquidity; developing technologies that make our existing technology solutions and products obsolete or less relevant or a failure to introduce new products and services in a timely manner; quarterly variation in our operating results; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the PCI Security Standards Council security standards or other industry standards; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business spending; costs relating to product defects and any related product liability and/or warranty claims; maintenance and further imposition of tariffs and/or trade restrictions on, or slow-downs or interruptions in our ability to obtain, goods imported into the United States; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state retailers, and challenges to our income tax positions; our dependence on licensing arrangements; risks associated with international operations; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products; our ability to comply with a wide variety of environmental, health and safety laws and regulations and the exposure to liability for any failure to comply; risks associated with the controlling stockholders’ ownership of our stock; potential conflicts of interest that may arise due to our board of directors being comprised of directors who are principals of our largest stockholder; and other risks that are described in Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”). +We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. +2 +Table of Contents +CPI Card Group Inc. qualifies as a Smaller Reporting Company in accordance with Rule 12b-2 of the Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Form 10-K. +PART I +Item 1. Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States which are audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). This leading network of high-security production facilities allows us to offer solutions that serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +· +the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +· +the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. Businesses not considered part of these segments are considered “Other” and included our operations in Canada prior to the sale and disposition of our Canadian operations and corporate expenses. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and transaction costs, including employee termination costs, the majority of which were expensed in 2018, the sale did not have a significant impact on cash, and no significant loss on sale. The Canadian subsidiary was not a significant operating segment and the results of this business through the transaction closing date have been presented as part of the Other reportable segment. +3 +Table of Contents +On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position, results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to continuing operations. The divestitures of the U.K. and Canada businesses allow us to further optimize our footprint and to better position ourselves to serve customers by focusing on our core businesses. +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a market-competitive business model. This consolidation was completed in 2018. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the U.S. prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. For our instant issuance solutions, our install bases at bank and credit union branches across the United States permit customer integration, and our Card@Once ® instant issuance solution utilizes our secure technology to instantly personalize cards. A significant number of our customers have integrated our proprietary software into their systems to improve the quality of the overall process and to offer card design and customization to their cardholders. We believe this level of integration provides for a longer lasting and closer relationship with our customers. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Compliant Network of High-Security Facilities. Our high-security facilities are each audited and found compliant by one or more of the Payment Card Brands under the PCI Card Security Standards Council, forming a leading network of approved production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly compliance process may serve as a barrier to new entrants into our market. +· +Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a +4 +Table of Contents +global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. For example, in response to customer and market demand, we have introduced CPI Metals T M , a premium metal card, and Second Wave TM payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”) to address customer demands for sustainable card options. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 28 U.S. patents, 19 foreign patents, as well as 26 pending U.S. and foreign patent applications. +· +Experienced Leadership Team. We have built an experienced leadership team that has energized the organization to focus on customers, accountability, innovation, and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countrie s +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our clients elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market- Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their business. We listen to the voice of our customers and focus our energy on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our shareholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed +5 +Table of Contents +customers’ expectations. Continuous innovation is aimed at winning new business and helping our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We have streamlined our operations enabling us to allocate resources aimed at providing our customers with unmatched solutions, innovation and world-class services. We have also developed company-wide standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We have invested in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact, Contactless, and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, including plastic and metal dual-interface EMV cards, which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, as well as retail gift cards (which are not issued on the networks of the Payment Card Brands). +Second Wave TM cards featuring a core made with Recovered Ocean-Bound Plastic +In 2019, we launched Second Wave TM cards which feature a core made with ROBP. Aimed at reducing first-use plastic and diverting plastic waste from entering the ocean, Second Wave includes all forms of EMV Financial Payment Cards (dual-interface, contact, and contactless) and cards for access applications such as travel, ticketing, lodging, and entertainment. Our Second Wave cards have been approved by two of the major payment brands. Second Wave offers a seamless cardholder experience that aligns with broader consumer values and helps support sustainability initiatives by providing companies across multiple segments of the card industry with a simple, effective, and more environmentally-friendly solution. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the +6 +Table of Contents +fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, a contactless RFID, or a dual-interface EMV card, and personalizes the card on a desktop output terminal. These processes are audited for PCI Data Security Standard compliance annually. Our instant issuance system generates both system sales and recurring revenue from card personalization and sales of cards and consumables. +CPI On-Demand TM Solutions +Through our CPI On-Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution customers and will enable us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +Adaptives +While not currently significant to our financial results, during 2019 we launched Adaptives, an EMVCo certified chip and antenna personalization technology. This technology is one of the smallest and most flexible available, allowing for versatility and use across a wide variety of form factors. Adaptives’ embedded contactless technology can be integrated into portable, wearable or non-wearable devices, or other objects allowing consumers to transact payments. Consumers simply tap or wave the object at contactless-enabled point-of-sale terminals to purchase products or services, gain access to events, or to pay for and board transit systems. +Digital Services +While not currently significant to our financial results, we are investing in digital services and payments technologies, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV/ dual-interface microchip and antenna. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in Germany, Thailand, South Korea, France, and Singapore, primarily on a purchase order basis. Our main suppliers of EMV/ dual-interface microchips and antenna include four leading international manufacturers. Approximately 91% of our purchased microchips for the year ended December 31, 2019 came from these four main suppliers. The other key components for our products are substrates (such as PVC), and inlays which we also source from multiple suppliers. We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. We generally purchase inventory to fulfill customer purchase orders. In addition, we maintain certain levels of inventory in anticipation of future customer demand. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers including financial technology companies, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the +7 +Table of Contents +largest U.S. Prepaid Debit Card program managers. Our top customer represented approximately 18% of our net sales for the year ended December 31, 2019. Our top five customers represented approximately 42% of our net sales for the year ended December 31, 2019, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a large network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to offer cost-effective price points on large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +As of December 31, 2019, we operate facilities comprising approximately 384,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card packaging and fulfillment services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +In addition, we embrace practices and solutions at our facilities that limit our impact on the environment, preserve natural resources, and create innovative and responsible products. Our key areas of focus include: incorporating environmental sustainability practices across the business; sustainability efforts aligned with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to sustainability. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives that give us a wide geographic reach across the United States. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, +8 +Table of Contents +podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe we are in competition with IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Thales (formerly known as Gemalto NV), CompoSecure L.L.C., Multi Packaging Solutions, Inc., and Arroweye. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2019, we had 39 U.S. and foreign trademark registrations and applications, 28 existing U.S. patents, 19 foreign patents, as well as 26 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +9 +Table of Contents +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to obtain and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly compliance process may serve as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts, and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Employees and Labor +As of December 31, 2019, our businesses employed approximately 1,100 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +10 +Table of Contents +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. +Item 1A. Risk Factors +The covenants and restrictions contained in our First Lien Term Loan and our new Senior Credit Facility may adversely affect our business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely make our debt service payments or refinance our debt when it comes due. +We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our business. Our substantial indebtedness and interest expense could have important consequences to us, including: +· +limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, research and development, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt; +· +impacting our cash flows, results of operations and financial condition when interest rates rise, because the interest rates on our First Lien Term Loan and Senior Credit Facility (both as defined in Item 8 Financial Statements and Supplemental Data, Note-10 Long-Term Debt) are floating rates that vary depending on market interest rates from time to time; +· +limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to our significant amount of debt and the related implications of such debt for the Company’s long-term financial condition; +· +limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; +· +limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; +· +limiting our ability to timely make our debt service payments or to satisfy our other obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); +· +increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally; +· +placing us at a competitive disadvantage as compared to our competitors that are less leveraged; +· +limiting our ability, or increasing the costs, to refinance indebtedness, when our First Lien Term Loan matures on August 17, 2022 and our Senior Credit Facility matures on May 17, 2022 ; and +· +limiting access to supply chain and vendor terms. +The terms of our First Lien Term Loan and Senior Credit Facility, restrict our ability to operate our business and to pursue our business strategies. Refer to Item 9B- Other Information, for further information regarding the new Senior Credit Facility entered into on March 6, 2020. Among other things, our First Lien Term Loan and our Senior Credit Facility restrict our ability to: +· +incur additional debt or contingent liabilities; +· +declare or pay dividends, repurchase stock, or make other distributions to stockholders; +· +make investments in any business that is not a wholly-owned subsidiary; +· +create liens or use assets as security in other transactions; +· +merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; +· +enter into transactions with affiliates; and +11 +Table of Contents +· +enter into certain asset sale transactions or other dispositions of assets. +In addition, our new Senior Credit Facility contains a covenant requiring us to achieve at least $25 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the previous four consecutive fiscal quarters in total for each quarterly period ending on or after March 31, 2020. The adjusted EBITDA computation is defined in the Senior Credit Facility. Our failure to comply with any of these covenants could result in an event of default, which could result in the acceleration of all of our indebtedness under the First Lien Term Loan and Senior Credit Facility. Moreover, these restrictions, as well as the limitations described above, could have a material adverse effect on our business, financial condition, results of operations and prospects. If we are unable to satisfy our obligations under our indebtedness as they become due, or if we are unable to pay our interest obligations we would be rendered insolvent. +Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of our strategic initiatives. +Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. The terms of our outstanding indebtedness and our financial condition may adversely affect the availability of additional financing and any such financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. Any failure to achieve adequate funding will delay our product and services innovation and development and could lead to abandonment of one or more of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects. +System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, impair customer and vendor relationships, disrupt our internal operations, harm perception of our products, and expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and our reputation. +The reliability and security of our information technology (“IT”) infrastructure and our ability to protect sensitive and confidential information for our customers, which include many financial institutions, is critical to our business. Our handling of such information makes us a potential target of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to computer systems (including from internal and external sources). A breach of our security defenses could result in a loss of our intellectual property, the release of sensitive cardholder information, customer or employee personal data, or the loss of production capabilities at one or more of our production facilities. These types of incidents have become more prevalent and pervasive across industries, including in our industry. +In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the security we are able to provide through this technology. Any material breach of our secured systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches or otherwise, which could ultimately have a material adverse effect on our business, financial condition and results of operations. +The protective measures we have implemented to protect against data and security breaches and cyber-attacks may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future security breaches. Our activities and investment in protective measures may not be deployed quickly enough or successfully protect our system or network against disruptions and may be insufficient to prevent or limit the damage from any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. +12 +Table of Contents +Current and proposed regulations and customer contractual requirements addressing consumer privacy and data use and security could increase our costs of operations, which could adversely affect our operations, results of operations and financial condition. +In operating a Financial Payment Card business, we manage large amounts of personally identifiable information of cardholders, including cardholder names, account numbers and similar information and are thus subject to laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly difficult to comply with. For example, the California Consumer Privacy Act (“CCPA”) generally requires covered companies to provide certain disclosures to California consumers and requires companies to delete a consumer’s personal information if requested by the consumer. The CCPA has already been amended, and it remains unclear whether it will be further amended and how it will be interpreted. Furthermore, to the extent these laws apply to our customers, our customers may impose privacy related contractual obligations on us, adherence to which may require significant investment in resources and internal processes. As the number of jurisdictions enacting privacy and related laws increases and the scope of these laws and enforcement efforts expand, we will increasingly become subject to new and varying requirements. We have incurred and we expect to continue to incur significant expenses to meet the obligations of current privacy-related laws and requirements (as well as potential new privacy related laws and regulations), which have necessitated and will continue to necessitate us making significant changes to our internal processes, procedures, and systems. Failure to comply with existing or future data privacy and security laws, regulations, and requirements to which we are subject or could become subject, could result in fines, sanctions, penalties, civil lawsuits, or other adverse consequences as well as loss of customer and consumer confidence, which could materially adversely affect our results of operations, overall business, and reputation. The legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs, liability and reputational damage. +Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business and reputation. +Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, including the operation of complex IT systems. In addition, a significant portion of the communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, are critical to our business. +In order to serve our customers and operate certain aspects of our business, we depend on data centers and computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure partners with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted operation of our own computer information systems residing at our leased facilities. The proper functioning of such systems can be adversely affected by the increasing age and usage of such systems. Any interruption in our business applications, systems or networks, including, but not limited to, new system implementations, server downtime, facility issues or energy blackouts, could have a material adverse impact on our operations, sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise. +Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our facilities, any of which could have a material adverse effect on our business. In addition, to successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Protective measures we have established for continuation of core business operations in the event +13 +Table of Contents +of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results of operations. +Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results of operations and/or financial condition. +Any serious disruption at any of our facilities could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our business, results of operations and/or financial condition. Long‑term production disruptions may cause our customers to seek alternative supply which could further adversely affect our profitability. +A significant amount of certain specialized manufacturing capacity is also concentrated in single-site locations. Due to the specialized nature of the assets, in the event such a location experiences disruption, it may not be possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption at a single-site manufacturing operation could significantly impact our ability to supply our customers and could have a severe impact on us. +Additionally, all of our manufacturing facilities are currently leased, and we are subject to risks associated with our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all, and we may be unable to find replacement locations with adequate capacity for our unique equipment and operational needs, which could have an adverse effect on our operations, customer relationships, and financial performance. +We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or infringement, which may have a material adverse effect on our business. +Our ability to protect our intellectual property is important to our business. We depend on patents and other intellectual property rights to protect our products, proprietary designs, and technological processes against misappropriation by others. There is no assurance that our existing or future patents will not be challenged, invalidated or circumvented. Our patents have and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional patents and other intellectual property protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright, and trade secret protection may not be available in every country in which we provide services or sell or license products. +Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic partners and controlling access to and distribution of our technologies, documentation, and other proprietary information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that we regard as proprietary and may use such information to interfere with our business. Enforcing our intellectual property rights has in the past, and may in the future, cause us to incur significant costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition, and results of operations. +We may be required to defend against alleged infringement by us of the intellectual property rights of others. Our products often contain technology provided to us by other parties such as suppliers or customers and we compete in an industry that is highly active in generating intellectual property. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. +Companies in our industry aggressively protect their intellectual property rights. From time to time, we receive notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from intellectual property litigation, an adverse determination in these types of disputes could prevent us from offering some +14 +Table of Contents +of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to allegations, regardless of merit, that our products infringe on the intellectual property rights of others. +We also face risks related to open source software. Our software may be derived from open source software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works on terms different from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software. Usage of open source software can lead to greater risks than the use of third‑party commercial software, as open source licensors generally do not provide warranties, controls on the origin or development of the software, or remedies against the licensors. Many of the risks associated with open source software cannot be eliminated and could have a material adverse effect on our business, financial condition and results of operations. +We may experience software defects, which could harm our business and reputation and expose us to potential liability. +Our services are based on sophisticated software and computing systems, and the software underlying our services may contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in our software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption of business operations, delays in market acceptance, additional development and remediation costs, diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims. +Our business could suffer from problems in production quality, materials, and process, which could reduce, delay or interrupt production of our products, resulting in adverse impacts to our business and financial results. +We produce our products using processes that are highly complex, require advanced and costly equipment and must continually be modified to improve yields and performance. Difficulties in the production process can reduce product yields, reduce product quality or interrupt production altogether. Additionally, if certain machinery used in our production process fails or malfunctions, we may not have adequate replacements for such machinery immediately available. As a result of such problems, we may not be able to deliver products, or may deliver in a less timely or cost‑effective manner or at a lower than expected quality level, or we may be required to rework or replace products. As the complexity of both our products and our technological processes has become more advanced, production tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our production processes at the market rate, we may experience a lower production quality than the market standard. We may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control, such as delay of, or quality issues with, materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-compliance with certain industry standards if we experience failure of certain required operations or processes, such as those related to facility security, which may impede our ability to deliver products to our customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. +A disruption or other failure in our supply chain could adversely affect our business and financial results. +As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including disruptions or delays in supply chain, product quality control, as well other external factors over which we have no control. Key components for our products include EMV microchips, substrates (such as PVC), modules, antennas, and inlays, which we source from multiple suppliers located in Haiti, France, Germany, Singapore, South Korea, Thailand, and the United States, primarily on a purchase order basis. Additionally, our Second Wave TM cards, featuring a core made with ROBP rely on a largely international supply chain to source and provide “recovered ocean bound plastic” in accordance with our defined parameters. It is difficult and costly to monitor suppliers of key +15 +Table of Contents +components and their compliance with our parameters, our codes of conduct, and applicable laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Second Wave TM payment cards or cards with EMV microchips at all or in a manner consistent with standards agreed upon with our customers, which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as with ROBP suppliers, we may rely on suppliers for which there are not adequate and immediate replacements, which may result in our inability to continue to produce products that use components from these suppliers in the event the suppliers terminate their relationships with us or otherwise fail to meet their obligations to us. Also, changes in the financial or business condition of our suppliers, political instability in a supplier’s country, or failure to comply with our codes of conduct or other contractual requirements could render our suppliers unable to provide us with, or render us unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a timely manner could adversely affect our customer service levels, our reputation and our overall business. For example, we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In addition, any increases in the costs of goods and services for our business may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable conduct, we may not have visibility to these practices and we, and our customers, may face reputational harm in addition to interruptions to our supply chain. +Failure to retain our existing customers or identify and attract new customers could have a material adverse effect on our business. +A substantial portion of our net sales is derived from several large customers. Our top five customers accounted for approximately 42% of our net sales for the year ended December 31, 2019. If one or more of these key customer relationships ends, it could have a material adverse effect on our business and financial results. Our ability to provide products and services to these customers and our other customers and meet very high quality standards in a timely manner is critical to our business success. For example, one of the key services that we offer our customers is the prompt and timely production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If we are unable to offer these and our other products and services in a timely manner, our relationships with our customers may be adversely affected and customers may terminate our contracts with them. +In addition, our continued business relationship with our customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures, or the financial health of these customers, many of whom operate in competitive businesses and depend on favorable macroeconomic conditions. Because our contractual arrangements with customers generally do not include exclusivity clauses or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a given year. +If we experience difficulty attracting and retaining customers, our business, financial condition, and results of operations may be materially and adversely affected. +We face competition that may result in a loss of our market share and/or a decline in our profitability. +Our marketplace is highly competitive, relatively saturated, and increasingly consolidated. We expect these market dynamics to continue as new product markets develop, companies develop lower-cost production processes, our competitors consolidate, and other competitors attempt to enter the markets in which we operate. +Some of our competitors have larger global customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical, and other capabilities than we do. These competitors may be able to adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements and to leverage their scale to lower production costs and prices. We also face competition from newly established competitors, suppliers of products, and customers who choose to develop their own products and services. +Existing or new competitors may develop products, technologies, or services that more effectively address our markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological sophistication of our competitors and the size of the market increases, competing low‑cost producers could emerge and +16 +Table of Contents +grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies, or services, we may not be able to compete successfully and we may lose market share, which could have a material adverse effect on our business, financial condition, and results of operations. +The failure to effectively recruit, retain and develop qualified personnel and succession processes could adversely affect our success and ability to grow and have a material adverse effect on our profitability. +Our business functions are complex and require wide‑ranging expertise and intellectual capital. If we fail to retain, recruit, and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs, then the ability of our business to successfully compete and grow may be adversely affected. In addition, the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key business functions. Additionally, the market for qualified personnel is highly competitive, particularly in the states in which our operations are concentrated. This may result in market increases in compensation. Our efforts to retain and develop personnel may also result in significant additional expenses, which could have a material adverse effect on our profitability. Even then, we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. In addition, our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the future. Any failure to retain or attract employees or key personnel could have a material adverse effect on our business, financial condition and results of operations. +We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our strategy or that should be consolidated. +In executing our strategy, we have experienced consolidation of certain of our facilities and/or the divestiture of certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position. +We cannot provide any assurance that we will be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may be more costly than anticipated. +Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a timely basis, or at all. +The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological, market and industry trends, as well as precise technical execution. The successful development of new products may require us to undertake time-consuming and costly development activities, and we may experience difficulties or challenging market conditions that could delay or prevent the successful development, commercialization and marketing of these new products, including, for example, limited market acceptance of dual-interface EMV technology in the United States. Before we can commercialize any new products, we may need to expend significant funds in order to conduct substantial research and development. Additionally, we have limited research and development resources as compared to many of our competitors, which may result in an immature product development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product offerings may also expose us to additional risks, such as new sources of supplies or reputational harm. +As we develop products, we may need to make significant investments in product development, as well as sales and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a cost‑effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors may develop and commercialize competing products faster than we are able to do so. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. +17 +Table of Contents +New and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. +The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems or mobile payments may make physical cards less attractive as a method of payment. Mobile payments offer consumers an alternative method to make purchases without the need to carry a physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and developing technology solutions and products could make our existing technology solutions and products obsolete or irrelevant. +Our ability to enhance our current products and services and to develop and introduce innovative products and services that address the increasingly sophisticated needs of our customers will significantly affect our future success. We may not be successful in developing, marketing or selling new products and services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services, or our new services and enhancements may not adequately meet the demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new products, services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or attract new ones. For example, one of our growth opportunities is the potential adoption of dual-interface EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual‑interface EMV cards due to increased costs and other factors. If these entities do not deploy dual‑interface EMV technology or do so less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our business, financial condition and results of operations. +Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: +· +effectively identify and capitalize upon opportunities in new and emerging product markets; +· +invest resources in innovation and research and development; +· +complete and introduce new products and integrated services solutions in a timely manner; +· +license any required third‑party technology or intellectual property rights; +· +qualify for and obtain required industry compliance for our products; +· +effectively manage the supply chain and related risks; +· +comply with applicable data protection regulations; and +· +retain and hire personnel experienced in developing new products and services +Additionally, opportunities to combine or package products and service offerings and the ability to cross‑sell products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to identify adequate opportunities to cross‑sell our products and services, this may have a material adverse effect on our business, financial condition and results of operations. +Our business and financial results may be materially adversely affected by various legal and regulatory proceedings. +We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on our business, operating results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any liability that may be imposed on us. See Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K for information on our currently pending legal proceedings. +18 +Table of Contents +If we fail to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market, our common stock may no longer be permitted to trade on these platforms, which may adversely affect the market price and liquidity of our common stock. +Our common stock is currently traded on the Toronto Stock Exchange (“TSX”) and, the OTCQX® Best Market (“OTCQX”). In order to maintain our listing on the TSX, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public shareholders, a minimum amount of free trading public shares, a minimum amount of market capitalization, and a minimum amount of value held by public shareholders. In addition to objective standards, the TSX may delist the securities of any issuer if, in the TSX’s opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of the public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the TSX inadvisable; if the issuer sells or disposes of principal operating assets or cease to be an operating company; if an issuer fails to comply with the listing requirements of the TSX; or if any other event occurs or any condition exists which makes continued listing on the TSX, in the opinion of the TSX, inadvisable. In order to continue trading on the OTCQX, we must maintain a minimum per share bid price, a minimum amount of market capitalization, minimum net tangible assets, a minimum amount of net sales, and a minimum public float, in addition to continuing to comply with the United States securities laws and SEC reporting rules. +If we are unable to maintain the continued listing requirements of the TSX or comply with the OTCQX rules, this could result in an inability of our stock to trade on such platforms, resulting in adverse consequences for our stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers, and employees, and an adverse effect on our ability to obtain financing to continue operations. +Our common stock is not currently traded on a United States national securities exchange, which may continue to decrease the value of our common stock and prevent investors from investing or achieving a meaningful degree of liquidity. +In January 2020, our common stock was suspended from the Nasdaq Capital Market (“NASDAQ”) and began being quoted on the OTCQX. While our stock is still currently listed on the TSX, a Canadian stock exchange, we cannot assure investors that our common stock will be listed on a United States national exchange such as NASDAQ or another securities exchange in the future. +Based upon the fact that our common stock is no longer traded on a United States national exchange and that the value of our issued and outstanding common stock has decreased in value in recent years, certain stockholders may no longer be permitted to invest in our common stock. Bid quotations on the OTCQX can be sporadic and may not provide meaningful liquidity to investors. An investor may find it difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. As a result of these limitations, our common stock may have fewer market makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on a national stock exchange or automated quotation system would typically have. +Because there may be a limited market and generally low volume of trading in our common stock, the share price of our common stock may be more significantly affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business and announcements made by us, our competitors or parties with whom we have business relationships. There may also be fewer institutional investors willing to hold or acquire our common stock. The lack of liquidity in our common stock may make it difficult for us to issue additional securities for financing or other purposes or to otherwise arrange for financing that we may need in the future, which could harm our business. +Furthermore, our common stock may not continue to trade on the OTCQX in the future, broker-dealers may cease to provide public quotes of our common stock on this market, or the trading volume of our common stock may be insufficient to provide for an efficient trading market. Any such developments could impair the value of your investment. We expect that the price of our common stock could fluctuate substantially. +Because we are not listed on a United States national exchange, we are not subject to certain standards, such as certain corporate governance requirements. Without required compliance with such standards, investor interest in our common stock may decrease. +19 +Table of Contents +Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may differ significantly from our expectations. +Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue and profitability or lead to significant variability in our operating results. These factors include, among others, the cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the availability of funding, competition, new product developments, technological changes, production problems, supplier management and other factors. +Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their end‑markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full‑year production levels, net sales, profits and cash flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of operations. +Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value. +Our long-lived assets recorded as of December 31, 2019 were $121.3 million, representing 57% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $42.1 million, which includes significant investments in machinery and equipment as used in our operations. +We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we were to conclude that a future write‑down of our long-lived assets is necessary, we would have to record the appropriate charge, which could result in a material adverse effect on our results of operations. A write‑down of our long-lived assets may result from, among other things, deterioration in our performance and a decline in expected future cash flows and could have a material adverse effect on our business, financial condition and results of operations. +During the second quarter of 2018, we recorded an impairment charge of $7.6 million on the long lived assets in our U.K. Limited segment. During the fourth quarter of 2019, based on the goodwill impairment test performed annually as of October 1, there were no impairment charges necessary. See Part II, Item 8, Financial Statements and Supplementary Data , Note 7 “Goodwill and Other Intangible Assets,” and Note 4 “Discontinued Operation” in this Annual Report on Form 10-K for more information. +Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Card Brand compliance standards, could have a material adverse effect on our business. +Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to supply products and services to such customers. Most of our contractual arrangements with our customers may be terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria. +We make significant investments to our network of high‑security facilities in order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we may become ineligible to provide products and services that have constituted in the past an important part of our revenue and profitability. For the year ended December 31, 2019, the vast majority of the products we produced and services we provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under waivers of certain of these standards. If such waivers are not granted in the future or if we are required to move a facility in order to +20 +Table of Contents +maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that facility which would be disruptive to our business and have an adverse effect on our customer relationships and financial results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. +Risks associated with reduced levels of consumer and business spending could adversely affect our business, financial condition and results of operations. +Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income, or changes in consumer purchasing habits. A sustained deterioration in general economic condition, particularly in the United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn occurs, credit card issuers may reduce credit limits, close accounts, and become more selective with respect to whom they issue credit cards. These and other changes in economic conditions could therefore adversely impact our future revenues and profits and cause a materially adverse effect on our business, financial condition, and results of operations. +Costs relating to product defects, and any related product liability and warranty claims may materially adversely affect our business +We offer highly complex services and products and, accordingly, from time to time, defects have occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, the loss of potential sales, and claims by third parties. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we sell defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition, and results of operations. +If the U.S. government puts significant tariffs or other restrictions on or there is an economic downturn impeding goods imported into the United States, our revenue and results of operations may be materially harmed. +Most of our chips, as well as certain other raw materials, are imported from companies located outside of the United States. The U.S. government has already imposed tariffs on imports from certain countries and may impose further tariffs and/or trade restrictions. There may also be other slow-downs or interruptions in our ability to obtain materials imported into the United States due to global economic downturns and trade disruptions. The current U.S. administration has also expressed antipathy towards certain existing international trade agreements. Any of these factors could depress economic activity, restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations. +Existing tariffs are subject to a number of uncertainties as they are implemented, including future adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. The ultimate reaction of other countries, and the impact of these tariffs or other actions on the United States and our business, financial condition and results of operations, cannot be predicted at this time, nor can we predict the impact of any other developments with respect to global trade. +21 +Table of Contents +We may become subject to additional sales tax collection obligations and claims for uncollected amounts, and our income tax positions may be challenged by relevant tax authorities, both of which could adversely affect our cash flow and financial results. +In recent years, a number of states have adopted or considered adopting legislation requiring out-of-state sellers to collect and remit sales tax on sales transactions into those states where they have no physical presence. The United States Supreme Court’s June 2018 decision in South Dakota v. Wayfair, Inc. significantly increased the ability of states to impose sales tax collection responsibilities on out-of-state sellers. An increased number of states seeking to expand applicability of sales tax “nexus” laws can result in costs and administrative requirements to collect and remit sales tax in additional jurisdictions and subject companies to retroactive assessment of state or local sales taxes in certain jurisdictions. Such assessments may adversely affect our future cash flow and financial results. In addition, we are subject to U.S. federal and state income taxes. O ur tax expense and the tax positions included in our financial statements are subject to estimates, and could be impacted by changes in rules or interpretations of existing tax laws, and changes in U.S. federal and state tax legislation and tax rates, particularly in response to the comprehensive tax reform legislation enacted in December 2017, “The Tax Cuts and Jobs Act”. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Additionally, the results of potential audits and examinations of previously filed tax returns may adversely affect our future cash flow and financial results. +We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. +Many of our products integrate third‑party technologies that we license or otherwise obtain the right to use, including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy, we have entered into licensing agreements with other leading industry participants that provide us with, among other benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products, including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have also entered into cross‑licensing agreements with certain of our competitors that provide for an exchange of intellectual property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain of our products, which could have a material adverse effect on our operations. +We are required to comply with complex laws and regulations in the United States and other countries and are exposed to business risks associated with our international business. +We are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in the future may increasingly expose us to risks associated with international business operations, including political instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect our employees, reputation, business, or financial results as well as our ability to meet our objectives. +We may not be in full compliance at all times with the laws and regulations to which we are subject and we may not have obtained the permits, authorizations, or licenses that we need. Any failure to comply with applicable laws or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to materialize, there could be a material adverse effect on our business, financial condition, and results of operations. +22 +Table of Contents +Environmental, health and safety laws and regulations expose us to liability and any such liability may have a material adverse effect on our business. +We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our employees. For example, our products and the raw materials we use in our production processes are subject to numerous environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We may not be able to be at all times, in full compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. +As with other companies engaged in similar activities or that own or lease real property, we face inherent risks of environmental liability at our current and historical production facilities. Certain environmental laws impose strict and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition and results of operations. +The scientific examination of, political attention to, and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in our cost of production due to increases in the price of energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in environmental regulations could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. +Our majority stockholders have the ability to control significant corporate activities, which may result in the Company taking actions that other stockholders did not approve and may reduce the trading price of our stock or trigger a change in control under our Senior Credit Facility. +Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor Pacific Capital), own approximately 37% and 22% of our common stock, respectively, as of December 31, 2019. As a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision‑making with respect to our business direction and policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include: +· +election of directors; +· +mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; +· +other acquisitions or dispositions of businesses or assets; +· +incurrence of indebtedness and the issuance of equity securities; +· +repurchases of stock and payment of dividends; and +· +the issuance of shares to management under our incentive plans. +Tricor Funds may divest all or some of their ownership of our common stock at any time, either through sale on the open market or through a distribution to the participants in the funds. If Tricor Funds or the participants in the funds cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. +23 +Table of Contents +In addition, if Tricor Funds were to sell or otherwise dispose of more than 25% of our outstanding common stock, or otherwise cease to own at least 30% of our outstanding common stock, other than by means of distributing our common stock to the participants in Tricor Funds, a “change of control” event of default would occur under the terms of our Senior Credit Facility. +Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial portion of our board of directors. +Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors. +Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial. +Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and bylaws include, among other things, the following: +· +the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and special meetings may only be called by a majority of the total number of directors that we would have if there were no vacancies on our board of directors +· +advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings +· +allowing only our board of directors to fill vacancies on our board of directors; and +· +following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common stock, super‑majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation +We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination +24 +Table of Contents +Agreement bears the same proportion to the total number of members of our board of directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their designees participate on committees of our board of directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than 5% of our outstanding common stock. +We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), an anti‑takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti‑takeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. +While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market price. +In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. +Any issuance of preferred stock could adversely affect holders of our common stock, which could depress the price of our common stock. +Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance or issuance of preferred stock may adversely affect the market price and the voting and other rights of the holders of our common stock. +Item 1B. Unresolved Staff Comment s +None. +25 +Table of Contents +Item 2. Propertie s +Information regarding each of our facilities, which may include multiple leases at each location, is set forth below. +Square +Owned/ +Location +Operations +Footage +Leased +Littleton, Colorado (Corporate) +Corporate facility +12,000 +Leased +Littleton, Colorado (Centennial) +Financial Payment Card production +65,000 +Leased +Roseville, Minnesota +Financial Payment Card production, card personalization, card packaging services, fulfillment +200,000 +Leased +Fort Wayne, Indiana +Financial Payment Card production +36,000 +Leased +Nashville, Tennessee +Financial Payment Card personalization services, instant issuance, and fulfillment +71,000 +Leased +Item 3. Legal Proceeding s +Heckermann v. Montross et al. , Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”) +On November 20, 2017, a purported Company stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of the Company’s former officers and current and former directors, along with the sponsors of the Company’s October 2015 initial public offering (“IPO”). The Company was also named as a nominal defendant. The derivative complaint asserted claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and sought, among other things, injunctive relief, damages and costs. It alleged false or misleading statements and omissions in the Registration Statement filed by the Company in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserted claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets. +On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on January 2, 2020, the Court granted preliminary approval of the settlement set forth therein. Under the settlement, (i) all claims that were or could have been asserted in the Derivative Suit will be resolved and discharged, (ii) the Company will implement certain corporate governance reforms, and (iii) the Company’s insurer will pay fees and expenses awarded to the plaintiff’s counsel in the amount of $0.3 million and a service award to the plaintiff of a nominal amount. The Court will hold a hearing on April 1, 2020 to, among other things, approve the settlement. +CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. +On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultra-secure gift card packages sold to at least one customer infringe a Company patent on ultra-secure gift card packages. MPS answered the complaint and counterclaimed for invalidity and non-infringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. MPS’s early motion for summary judgment was denied in August 2017 and its motion to dismiss on jurisdictional grounds was denied in July 2018. The Company’s subsidiary CPI Card Group-Minnesota, Inc., has been added to the case as plaintiff. The Company’s patent will expire in 2028. +In June 2017, MPS filed an Inter Partes Review (“IPR”) petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”) to review the patent at issue in the patent infringement suit. The PTAB instituted the IPR on January 9, 2018. The PTAB entered its final written decision on January 4, 2019, determining that all of the claims in the patent are unpatentable. The Company filed an appeal of this decision to the federal circuit court on March 1, 2019, and a hearing regarding the Company’s appeal was held on March 3, 2020. The federal circuit court has not yet issued its decision regarding the Company’s appeal. The patent infringement suit is administratively dismissed pending the final determination of the patent validity. +26 +Table of Contents +In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +Item 4. Mine Safety Disclosure s +Not applicable. +PART I I +Item 5. Market for Registrant’s Common Equit y, Related Stockholder Matters, and Issuer Purchases of Equity Securities +Market Information for Common Stock +Our common stock was listed on the NASDAQ and the TSX during 2019, and is currently traded on OTCQX Best Market and the TSX under the symbol “PMTS”. In January 2020, our common stock was suspended from the NASDAQ and began being quoted on the OTCQX. Any over-the-counter market quotations reflect inter-dealer prices, without mark-up, mark-down, or commission and may not necessarily represent actual transactions. +Holders +There were seven stockholders of record as of February 17, 2020. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. +Issuer Purchases of Equity Securities +There were no shares repurchased during the years ended December 31, 2019, and 2018. +Item 6. Selected Financial Dat a +Not required due to smaller reporting company status +Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations +You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control. See "Risk Factors" and “Forward-Looking Statements.” +Company Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest U.S. Prepaid Debit +27 +Table of Contents +Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States which are audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. This leading network of high-security production facilities allows us optimize our solutions offerings and to serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +· +the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +· +the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. Businesses not considered part of these segments are considered “Other” and included our operations in Canada prior to the sale and disposition of our Canadian operations and corporate expenses. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and transaction costs, including employee termination costs, the majority of which were expensed in 2018, the sale did not have a significant impact on cash, and no significant loss on sale. The Canadian subsidiary was not a significant operating segment and the results of this business through the transaction closing date have been presented as part of the Other reportable segment. +On August 3, 2018, we completed the sale of our three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for total consideration of approximately $4.5 million. During the third quarter 2018, the Company received net cash proceeds of $0.3 million after the repayment of liabilities associated with the United Kingdom facilities, excluding tax benefits related to the structure of the sale. In connection with the substantial liquidation of the Company’s U.K Limited segment in the third quarter of 2018, we released the related foreign currency cumulative translation adjustment of $4.0 million from accumulated other comprehensive loss into loss from discontinued operations. U.K. Limited incurred a pre-tax loss from operations of $15.4 million for the year ended December 31, 2018, due to the softness in our U.K. Limited retail sector and a decline in sales relating to certain customers. Additionally, we recorded the following charges during the year ended December 31, 2018: impairment charges of $7.6 million associated with goodwill and customer +28 +Table of Contents +relationship intangible assets, and a $7.2 million loss on the sale. The major line items constituting the net loss of the discontinued operation were as follows: +For the year ended +December 31, +2019 +2018 +Total net sales +$ +— +$ +10,741 +Total cost of sales +— +10,222 +Selling, general and administrative +142 +4,336 +Impairments +— +7,615 +Other expense (income), net +— +4,006 +Pretax loss from discontinued operation +(142) +(15,438) +Pretax loss on sale of discontinued operation +— +(7,248) +Total pretax loss on discontinued operation +(142) +(22,686) +Income tax benefit +18 +23 +Net loss from discontinued operation +$ +(124) +$ +(22,663) +In 2018, the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $2.4 million for the year ended December 31, 2018. The Company recorded severance charges of $0.6 million, and recorded lease termination charges of $0.5 million in during the year ended December 31, 2018. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of Sales” and “Selling, General, and Administrative Expenses” on the Statement of Operations +2019 Summary of Financial Performance +Information below is described on a continuing operations basis. During the year ended December 31, 2019, net sales increased 8.7 % from 2018, to $278.1 million, and we recorded income from operations of $25.5 million compared to net sales of $255.8 million and income from operations of $4.6 million during 2018. The operating income margin for the year ended December 31, 2019 was 9.2%, an increase from operating income margin of 1.8% in 2018. During the year ended December 31, 2019, we received $6.0 million cash related to a litigation settlement, which was recorded as a reduction to net operating expenses in the Other segment. For the year ended December 31, 2019, we recorded net loss from continuing operations of $4.3 million, compared to net loss of $14.8 million in 2018, an improvement of $10.5 million. +Cash provided by operating activities from continuing operations for the year ended December 31, 2019 was $3.0 million, representing a decrease of $4.1 million compared to $7.1 million during the prior year period. +Segment Overview +Our business consists of the following reportable segments: +· +U.S. Debit and Credit, +· +U.S. Prepaid Debit, and +· +Other. +U.S. Debit and Credit Segment +Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual-interface cards, CPI Metals T M , a premium metal card and Second Wave TM payment cards featuring a core made with recovered ocean-bound plastic. We also sell instant card issuance solutions, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands. We provide CPI On-Demand services, where we produce images, personalized payment cards, and related +29 +Table of Contents +collateral on a one-by-one, on demand basis for our customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. Prepaid Debit segment operation is audited for compliance by multiple Payment Card Brands. Many of our customers require us to comply with the standards of the PCI Security Standards Council. +Other +Our Other segment includes corporate expenses and a less significant operation that generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada, prior to its sale. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019. +Key Components of Results of Operations +Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive loss. All line items below are described on a continuing operations basis. +Net Sales +Net sales reflect our revenue generated from the sale of products and services. Product net sales include the design and production of EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual-interface cards, CPI Metals and Second Wave ROBP. We also generate product revenue from the sale of our Card@Once instant issuance equipment and supplies, Private Label Credit Cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards. See Note 2, “Summary of Significant Accounting Policies” in Part II, Item 8, “ Financial Statements and Supplementary Data ” and “Critical Accounting Policies and Estimates—Revenue Recognition.” in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +Cost of Sales +Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide. Product costs include the cost of raw materials, including microchips in the case of EMV cards and, additionally, RFID assemblies in the case of contactless and dual-interface EMV cards, labor costs, material costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include desktop card personalization terminals in the case of Card@Once. Services costs include the cost of labor and the potential rising costs associated with labor, raw materials in the case of tamper-evident security packaging, and equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity and employee relations. +Gross Profit and Gross Margin +Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net sales. We include gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +30 +Table of Contents +Operating Expenses +Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service, human resources, research and development, and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Operating expense also includes depreciation and amortization expense, a cash litigation settlement gain received during the year ended December 31, 2019, and may include impairment charges on tangible and intangible assets, when necessary. +Income from Operations and Operating Margin +Income from operations consists of our gross profit less our operating expenses and impairments, if applicable. Operating margin is income from operations as a percentage of net sales. +Other Expense, net +Other expense, net consists primarily of interest expense and foreign currency losses. +Income tax (expense) benefit +Income tax (expense) benefit consists of our U.S. federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes. +Net Loss from Continuing Operations +Net loss from continuing operations consists of our income from operations, less other expense, net, and income taxes. +31 +Table of Contents +Results of Operations +Year Ended December 31, 2019 Compared With Year Ended December 31, 2018 +The table below presents our results of operations, on a continuing operations basis, for the years ended December 31, 2019 and 2018: +Year Ended December 31, +2019 +2018 +$ Change +% Change +(dollars in thousands) +Net sales: +Products +$ +143,941 +$ +125,069 +$ +18,872 +15.1 +% +Services +134,132 +130,745 +3,387 +2.6 +% +Total net sales +278,073 +255,814 +22,259 +8.7 +% +Cost of sales +186,754 +177,224 +9,530 +5.4 +% +Gross profit +91,319 +78,590 +12,729 +16.2 +% +Selling, general and administrative (including depreciation and amortization) +71,775 +74,002 +(2,227) +(3.0) +% +Litigation settlement gain +(6,000) +— +(6,000) +* +Income from operations +25,544 +4,588 +20,956 +456.8 +% +Other expense, net: +Interest, net +(24,891) +(23,431) +(1,460) +6.2 +% +Foreign exchange loss +(1,327) +(311) +(1,016) +* +Other income (loss) +(4) +16 +(20) +(125.0) +% +Loss before income taxes +(678) +(19,138) +18,460 +96.5 +% +Income tax benefit (expense) +(3,652) +4,339 +(7,991) +* +Net loss from continuing operations +$ +(4,330) +$ +(14,799) +$ +10,469 +70.7 +% +* Not meaningful +Net Sales +Year Ended December 31, +2019 +2018 +$ Change +% Change +(dollars in thousands) +Net sales by segment: +U.S. Debit and Credit +$ +213,141 +$ +178,597 +$ +34,544 +19.3 +% +U.S. Prepaid Debit +64,330 +69,199 +(4,869) +(7.0) +% +Other +1,679 +9,891 +(8,212) +(83.0) +% +Eliminations +(1,077) +(1,873) +796 +* +Total +$ +278,073 +$ +255,814 +$ +22,259 +8.7 +% +* Not meaningful +Net sales for the year ended December 31, 2019, increased $22.3 million, or 8.7%, to $278.1 million compared to $255.8 million for the year ended December 31, 2018. +U.S. Debit and Credit: +Net sales for U.S. Debit and Credit for the year ended December 31, 2019, increased $34.5 million, or 19.3%, to $213.1 million compared to $178.6 million for the year ended December 31, 2018. The net sales increase was primarily due to higher volumes of dual-interface EMV cards, including our Second Wave cards featuring a core made with recovered ocean bound plastics, and higher card personalization and fulfillment sales including increased net sales from our Card@Once instant issuance solution. Dual-interface EMV cards have additional technology to process contactless transactions and generally have a higher average selling price. +32 +Table of Contents +U.S. Prepaid Debit: +Net sales for U.S. Prepaid Debit for the year ended December 31, 2019, decreased $4.9 million, or 7.0%, to $64.3 million, compared to $69.2 million for the year ended December 31, 2018. The decrease was the result of lower sales volumes from our existing customer base, primarily during the fourth quarter of 2019 compared to the prior year comparable period in 2018. The full year 2018 benefited from higher sales volumes from our existing customer base along with new portfolio wins that did not recur in 2019. +Other: +For the year ended December 31, 2019, Other net sales were $1.7 million. During the year ended December 31, 2018, sales in the Other segment were $9.9 million. The Canada subsidiary was disposed on April 1, 2019, and accordingly, our Other segment 2019 results include only the first quarter of net sales for Canada. +Eliminations: +This includes the elimination of intercompany sales between segments in the consolidation of our financial statements. The decrease in eliminations for the year ended December 31, 2019 compared to the year ended December 31, 2018, is due to less sales between segments. +Gross Profit and Gross Margin +Year Ended December 31, +% of +% of +2019 +net sales +2018 +net sales +$ Change +% Change +(dollars in thousands) +Gross profit by segment: +U.S. Debit and Credit +$ +66,602 +31.2 +% +$ +50,036 +28.0 +% +$ +16,566 +33.1 +% +U.S. Prepaid Debit +24,814 +38.6 +% +26,422 +38.2 +% +(1,608) +(6.1) +% +Other +(97) +* +% +2,132 +21.6 +% +(2,229) +(104.5) +% +Total +$ +91,319 +32.8 +% +$ +78,590 +30.7 +% +$ +12,729 +16.2 +% +Gross profit for the year ended December 31, 2019 increased $12.7 million, or 16.2%, to $91.3 million compared to $78.6 million for the year ended December 31, 2018. +U.S. Debit and Credit +Gross profit for U.S. Debit and Credit segment for the year ended December 31, 2019 increased $16.6 million, or 33.1%, to $66.6 million compared to $50.0 million for the year ended December 31, 2018. Gross profit margin increased from 28.0% in 2018 to 31.2% in 2019. The increase in gross profit and gross profit margin was driven primarily by higher card personalization and fulfillment sales, and efficiencies gained from the consolidation of our personalization operations from three facilities to two facilities in the prior year. In addition, increased sales volumes from our dual-interface EMV cards improved our gross profit in 2019 compared to the prior year. Partially offsetting the gross profit margin increases were higher card manufacturing material costs driven primarily by a mix of certain products when compared to the prior year ended December 31, 2018. +U.S. Prepaid Debit +Gross profit for U.S. Prepaid Debit for the year ended December 31, 2019 decreased $1.6 million, or 6.1%, to $24.8 million compared to $26.4 million for the year ended December 31, 2018. The decrease in gross profit was attributed to lower sales volumes, primarily in the fourth quarter, and unfavorable cost absorption. Gross profit margin increased from 38.2% in 2018 to 38.6% in 2019, due to favorable product mix, partially offset by unfavorable cost absorption from lower sales in 2019. +33 +Table of Contents +Other +Gross profit in Other decreased $2.2 million in 2019 compared to the prior year. The decrease was a result of the disposition of our Canada subsidiary on April 1, 2019, and thereafter our Other segment did not include any operations contributing net sales or gross profit. +Year Ended December 31, +2019 +2018 +$ Change +% Change +(dollars in thousands) +Operating expenses by segment: +U.S. Debit and Credit +$ +30,604 +$ +27,622 +$ +2,982 +10.8 +% +U.S. Prepaid Debit +4,431 +4,494 +(63) +(1.4) +% +Other +36,740 +41,886 +(5,146) +(12.3) +% +Other-litigation settlement +(6,000) +— +(6,000) +* +% +Total +$ +65,775 +$ +74,002 +$ +(8,227) +(11.1) +% +Operating expenses, net, decreased $8.2 million, or 11.1%, to $65.8 million compared to $74.0 million for the year ended December 31, 2018. The cash litigation settlement gain received during the year ended December 31, 2019 contributed $6.0 million to the decrease in operating expenses, along with a decrease in the Other segment of $5.1 million compared to the prior year 2018. These decreases were partially offset by an increase in the U.S. Debit and Credit segment operating expenses. +U.S. Debit and Credit +U.S. Debit and Credit operating expenses increased $3.0 million to $30.6 million for the year ended December 31, 2019 compared to $27.6 million for the year ended December 31, 2018, due to increased selling and compensation costs. This increase was partially offset by the impact of charges relating to the consolidation of our personalization operations from three facilities to two facilities in 2018. +U.S. Prepaid Debit +U.S. Prepaid Debit operating expenses were essentially flat for the year ended December 31, 2019 when compared to the year ended December 31, 2018 given the relatively fixed nature of these costs. +Other +Other operating expenses decreased $5.1 million, or 12.3%, to $36.7 million compared to $41.9 million for the year ended December 31, 2018. Other operating expenses declined due to lower corporate costs, including legal and consulting fees, and expense savings from the sale of our Canadian subsidiary for the year ended December 31, 2019. During the year ended December 31, 2019, we received $6.0 million cash related to a litigation settlement as described previously, which was recorded as a reduction to net operating expenses in the Other segment. With this reduction, Other operating expenses decreased $11.1 million to $30.7 million for the year ended December 31, 2019, when compared to the year ended December 31, 2018. +34 +Table of Contents +Income from Operations and Operating Margin +Year Ended December 31, +% of +% of +2019 +net sales +2018 +net sales +$ Change +% Change +(dollars in thousands) +Income (loss) from operations by segment: +U.S. Debit and Credit +$ +35,982 +16.9 +% +$ +22,414 +12.6 +% +$ +13,568 +60.5 +% +U.S. Prepaid Debit +20,383 +31.7 +% +21,928 +31.7 +% +(1,545) +(7.0) +% +Other +(30,821) +* +% +(39,754) +* +% +8,933 +(22.5) +% +Total +$ +25,544 +9.2 +% +$ +4,588 +1.8 +% +$ +20,956 +456.8 +% +* Not meaningful +During the year ended December 31, 2019 we had income from operations of $25.5 million compared to income from operations of $4.6 million for the year ended December 31, 2018. The Company’s operating profit margin for the year ended December 31, 2019, increased to 9.2% compared to an operating profit margin of 1.8% for the year ended December 31, 2018. In 2019, we received $6.0 million cash for a litigation settlement gain which was recorded through income from operations within the Other segment. +U.S. Debit and Credit +Income from operations for U.S. Debit and Credit for the year ended December 31, 2019 increased $13.6 million to $36.0 million compared to $22.4 million for the year ended December 31, 2018. The increase in income from operations was driven by higher card personalization and fulfillment sales including Card@Once, efficiencies gained from the consolidation of our personalization operations, and increased sales volumes from dual-interface EMV card manufacturing. The impact of these improvements to income from operations were partially offset by higher card manufacturing material costs driven primarily by a mix of certain products, and higher operating expenses. Operating margins for the year ended December 31, 2019, increased to 16.9% compared to 12.6% for the year ended December 31, 2018, due to higher card personalization and fulfillment sales and efficiencies, and higher card manufacturing net sales and operating leverage. +U.S. Prepaid Debit +Income from operations for U.S. Prepaid Debit for the year ended December 31, 2019 decreased $1.5 million, or 7.0%, to $20.4 million compared to $21.9 million for the year ended December 31, 2018. The decrease in income from operations was attributed to lower sales volumes and unfavorable cost absorption. U.S. Prepaid Debit operating income margin for the year ended December 31, 2019 was consistent with 2018, due to favorable product mix offset by unfavorable cost absorption. +Other +The loss from operations in Other was $30.8 million for the year ended December 31, 2019, compared to a loss from operations of $39.8 million for the same time period in 2018. The 2019 loss benefited from the $6.0 million cash litigation settlement gain during the year ended December 31, 2019, in addition to lower corporate expenses and lower expenses due to the sale of our Canadian subsidiary. +Interest, net +Interest expense for the year ended December 31, 2019, increased $1.5 million to $24.9 million compared to $23.4 million for the year ended December 31, 2018. The additional interest expense resulted primarily from a higher average interest rate on the First Lien Term Loan during the first half of the year ended December 31, 2019. +35 +Table of Contents +Income tax expense/ benefit +During the year ended December 31, 2019, we recorded income tax expense of $3.7 million on pre-tax loss of $0.7 million, representing an effective income tax rate of negative 538.6%. Given the amount of pre-tax loss and our partial valuation allowance on certain U.S. deferred tax assets, the effective tax rate can be subject to significant variance from the federal U.S. statutory rate of 21%. For 2019, the effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to a partial valuation allowance of $3.2 million on certain U.S. deferred tax assets at an effective income tax rate impact of negative 474.7% for the year ended December 31, 2019. The partial valuation allowance is due to the limitation on the deductibility of interest expense which is a provision of U.S. government tax reform legislation enacted in December 2017. In addition, we have $2.3 million of tax benefits relating to certain elections in connection with the U.K. segment disposition. Other items impacting the effective tax rate in 2019 include other permanent non-deductible items, and state and foreign income taxes. During the year ended December 31, 2018, we recorded an income tax benefit of $4.3 million on pre-tax loss of $19.1 million, representing an effective tax rate of 22.7%. In the prior year, the effective tax rate differs from the federal U.S. statutory rate primarily due to tax benefits relating to the U.K., and partially offset by a valuation allowance due to a limitation on the deductibility of interest expense . +Net loss from continuing operations +Net loss from continuing operations for the year ended December 31, 2019 was $4.3 million, compared to net loss of $14.8 million for the year ended December 31, 2018. The change was primarily due to the $6.0 million cash litigation settlement gain, higher net sales and gross profit, offset partially by higher interest expense and income tax expense in the year ended December 31, 2019. +Fourth Quarter +Our net sales increased 6.0% in the fourth quarter of 2019 compared to the fourth quarter of 2018. Net sales for U.S. Debit and Credit increased 24.2% in the fourth quarter of 2019 compared to fourth quarter of 2018. The increase in net sales was primarily due to higher net sales volumes from dual-interface EMV cards, including Second Wave cards featuring a core made with recovered ocean bound plastic, and higher card personalization and fulfillment sales. +Net sales for our U.S. Prepaid Debit segment decreased $5.9 million, or 34.6%, to $11.2 million in the fourth quarter of 2019 compared to $17.1 million in the fourth quarter of 2018. The decrease was due to the timing of customer orders which resulted in lower sales volumes from our existing customer base compared to the prior year. +Selling, general and administrative (exclusive of depreciation and amortization) expenses decreased $3.3 million to $16.6 million in the fourth quarter of 2019 compared to $19.9 million in the fourth quarter 2018. The decrease was driven by lower corporate costs, including lower legal costs, and expense savings as a result of the sale of our Canadian subsidiary. +During the fourth quarter of 2019 we earned income from operations of $3.9 million compared to a loss from operations of $0.4 million in the fourth quarter of 2018. The increase in income from operations was primarily due to higher card manufacturing net sales volumes and higher card personalization and fulfillment sales in our U.S. Debit and Credit segment. This increase was partially offset by lower net sales volumes and unfavorable cost absorption in our U.S. Prepaid segment during 2019. +Liquidity and Capital Resources +As of December 31, 2019, we had $18.7 million of cash and cash equivalents. Of this amount, $0.4 million was held in accounts outside of the United States. +Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. +36 +Table of Contents +At December 31, 2019, there was $312.5 million outstanding under the First Lien Term Loan, and we had a $40.0 million Revolving Credit Facility, of which $20.0 million was available for borrowing. As of December 31, 2019, there were no borrowings outstanding on the Revolving Credit Facility. The First Lien Term Loan matures on August 17, 2022. The Company entered into the Senior Credit Facility on March 6, 2020, and the Revolving Credit Facility was terminated concurrently on March 6, 2020. Refer to Item 8: Financial Statements and Supplementary Data, Note 19- Subsequent Events, and Item 9B: Other Information for further information regarding the $30 million Senior Credit Facility. As of December 31, 2019, our net leverage ratio was 8.0 times adjusted EBITDA (as defined in the First Lien Term Loan). +Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of December 31, 2019, the interest rate on our First Lien Term Loan was 6.7%. Total cash interest paid during 2019 was $23.0 million, an increase of $2.3 million compared to the prior year 2018. +The First Lien Term Loan contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. We did not have a required excess cash flow payment related to 2019, and we were in compliance with all covenants under the First Lien Credit Facility as of December 31, 2019. +Operating Activities – Continuing Operations +Cash provided by operating activities – continuing operations for the year ended December 31, 2019, was $3.0 million compared to cash provided of $7.1 million for the year ended December 31, 2018. The year over year fluctuation was due primarily to a cash usage of $10.4 million related to our investment in additional inventory to support the growth of our business. We also had a cash usage in accrued expenses related primarily to employee performance incentive compensation earned in 2018 and paid in the first quarter of 2019. Offsetting these usages was an improvement in net loss from continuing operations of $10.5 million, including the $6.0 million cash received from the litigation settlement, and cash inflows from collections of accounts receivable when compared to the prior year. For the year ended December 31, 2019, cash interest paid was $23.0 million, which was higher than the prior year comparable period by $2.3 million. Cash inflows from tax refunds, net, of $0.7 million were received during the year ended December 31, 2018, compared to cash payments of $0.8 million in 2019. +Investing Activities – Continuing Operations +Cash used in investing activities – continuing operations for the year ended December 31, 2019 was $2.6 million, compared to a usage of $5.6 million during the year ended December 31, 2018. Cash used in investing activities – continuing operations, was related to capital expenditures, including investments to support the growth of the business, such as machinery and equipment, and information technology equipment, and was $4.2 million and $5.6 million for the years ended December 31, 2019 and 2018, respectively. Partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of our Canadian subsidiary in the second quarter of 2019. As presented in our supplemental disclosures of non-cash information on the statement of cash flows , finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $6.4 million, and $1.8 million during the year ended December 31, 2019, and 2018, respectively. +Financing Activities – Continuing Operations +During the year ended December 31, 2019 and 2018, cash used in financing activities was $1.9 million and $0.5 million, respectively, and related to principal payments on finance lease obligations. For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility for the year ended December 31, 2019, all occurring within the first and second quarter of 2019. We had no borrowings or payments on the Revolving Credit Facility during the final six months of the year ended December 31, 2019, and had no balance outstanding as of December 31, 2019. +37 +Table of Contents +Working Capital +Our working capital as of December 31, 2019 was $52.4 million, compared to $43.2 million as of December 31, 2018. During the year ended December 31, 2019, our cash balance decreased by $1.6 million, and our inventory balance increased $10.4 million to support the growth of the business, which was the primary driver of the increase in working capital. +Cyclical and Seasonal Nature of Business +Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes in the economy, with economic downturns resulting in decreases in the demand for our products and services. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions. Net sales are also influenced by Financial Payment Card renewal cycles and demand for new products, such as dual-interface cards. Additionally, we historically have generated higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States. +Off-Balance Sheet Arrangements +We had no off-balance sheet arrangements at December 31, 2019, and 2018. +Critical Accounting Policies and Estimates +Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. +Impairment Assessments of Goodwill and Long-Lived Assets +We account for business combinations using the acquisition method and allocate the acquisition price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is recorded as goodwill. +In determining the fair values in impairment tests, we use one or more of the following recognized valuation methods: +· +the income approach (including discounted cash flows); +· +the market approach; or +· +the cost approach. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in those fair value measurements include identifying business factors such as size, sales growth, profitability, risk and return on investment and assessing comparable net sales and earnings multiples. +38 +Table of Contents +Further, when measuring fair value based on discounted cash flows, we make assumptions about rates of increase in net sales, cost of sales and operating expenses, weighted average cost of capital, and rates of long term growth. We also consider our total invested capital adjusted for a control premium and other factors determined by management. Valuations are performed by management or third party valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values used in impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Changes to or a failure to achieve our projected business assumptions, including growth and profitability, could result in a valuation that would trigger an impairment of goodwill. +Goodwill is not amortized, but instead tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, we first make a qualitative assessment with respect to goodwill. In 2017, we adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with our annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. We completed our annual goodwill impairment testing as of October 1, 2019, which resulted in no impairment charge. +On August 3, 2018, we completed the sale of our United Kingdom facilities that comprised the U.K. Limited reporting segment. We did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. In connection with the sale, we performed a goodwill impairment test and recorded a charge of $6.4 million in the second quarter of 2018. The impairment was a result of continued market softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the carrying value of the segment. We recorded an impairment charge of $1.2 million to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018, which is reported in discontinued operations. +Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to a reporting unit, it no longer retains its identification with a particular acquisition and becomes identified with that reporting unit. If our operating segments are modified or changed based on our Chief Operating Decision Maker’s (“CODM”) review of financial information and allocation of resources, we may be required to allocate goodwill on a relative fair value to the new reporting units. As of December 31, 2019, all of our goodwill is included within reporting units in our U.S. Debit and Credit segment. +Refer to Note 7, “Goodwill and Other Intangible Assets” and Note 8 “Fair Value of Financial Instruments” in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain additional information on goodwill and intangible asset impairments and for further definition of valuation inputs. +Long-lived assets, such as plant and equipment, and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. There were no material long-lived asset impairments recorded for the years ended December 31, 2019 and 2018, relating to the continuing operations of the Company. +Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of goodwill or long-lived assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our balance sheet and operating results. +39 +Table of Contents +Revenue Recognition +Products Net Sales: “ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and billed, we estimate net sales by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including contact-EMV, Dual-Interface EMV, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. +Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service personalization of instant issuance debit cards. For work performed but not completed and billed, we estimate revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts: The Company generally enters into master purchase or service agreements that govern the general terms and conditions of our commercial relationships with customers. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. The contract term is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Inventory Valuation +Raw materials, and finished goods inventories are valued at the lower of cost or net realizable value, with cost determined using a first-in, first-out, specific identification or weighted-average method. Cost is calculated based upon the price paid for an item at the time it is received by us. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence. We record adjustments to the valuation of inventory, as necessary. For manufacturing work performed but not completed and billed, inventory costs are recognized through cost of sales as the work is completed, consistent with the recognition of revenue. +Income Taxes +We record income tax expense using the liability method for taxes and are subject to income tax in many jurisdictions, including the United States, various states and localities, the United Kingdom, and historically in Canada. A current tax asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of future taxable income: +· +future reversals of existing taxable temporary differences; +· +future taxable income, exclusive of reversing temporary differences and carryforwards; +· +taxable income in prior carryback years; and +40 +Table of Contents +· +tax-planning strategies. +Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets was $5.6 and $6.8 million as of December 31, 2019 and December 31, 2018, respectively. If actual results differ from estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate. +The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis. +Leases +We recorded lease liabilities and right-to-use assets as the present value of future minimum lease payments using a discount rate that is either implicit in the lease or our incremental borrowing rate. If not implicit in the lease, we estimate our incremental borrowing rate by using market data from companies similar to us, having publically traded debt instruments and similar credit ratings. Our estimated incremental borrowing rate utilizes judgements, including selection of comparable companies, our credit risk, sensitivity analysis and certain other valuation estimates. We also use judgement in determining whether a contract contains a lease. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. +The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, historical financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019. +The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient. +The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements as applicable. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases. +Right-to-use (“ROU’) represents the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most +41 +Table of Contents +of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. If applicable, the Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. +A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. +As a result of the adoption of ASC 842 the Company recorded $8.0 million of operating ROU assets, and corresponding operating lease liabilities of $8.8 million on January 1, 2019, relating to existing real estate operating leases. +As of January 1, 2018, we adopted ASC 606, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Consolidated Balance Sheet 2018. Under the new guidance, we recognize certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and we have the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. In addition, as a result of adopting the new guidance, we have recorded decreases to deferred revenue, and inventory work in process, and an increase to accounts receivable. +Recently Issued Accounting Standards +In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the adoption of this standard will have a material impact on the Company’s consolidated financial position, results of operations, and cash flows. +Item 7A. Quantitative and Qualitative Disclosures about Market Ris k +Not required due to smaller reporting company status +42 +Table of Contents +Item 8. Financial Statement s and Supplementary Data +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Page +CPI Card Group Inc. +As of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018 +Report of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets +F-3 +Consolidated Statements of Operations and Comprehensive Loss +F-4 +Consolidated Statements of Stockholders’ Deficit +F-5 +Consolidated Statements of Cash Flows +F-6 +Notes to Consolidated Financial Statements +F-7 +F-1 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Stockholders and Board of Directors +CPI Card Group Inc.: +Opinion on the Consolidated Financial Statements +We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two‑year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. +Change in Accounting Principle +As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases . +Basis for Opinion +These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2014. +Denver, Colorado +March 6, 2020 +F-2 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Balance Sheets +(Dollars in Thousands, Except Shares and Per Share Amounts) +December 31, +2019 +2018 +Assets +Current assets: +Cash and cash equivalents +$ +18,682 +$ +20,291 +Accounts receivable, net of allowances of $395 and $211, respectively +42,832 +43,794 +Inventories +20,192 +9,827 +Prepaid expenses and other current assets +6,345 +4,997 +Income taxes receivable +4,164 +5,564 +Total current assets +92,215 +84,473 +Plant, equipment, leasehold improvements and operating lease right-of-use assets, net +42,088 +39,110 +Intangible assets, net +30,802 +35,437 +Goodwill +47,150 +47,150 +Other assets +1,232 +1,034 +Total assets +$ +213,487 +$ +207,204 +Liabilities and stockholders’ deficit +Current liabilities: +Accounts payable +$ +16,482 +$ +16,511 +Accrued expenses +22,820 +23,853 +Deferred revenue and customer deposits +468 +912 +Total current liabilities +39,770 +41,276 +Long-term debt +307,778 +305,818 +Deferred income taxes +6,896 +5,749 +Other long-term liabilities +11,478 +3,937 +Total liabilities +365,922 +356,780 +Commitments and contingencies (Note 14) +Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at December 31, 2019 and 2018 +— +— +Stockholders’ deficit: +Common Stock; $0.001 par value—100,000,000 shares authorized; 11,224,191 shares issued and outstanding and 11,160,377 shares issued and outstanding at December 31, 2019 and 2018, respectively +11 +11 +Capital deficiency +(111,988) +(112,223) +Accumulated loss +(40,458) +(36,004) +Accumulated other comprehensive loss +— +(1,360) +Total stockholders’ deficit +(152,435) +(149,576) +Total liabilities and stockholders' deficit +$ +213,487 +$ +207,204 +See accompanying notes to consolidated financial statements +F-3 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Operations and Comprehensive Loss +(Dollars in Thousands, Except Share and Per Share Amounts) +Year Ended December 31, +2019 +2018 +Net sales: +Products +$ +143,941 +$ +125,069 +Services +134,132 +130,745 +Total net sales +278,073 +255,814 +Cost of sales: +Products (exclusive of depreciation and amortization shown below) +94,889 +82,110 +Services (exclusive of depreciation and amortization shown below) +80,894 +82,697 +Depreciation and amortization +10,971 +12,417 +Total cost of sales +186,754 +177,224 +Gross profit +91,319 +78,590 +Operating expenses: +Selling, general and administrative (exclusive of depreciation and amortization shown below) +65,744 +68,014 +Depreciation and amortization +6,031 +5,988 +Litigation settlement gain +(6,000) +— +Total operating expenses, net +65,775 +74,002 +Income from operations +25,544 +4,588 +Other expense, net: +Interest, net +(24,891) +(23,431) +Foreign currency loss +(1,327) +(311) +Other income (expense), net +(4) +16 +Total other expense, net +(26,222) +(23,726) +Loss before income taxes +(678) +(19,138) +Income tax (expense) benefit +(3,652) +4,339 +Net loss from continuing operations +(4,330) +(14,799) +Net loss from discontinued operation, net of taxes +(124) +(22,663) +Net loss +$ +(4,454) +$ +(37,462) +Basic and diluted loss per share: +Continuing operations +$ +(0.39) +$ +(1.33) +Discontinued operation +(0.01) +(2.03) +$ +(0.40) +$ +(3.36) +Basic and diluted weighted-average shares outstanding +11,196,710 +11,149,554 +Comprehensive loss +Net loss +(4,454) +(37,462) +Reclassification adjustment to foreign currency loss +1,329 +— +Other comprehensive loss from discontinued operations +— +3,983 +Currency translation adjustment +31 +(205) +Total comprehensive loss +$ +(3,094) +$ +(33,684) +See accompanying notes to consolidated financial statements +F-4 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Stockholders’ Deficit +(Dollars in Thousands, Except Share Amounts) +Accumulated +other +Common Stock +Capital +Accumulated +comprehensive +Stockholders +Shares (1) +Amount (1) +deficiency +loss +loss +Deficit +December 31, 2017 +11,134,714 +$ +11 +$ +(113,081) +$ +(1,366) +$ +(5,138) +$ +(119,574) +Adoption of ASC 606 +— +— +— +2,824 +— +2,824 +Shares issued under stock-based compensation plans +25,663 +— +— +— +— +— +Stock-based compensation +— +— +858 +— +— +858 +Components of comprehensive (loss) income: +Net loss +— +— +— +(37,462) +— +(37,462) +Other comprehensive loss from discontinued operations +— +— +— +— +3,983 +3,983 +Currency translation adjustment +— +— +— +— +(205) +(205) +December 31, 2018 +11,160,377 +$ +11 +$ +(112,223) +$ +(36,004) +$ +(1,360) +$ +(149,576) +Shares issued under stock-based compensation plans +63,814 +— +— +— +— +— +Stock-based compensation +— +— +235 +— +— +235 +Components of comprehensive (loss) income: +Net loss +— +— +— +(4,454) +— +(4,454) +Reclassification adjustment to foreign currency loss +— +— +— +— +1,329 +1,329 +Currency translation adjustment +— +— +— +— +31 +31 +December 31, 2019 +11,224,191 +$ +11 +$ +(111,988) +$ +(40,458) +$ +— +$ +(152,435) +See accompanying notes to consolidated financial statements +F-5 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Consolidated Statements of Cash Flows +(Dollars in Thousands) +Year Ended December 31, +2019 +2018 +Operating activities +Net loss +$ +(4,454) +$ +(37,462) +Adjustments to reconcile net loss to net cash provided by operating activities: +Loss from discontinued operations +124 +22,663 +Depreciation and amortization expense +17,002 +18,405 +Stock-based compensation expense +250 +961 +Amortization of debt issuance costs and debt discount +1,960 +1,949 +Deferred income tax +1,147 +(6,897) +Reclassification adjustment to foreign currency loss +1,329 +— +Other, net +146 +302 +Changes in operating assets and liabilities: +Accounts receivable +(688) +(5,523) +Inventories +(10,410) +(1,998) +Prepaid expenses and other assets +(1,328) +(2,108) +Income taxes +1,369 +2,644 +Accounts payable +1,127 +2,411 +Accrued expenses +(4,395) +10,436 +Deferred revenue and customer deposits +(446) +632 +Other liabilities +232 +655 +Cash provided by operating activities - continuing operations +2,965 +7,070 +Cash used in operating activities -discontinued operations +(124) +(3,550) +Investing activities +Acquisitions of plant, equipment and leasehold improvements +(4,175) +(5,634) +Cash received from sale of Canadian subsidiary +1,451 +— +Other +150 +— +Cash used in investing activities - continuing operations +(2,574) +(5,634) +Cash used in investing activities - discontinued operations +— +(220) +Financing activities +Proceeds from revolving credit facility +11,500 +— +Principal payment on revolving credit facility +(11,500) +— +Payments on financing leases +(1,926) +(519) +Cash used in financing activities +(1,926) +(519) +Effect of exchange rates on cash +50 +(61) +Net decrease in cash and cash equivalents: +(1,609) +(2,914) +Cash and cash equivalents, beginning of period +20,291 +23,205 +Cash and cash equivalents, end of period +$ +18,682 +$ +20,291 +Supplemental disclosures of cash flow information +Cash paid (refunded) during the period for: +Interest +$ +23,036 +$ +20,703 +Income tax (refunds) payments, net +$ +780 +$ +(657) +Right-of-use assets obtained in exchange for lease obligations: +Operating leases +$ +8,533 +$ +— +Financing leases +$ +6,438 +$ +1,812 +Accounts payable and accrued expenses for acquisitions of plant, equipment and leasehold improvements +$ +308 +$ +1,339 +See accompanying notes to consolidated financial statements +F-6 +Table of Contents +CPI Card Group Inc. and Subsidiaries +Notes to Consolidated Financial Statements +(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) +1. Business +CPI Card Group Inc., (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover) and Interac (in Canada). The Company also offers an instant card issuance system and services, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. +As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be compliant and registered with one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers. +In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1 ,451 . After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale. In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the year ended December 31, 2019. This adjustment was $1,3 29 and is included in “Foreign Currency Loss” on the Statement of Operations. The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment +On August 3, 2018, the Company completed the sale of the U.K. Limited segment. The historical financial position, results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to continuing operations. +In 2018, the Company consolidated three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a market-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $2,398 for the year ended December 31, 2018. The Company recorded severance charges of $552, and recorded lease termination charges of $476 during the year ended December 31, 2018. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of sales” and “Selling, general and administrative” expenses on the Consolidated Statement of Operations. +The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and Other. +U.S. Debit and Credit Segment +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual-interface cards, CPI Metals T M , a premium metal card and Second Wave TM payment cards featuring a core made with recovered ocean-bound plastic. The Company also sells instant card issuance solutions, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, and produces images, personalized payment cards, and related collateral on a one-by-one, on demand basis for its customers. This segment also provides a +F-7 +Table of Contents +variety of integrated card services, including card personalization and fulfillment services and instant issuance solutions. The U.S. Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many customers require the Company to comply with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. Prepaid Debit segment operation is audited for compliance by multiple Payment Card Brands. Many customers require the Company to comply with the standards of the PCI Security Standards Council. +Other +The Other segment includes corporate expenses and a less significant operation that generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada, prior to its sale. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019. +2. Summary of Significant Accounting Policies +Basis of Presentation +The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. +Cash and Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value. +Trade Accounts Receivable and Concentration of Credit Risk +Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. +December 31, 2019 +December 31, 2018 +Trade accounts receivable +$ +39,004 +$ +36,428 +Unbilled accounts receivable +4,223 +7,577 +43,227 +44,005 +Less allowance for doubtful accounts +(395) +(211) +$ +42,832 +$ +43,794 +The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is +F-8 +Table of Contents +determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2019 and 2018 is summarized as follows: +Balance as of December 31, 2017 +$ +48 +Bad debt expense +169 +Write-off of uncollectible accounts +(6) +Balance as of December 31, 2018 +$ +211 +Bad debt expense +228 +Write-off of uncollectible accounts +(37) +Currency translation adjustments +(7) +Balance as of December 31, 2019 +$ +395 +The increase in bad debt expense during 2019 primarily relates to reserves established for outstanding receivables from the Company’s Canadian operations that were disposed on April 1, 2019. +For the year ended December 31, 2019 one customer represented 18% of the Company’s consolidated net sales. For the year ended December 31, 2018 one customer represented 19% of the Company’s consolidated net sales. +Inventories +Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The stock cards are ready to be personalized as customer orders are received. +Plant, Equipment and Leasehold Improvements +Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred. +Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required. +Goodwill and Intangible Assets +Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For impairment evaluations, the Company first makes a qualitative assessment with respect to goodwill. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. +During the year-ended December 31, 2019, the Company’s reporting units for goodwill impairment testing changed, based on the Company’s chief operating decision maker’s review of financial information and allocation of resources. As a result of this change in reporting units for goodwill impairment testing, the Company allocated goodwill, on a relative fair value, to the new reporting units. All of the Company’s goodwill is included in the U.S. Debit and Credit segment. +F-9 +Table of Contents +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required. +Income Taxes +The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. +The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made. +The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. +Stock-Based Compensation +The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 16 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans. +Net Sales +Products Net Sales +“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers, have no alternative use, and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” revenue are the design and production of Financial Payment Cards, including contact-EMV, Dual-Interface EMV ® , metal, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once ® printers and consumables are also included in “Products” net sales, and their +F-10 +Table of Contents +associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +Services Net Sales +Revenue is recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards. The Company also generates “Service” revenue usage-fees from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards historically in Canada prior to disposition. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASU 2014-09 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +Use of Estimates +The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates. +Foreign Currency Translation +Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for net sales, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements. Subsequent to the sale of the UK Ltd. Segment and Canada, the Company has no significant foreign subsidiaries. +Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency loss” in the accompanying Consolidated Statements of Operations and Comprehensive Loss. For the years ended December 31, 2019 and 2018 there were ($1,327) and ($311) of such foreign currency losses, respectively. During the year ended December 31, 2019, in connection with the sale of the Company’s Canada subsidiary, the Company released the related cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the Balance Sheet into net loss from continuing operations. +Recent Accounting Pronouncements +Recently Adopted Accounting Pronouncements +In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption +F-11 +Table of Contents +permitted. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. +The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, historical financial information has not been updated and the disclosures required under the new standard have not be provided for dates and periods before January 1, 2019. +The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient. +The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements as applicable. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases. +Right-of-use (“ROU’) represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. If applicable, the Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. +A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. +As a result of the adoption of ASC 842 the Company recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases. +F-12 +Table of Contents +The components of operating and finance lease costs for the year ended December 31, 2019 were as follows: +Year Ended +December 31, 2019 +Total operating lease costs +$ +2,625 +Finance lease cost: +Amortization of right-of-use assets +$ +886 +Interest on lease liabilities +290 +Total financing lease costs +$ +1,176 +The following table reflects balances for operating leases and financing leases: +December 31, 2019 +Operating leases +Operating lease right-of-use assets, net of amortization +$ +6,312 +Operating lease liability (current) +$ +2,283 +Long-term operating liability +5,067 +Total operating lease liabilities +$ +7,350 +Financing leases +Property, equipment and leasehold improvements +$ +8,256 +Accumulated depreciation +(1,094) +Total financing leases in property, equipment and leasehold improvements, net +$ +7,162 +Financing lease liability (current) +$ +2,211 +Long-term financing liability +3,886 +Total financing lease liabilities +$ +6,097 +Finance and operating lease right-of-use assets are recorded in “Plant, equipment and leasehold improvements, net”. Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities”. +Components of lease expense were as follows: +December 31, 2019 +Weighted Average Remaining Lease Term +Operating Leases +3.40 +Financing Leases +2.86 +Weighted Average Discount Rate +Operating Leases +8.94% +Financing Leases +9.28% +F-13 +Table of Contents +Future cash payments with respect to lease obligations as of December 31, 2019 were as follows: +Operating +Financing +Lease +Leases +Year Ending +2020 +$ +2,854 +$ +2,659 +2021 +2,646 +2,043 +2022 +1,371 +1,565 +2023 +1,097 +676 +2024 +602 +— +Total lease payments +8,570 +6,943 +Less imputed interest +(1,220) +(846) +Total +$ +7,350 +$ +6,097 +Future cash payments with respect to lease obligations as of December 31, 2018 were as follows: +Operating +Capital +Leases +Leases +2019 +$ +2,927 +$ +521 +2020 +2,771 +474 +2021 +2,512 +243 +2022 +1,243 +256 +2023 +971 +71 +Thereafter +652 +— +Total +$ +11,076 +$ +1,565 +Cash paid on operating leases was $1,973 during the year ended December 31, 2019. +As of January 1, 2018, the Company adopted Accounting Standards Update Codification ASC 606, Revenue from Contracts with Customers , which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied ASC 606 as of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. See Note 3 “Net Sales” for revenue recognition timing and methodology under ASC 606. +Recently Issued Accounting Pronouncements +In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the adoption of this standard will have a material impact on the Company’s consolidated financial position, results of operations, and cash flows. +F-14 +Table of Contents +3. Net Sales +The Company disaggregates its net sales by major source as follows: +For the year ended December 31, 2019 +Products +Services +Total +U.S. Debit and Credit +$ +144,541 +$ +68,600 +$ +213,141 +U.S. Prepaid Debit +— +64,330 +64,330 +Other +396 +1,283 +1,679 +Intersegment eliminations +(996) +(81) +(1,077) +Total +$ +143,941 +$ +134,132 +$ +278,073 +For the year ended December 31, 2018 +Products +Services +Total +U.S. Debit and Credit +$ +122,119 +$ +56,478 +$ +178,597 +U.S. Prepaid Debit +— +69,199 +69,199 +Other +4,398 +5,493 +9,891 +Intersegment eliminations +(1,448) +(425) +(1,873) +Total +$ +125,069 +$ +130,745 +$ +255,814 +Products Net Sales +“ Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” revenue are manufactured Financial Payment Cards, including in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe cards, Second Wave, metal, private label credit cards and retail gift cards. Card@Once printers and consumables are also included in “Products” revenue, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. +Services Net Sales +Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. +Customer Contracts +The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. +4. Discontinued Operation +On August 3, 2018, the Company completed the sale of its United Kingdom facilities that comprised the U.K. Limited reporting segment. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. In connection with the sale, the Company performed a goodwill impairment test and recorded a charge of $6,366 in the second quarter of 2018. The impairment was a result of continued market +F-15 +Table of Contents +softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the carrying value of the segment. The Company also recorded an impairment charge of $1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018. +The Company recorded a $7,248 loss on sale of U.K Limited for the year ended December 31, 2018. In connection with the substantial liquidation of the foreign entity, the Company released the related cumulative translation adjustment from accumulated other comprehensive loss into loss from discontinued operations. This adjustment was $3,983 and is included in other expense (income), net in the schedule below. +The major line items constituting the loss of the discontinued operation for the year ended December 31, 2019 and 2018 were as follows: +For the year ended +December 31, +2019 +2018 +Total net sales +$ +— +$ +10,741 +Total cost of sales +— +10,222 +Selling, general and administrative +142 +4,336 +Impairments +— +7,615 +Other expense (income), net +— +4,006 +Pretax loss from discontinued operation +(142) +(15,438) +Pretax loss on sale of discontinued operation +— +(7,248) +Total pretax loss on discontinued operation +(142) +(22,686) +Income tax benefit +18 +23 +Net loss from discontinued operation +$ +(124) +$ +(22,663) +5. Inventories +Inventories are summarized below: +December 31, +2019 +2018 +Raw materials +$ +16,492 +$ +8,235 +Finished goods +5,047 +2,991 +Inventory reserve +(1,347) +(1,399) +$ +20,192 +$ +9,827 +6. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-use Assets +Plant, equipment, leasehold improvements and operating lease right-of-use assets consist of the following: +December 31, +2019 +2018 +Machinery and equipment +$ +52,212 +$ +62,067 +Machinery and equipment under financing leases +8,256 +1,812 +Furniture, fixtures and computer equipment +4,749 +7,730 +Leasehold improvements +14,905 +19,651 +Construction in progress +455 +1,596 +80,577 +92,856 +Less accumulated depreciation and amortization +(44,801) +(53,746) +Operating lease right-of-use assets, net of accumulated amortization +6,312 +— +$ +42,088 +$ +39,110 +Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $12,384 and $13,749 for the years ended December 31, 2019 and 2018, respectively. +F-16 +Table of Contents +There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the continuing operations of the Company for the years ended December 31, 2019 and 2018. +7. Goodwill and Other Intangible Assets +All of the Company’s $47,150 of goodwill is included in the U.S. Debit and Credit segment at December 31, 2019 and 2018. +In connection with the sale of the Company’s U.K. Limited segment, the Company performed a goodwill impairment test and recorded a charge of $6,366 in discontinued operations during the year ended December 31, 2018. The impairment was a result of continued market softness in the U.K. operations, resulting in lower sales and margins and an expected sale price below the carrying value of the segment. +The Company completed its goodwill impairment testing as of October 1, 2019, and no impairments were recognized as a result of this analysis. +CPI’s amortizable intangible assets consist of customer relationships, technology and software, and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization expense totaled $4,635 and $4,656 for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019 there were no impairments of the Company’s amortizable intangible assets. The Company recorded an impairment charge of $1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018, which is reported in discontinued operations. +Intangible assets consist of the following: +December 31, 2019 +December 31, 2018 +Weighted Average +Accumulated +Net Book +Accumulated +Net Book +Life (Years) +Cost +Amortization +Value +Cost +Amortization +Value +Customer relationships +17.2 +$ +55,454 +(28,865) +$ +26,589 +$ +55,454 +$ +(25,587) +$ +29,867 +Technology and software +8 +7,101 +(4,952) +2,149 +7,101 +(4,024) +3,077 +Trademarks +8.7 +3,330 +(1,266) +2,064 +3,330 +(877) +2,453 +Noncompete agreements +5 +491 +(491) +— +491 +(451) +40 +Intangible assets subject to amortization +$ +66,376 +$ +(35,574) +$ +30,802 +$ +66,376 +$ +(30,939) +$ +35,437 +The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2019 is as follows: +2020 +$ +4,595 +2021 +4,352 +2022 +3,867 +2023 +3,867 +2024 +3,530 +Thereafter +10,591 +$ +30,802 +8. Fair Value of Financial Instruments +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: +· +Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. +F-17 +Table of Contents +· +Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. +· +Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. +The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Consolidated Balance Sheets are as follows: +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2019 +December 31, +December 31, +(Using Fair Value Hierarchy) +2019 +2019 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +234,375 +$ +— +$ +234,375 +$ +— +Carrying +Fair Value Measurement at +Value as of +Fair Value as of +December 31, 2018 +December 31, +December 31, +(Using Fair Value Hierarchy) +2018 +2018 +Level 1 +Level 2 +Level 3 +Liabilities: +First Lien Term Loan +$ +312,500 +$ +203,125 +$ +— +$ +203,125 +$ +— +The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 10, “Long-Term Debt and Credit Facility,” was based on bank quotes. +The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities. +Nonrecurring fair value measurements include the Company’s goodwill and intangible asset impairments recognized during the year ended December 31, 2018, as determined based on unobservable Level 3 inputs. Refer to Note 7, “Goodwill and Other Intangible Assets”, and Note 4, “Discontinued Operations”. +9. Accrued Liabilities +Accrued liabilities consisted of the following: +December 31, 2019 +December 31, 2018 +Accrued payroll and related employee expenses +$ +3,954 +$ +4,040 +Accrued employee performance bonus +3,920 +7,137 +Accrued Interest +4,951 +5,058 +Operating and financing lease liability (current portion) +4,494 +521 +Other +5,501 +7,097 +Total accrued expenses +$ +22,820 +$ +23,853 +F-18 +Table of Contents +10. Long-Term Debt and Credit Facility +Long-term debt consists of the following: +Interest +December 31, +December 31, +Rate +2019 +2018 +First Lien Term Loan (a) +6.71% +$ +312,500 +$ +312,500 +Unamortized discount +(1,770) +(2,448) +Unamortized deferred financing costs +(2,952) +(4,234) +Total long-term debt +307,778 +305,818 +Less current maturities +— +— +Long-term debt, net of current maturities +$ +307,778 +$ +305,818 +(a) +Interest rate on December 31, 2019 +First Lien Credit Facility +On August 17, 2015, the Company entered into the first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan matures August 17, 2022 and the Revolving Credit Facility was terminated on March 6, 2020. +On March 6, 2020, the Company entered into a new $30,000 senior credit facility (the “Senior Credit Facility”), which matures on May 17, 2022. The Revolving Credit Facility was terminated concurrently with the closing of the new Senior Credit Facility on March 6, 2020. Refer to Note 19- Subsequent Event for further information. +The Revolving Credit Facility was, and the First Lien Credit Facility is, secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property. +Interest rates under the First Lien Term Loan are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%. The interest rate as of December 31, 2019 was 6.71%. +The First Lien Term Loan contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also contained a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility was greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, then the Company must maintain a first lien net leverage not in excess of 7.0 times adjusted EBITDA, as defined in the agreement. As of December 31, 2019, the Company was in compliance with all covenants under the First Lien Credit Facility. +The Revolving Credit Facility required, and the First Lien Term Loan also requires a prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company did not have a required excess cash flow payment related to 2019 . +In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional $10,000 during the fourth quarter of 2015. +As of December 31, 2019, the Company did not have any outstanding amounts under the Revolving Credit Facility, and had $19,950 available for borrowing. The interest rate on the Revolving Credit Facility was the Federal base rate plus 3.5%. The Company had one outstanding letter of credit for $50 relating to the security deposit on a real +F-19 +Table of Contents +property lease agreement under the terms of the Revolving Credit Facility. The Company paid a fee on outstanding letters of credit at the applicable margin, which was 4.5% as of December 31, 2019, in addition to a fronting fee of 0.125% per annum. In addition, the Company was required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The Company accrued interest of $4,951 and $5,058 recorded within “Accrued expenses” on the Consolidated Balance Sheets as of December 31, 2019, and 2018, respectively. +Deferred Financing Costs and Discount +Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. +11. Income Taxes +Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following: +December 31, +2019 +2018 +Current taxes: +Domestic +$ +2,490 +$ +2,558 +Foreign +15 +— +2,505 +2,558 +Deferred taxes: +Domestic +1,147 +(6,897) +Foreign +— +— +1,147 +(6,897) +Income tax expense (benefit) +$ +3,652 +$ +(4,339) +Loss before income taxes +Domestic income (loss) +$ +801 +$ +(18,383) +Foreign +(1,479) +(755) +Total +$ +(678) +$ +(19,138) +Effective income tax rate +(538.6) +% +22.7 +% +The effective income tax rate differs from the U.S. federal statutory income tax rate as follows: +December 31, +2019 +2018 +Tax at federal statutory rate +21.0 +% +21.0 +% +State income taxes +(114.8) +4.0 +Foreign taxes +(51.9) +(0.1) +Tax benefit for U.K. sale +345.2 +17.5 +Valuation allowance +(474.7) +(13.5) +Unrecognized tax benefits +(34.5) +(4.8) +Tax credits +(108.4) +2.5 +Deferred tax impact of enacted tax rate and law changes +— +(0.7) +Permanent items +(120.6) +(1.8) +Other +0.1 +(1.4) +Effective income tax rate +(538.6) +% +22.7 +% +F-20 +Table of Contents +The components of the deferred tax assets and liabilities are as follows: +December 31, +2019 +2018 +Deferred tax assets: +Accrued expense +$ +2,426 +$ +2,553 +Net operating loss carryforward +1,216 +5,589 +Deferred financing costs +400 +553 +Stock compensation +892 +861 +Tax credit carryforward +17 +1,118 +Interest limitation +8,773 +4,412 +Lease liability +1,728 +— +Other +669 +927 +Total gross deferred tax assets +16,121 +16,013 +Valuation allowance +(5,638) +(6,823) +Net deferred tax assets +10,483 +9,190 +Deferred tax liabilities: +Plant, equipment and leasehold improvements +(5,505) +(3,851) +Intangible assets +(8,877) +(9,311) +Right-of-use assets +(1,486) +— +Prepaid expenses and other +(1,511) +(1,777) +Total gross deferred tax liabilities +(17,379) +(14,939) +Net deferred tax liabilities +$ +(6,896) +$ +(5,749) +The net change in the valuation allowance during the year ended December 31, 2019 was a decrease of $1,185. The overall decrease is comprised primarily of a decrease related to the sale of certain foreign subsidiaries and changes in facts and circumstances related to state research and development credits carried forward, partially offset by an increase due to the interest deduction limitation related to section 163(j) that is not expected to be fully realized. +For 2019, the effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to a partial valuation allowance on certain U.S. deferred tax assets. The partial valuation allowance is due to the limitation on the deductibility of interest expense which is a provision of U.S. government tax reform legislation enacted in December 2017. In addition, the Company recorded tax benefits relating to certain elections in connection with the U.K. segment disposition. Other items impacting the effective tax rate in 2019 include other permanent non-deductible items, and state and foreign income taxes. +The Company no longer has any substantial potential tax benefits associated with gross foreign operating loss carryforwards due to the sale of its Canadian subsidiary. The Company has potential tax benefits associated with $3,668 of gross domestic operating loss carryforwards as of December 31, 2019, which do not expire. The Company also has various state and local operating loss carryforwards which will expire at various dates from 2033 to 2038. The Company does expect to be able to utilize these losses prior to expiration. The Company’s income tax receivable on the consolidated balance sheet as of December 31, 2019, and December 31, 2018, is primarily comprised of a U.S. federal income tax receivable relating to a prior tax year. +The Company has potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2019 of $ 108 , which will expire in 2032. The Company expects to be able to recognize these credit carryforwards, and accordingly has not provided a valuation allowance for the tax benefit. Additionally, the Company does not have any potential tax benefits associated with federal research and development tax credit carryforwards as of December 31, 2019. +F-21 +Table of Contents +At December 31, 2019, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings as there are no current or cumulative earnings of foreign operations. The Company recorded no current tax benefit in 2019 related to the sale of the Canadian operations. +Unrecognized Tax Benefits +Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Other long term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination. +Balance as of December 31, 2018 +$ +2,044 +Increase related to current year tax position +349 +Decrease related to prior year tax position +(97) +Decrease related to settlements with tax authorities, net of federal benefit +(124) +Balance as of December 31, 2019 +$ +2,172 +The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits for the year ended December 31, 2019 was $238, and was $221 for the year ended December 31, 2018. +The Company is generally subject to potential federal and state examinations for the tax years on and after December 31, 2014 for federal purposes and December 31, 2015 for state purposes. The Company is subject to examinations for its U.K. subsidiaries for tax years ended on and after December 31, 2018. The Company's Canadian subsidiary which was sold April 1, 2019, is subject to examination for tax years ended on and after December 31, 2016. +12. Stockholders’ Deficit +Common Stock +Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. +13. Loss per Share +Basic or diluted loss per share is computed by dividing net earnings or loss by the weighted-average number of ordinary shares outstanding during the period. +F-22 +Table of Contents +The following table sets forth the computation of basic and diluted loss per share: +December 31, +2019 +2018 +Numerator: +Net loss from continuing operations +$ +(4,330) +$ +(14,799) +Net loss from a discontinued operation, net of taxes +(124) +(22,663) +Net loss +$ +(4,454) +$ +(37,462) +Denominator: +Basic and diluted EPS—weighted average common shares outstanding +11,196,710 +11,149,554 +Basic and Diluted EPS: +Loss per share from continuing operations +$ +(0.39) +$ +(1.33) +Loss per share from discontinued operations, net of taxes +(0.01) +(2.03) +Loss per share +$ +(0.40) +$ +(3.36) +The potentially dilutive effect of 800,431 and 985,876 stock options and restricted stock units as of December 31, 2019 and 2018, respectively, has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive. +14. Commitments and Contingencies; Litigation Settlement +Commitments +Please see Note 2 Summary of Significant Accounting Polices for details on our future cash payments with respect to financing and operating leases +The Company has recorded the current portion of financing lease obligations in “Accrued expenses” and the long-term financing lease obligations in “Other long-term liabilities”, within the consolidated balance sheet as of December 31, 2019, and December 31, 2018. +The Company incurred rent expense under non-cancellable operating leases during the years ended December 31, 2019 and 2018, totaling $3,344 and $3,767, respectively. +During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2021 and 2024 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. +Contingencies +In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. +Heckermann v. Montross et al. , Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”) +On November 20, 2017, a purported Company stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of the Company’s former officers and current and former directors, along with the sponsors of the Company’s October 2015 initial public offering (“IPO”). The Company was also named as a nominal defendant. The derivative complaint asserted claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and sought, among other things, injunctive relief, damages and costs. It alleged false or misleading statements and omissions in the Registration Statement filed by the +F-23 +Table of Contents +Company in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserted claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets. +On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on January 2, 2020, the Court granted preliminary approval of the settlement set forth therein. Under the settlement, (i) all claims that were or could have been asserted in the Derivative Suit will be resolved and discharged, (ii) the Company will implement certain corporate governance reforms, and (iii) the Company’s insurer will pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount. The Court will hold a hearing on April 1, 2020 to, among other things, approve the settlement. No liability has been recorded by the Company as of December 31, 2019, and December 31, 2018. +In addition to the matter described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. +Litigation Settlement +CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case +During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc. (together, the “Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees as individuals (collectively, the Defendants). On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to the Company. The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded the gain within income from operations, in the Other segment. The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019. +15. Employee Benefit Plan +The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment options. The Company matches 100% of the participant’s first 3% of deferrals and 50% matching on each of the 4 th and 5 th percent contributed by the participant. As the Company operates the plan as a safe harbor 401(k) plan, the Company’s match is 100% vested at the time of the match. +The aggregate amounts charged to expense in connection with the plan were $1,359 and $1,235 for the years ended December 31, 2019 and 2018, respectively. +16. Stock Based Compensation +CPI Card Group Inc. Omnibus Incentive Plan +During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 1,200,000 shares of common stock for issuance under the Omnibus Plan. As of December 31, 2019, there were 278,199 shares available for grant under the Omnibus Plan. +The Company did not grant any awards of non-qualified stock options for the year ended December 31, 2019. During the year ended December 31, 2018, the Company granted awards of non-qualified stock options for 159,755 shares of common stock. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. +F-24 +Table of Contents +The following is a summary of the activity in outstanding stock options under the Omnibus Plan: +Weighted- +Weighted- +Average +Average +Remaining +Exercise +Contractual Term +Options +Price +(in Years) +Outstanding as of December 31, 2018 +910,627 +$ +14.99 +Forfeited +(117,543) +15.48 +Outstanding as of December 31, 2019 +793,084 +$ +14.91 +7.40 +Options vested and exercisable as of December 31, 2019 +542,513 +19.01 +7.15 +Options vested and expected to vest as of December 31, 2019 +793,084 +14.91 +7.40 +The following is a summary of the activity in non-vested stock options under the Omnibus Plan: +Weighted- +Average +Grant-Date +Number +Fair Value +Non-vested as of December 31, 2018 +605,352 +$ +3.14 +Forfeited +(78,676) +3.39 +Vested +(276,105) +4.20 +Non-vested as of December 31, 2019 +250,571 +$ +1.90 +Unvested options as of December 31, 2019 vest as follows: +2020 +200,364 +2021 +50,207 +Total unvested options as of December 31, 2019 +250,571 +The fair value of stock option awards was determined at the date of grant using a Black-Scholes option-pricing model, with the following weighted-average assumptions: +December 31, 2018 +Expected term in years +6.0 +Volatility +48.0 +% +Risk-free interest rate +2.7 +% +Dividend yield +— +% +Expected term –For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. +Volatility – The Company considered the volatility of its own common stock in determining the fair value of stock option awards, in addition to a peer group average historical volatility over the expected option term. This is due to the limited amount of trading history of the Company’s common stock. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years. +Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term. +F-25 +Table of Contents +Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock. +The weighted average grant-date fair value of options granted is as follows: +Year Ended December 31, +2019 +2018 +Weighted Average Grant-Date Fair Value of Options Granted +$ +n/a +$ +1.21 +The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2019 under the Omnibus Plan: +Weighted- +Average +Grant-Date +Shares +Fair Value +Outstanding as of December 31, 2018 +68,649 +$ +6.25 +Vested +(57,563) +3.15 +Forfeited +(3,739) +22.01 +Outstanding as of December 31, 2019 +7,347 +$ +22.49 +The Company did not grant awards of restricted stock units for the year ended December 31, 2019. During the year ended December 31, 2018, the Company granted awards of restricted stock units for 75,188 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock are issued to the award recipients. Unvested restricted stock units of 7,347 as of December 31, 2019 will vest entirely in 2020. +The following table summarizes the changes in the number of outstanding cash performance awards for the year ended December 31, 2019: +Cash Performance Awards +Outstanding as of December 31, 2018 +425,012 +Vested +(212,505) +Forfeited +(71,435) +Outstanding as of December 31, 2019 +141,072 +During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663. These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The cash performance units originally in 2017 were valued using a Monte Carlo simulation. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2019, the Company recognized a liability of $65 in “Accrued expenses” in the Consolidated Balance Sheet for unsettled cash performance units, which are expected to vest in March 2020. +Compensation expense for the Omnibus Plan for the years ended December 31, 2019 and 2018 was $250 and $961, respectively. As of December 31, 2019, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $126, which the Company expects to recognize over an estimated weighted average period of 0.8 years. +F-26 +Table of Contents +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan +In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. +As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. +During the year ended December 31, 2019, the remaining 6,600 outstanding shares in the Option Plan were exercised. As such, there were no outstanding shares remaining as of December 31, 2019 +There was no compensation expense related to options previously granted under the Option Plan, for years ended December 31, 2019 and 2018. +17. Segment Reporting +The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA. +EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments. +On August 3, 2018, the Company completed the sale of the U.K. Limited segment. See Note 4 “Discontinued Operation” for further information. The Company has restated all historical periods presented within these financial statements and has not included U.K. Limited as a reportable segment. +As of December 31, 2019, the Company’s reportable segments were as follows: +· +U.S. Debit and Credit, +· +U.S. Prepaid Debit, and +· +Other. +U.S. Debit and Credit Segment +The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual-interface cards, CPI Metals T M , a premium metal card and Second Wave TM payment cards featuring a core made with recovered ocean-bound plastic. The Company also sells instant card issuance solutions, and Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. +F-27 +Table of Contents +The U.S. Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +U.S. Prepaid Debit Segment +The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The U.S. Prepaid Debit segment operation is audited for compliance by multiple Payment Card Brands. Many of the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council. +Other +The Other segment includes corporate expenses and a less significant operation that generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada, prior to its sale. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019. +Performance Measures of Reportable Segments +Net sales and EBITDA from continuing operations of the Company’s reportable segments for the years ended December 31, 2019 and 2018 were as follows: +Net Sales +EBITDA +December 31, +December 31, +2019 +2018 +2019 +2018 +U.S. Debit and Credit +$ +213,141 +$ +178,597 +$ +46,227 +$ +34,213 +U.S. Prepaid Debit +64,330 +69,199 +22,456 +23,782 +Other +1,679 +9,891 +(27,468) +(35,297) +Intersegment eliminations (a) +(1,077) +(1,873) +— +— +Total: +$ +278,073 +$ +255,814 +$ +41,215 +$ +22,698 +(a) +Amounts include the elimination of sales between segments for consolidation. +The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net loss from continuing operations” for the years ended December 31, 2019 and 2018: +December 31, +2019 +2018 +Total segment EBITDA from continuing operations +$ +41,215 +$ +22,698 +Interest, net +(24,891) +(23,431) +Income tax benefit (expense) +(3,652) +4,339 +Depreciation and amortization +(17,002) +(18,405) +Net loss from continuing operations +$ +(4,330) +$ +(14,799) +F-28 +Table of Contents +Balance Sheet Data of Reportable Segments +Total assets of the Company’s reportable segments as of December 31, 2019 and 2018 were as follows: +December 31, +2019 +2018 +U.S. Debit and Credit +$ +176,496 +$ +169,567 +U.S. Prepaid Debit +25,259 +25,117 +Other +11,732 +12,520 +Total assets +$ +213,487 +$ +207,204 +Net Sales to Geographic Location; Property, Equipment and Leasehold Improvements and Long-Lived assets by Geographic Segments +Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations, and the sale of the Company’s Canada operations on April 1, 2019, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant. +Net Sales by Product and Services +Net sales from products and services sold by the Company for the years ended December 31, 2019 and 2018 were as follows: +December 31, +2019 +2018 +Product net sales (a) +$ +143,941 +$ +125,069 +Services net sales (b) +134,132 +130,745 +Total net sales: +$ +278,073 +$ +255,814 +(a) +“Products” net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards. +(b) +“Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Services” revenue from usage fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards, historically generated in Canada prior to the disposition. +18. Quarterly Financial Information (Unaudited) +Summarized quarterly results for the years ended December 31, 2019 and 2018 on a continuing operations basis, were as follows: +Year Ended +December 31, +2019 by Quarter: +Q1 +Q2 +Q3 +Q4 +2019 +Net sales +$ +66,866 +$ +66,901 +$ +71,681 +$ +72,625 +$ +278,073 +Gross profit +$ +21,521 +$ +22,381 +$ +25,419 +$ +21,998 +$ +91,319 +Net income (loss) from continuing operations +$ +(3,097) +$ +1,552 +$ +(656) +$ +(2,129) +$ +(4,330) +Basic and diluted earnings (loss) per share from continuing operations +$ +(0.28) +$ +0.14 +$ +(0.06) +$ +(0.19) +$ +(0.39) +F-29 +Table of Contents +Year Ended +December 31, +2018 by Quarter: +Q1 +Q2 +Q3 +Q4 +2018 +Net sales +$ +54,857 +$ +61,454 +$ +70,987 +$ +68,516 +$ +255,814 +Gross profit +$ +14,428 +$ +19,875 +$ +23,308 +$ +20,979 +$ +78,590 +Net loss from continuing operations +$ +(5,677) +$ +(802) +$ +(1,085) +$ +(7,235) +$ +(14,799) +Basic and diluted loss per share from continuing operations +$ +(0.51) +$ +(0.07) +$ +(0.10) +$ +(0.65) +$ +(1.33) +19. Subsequent Event +On March 6, 2020, the Company entered into a new $30,000 floating rate senior credit facility (the “Senior Credit Facility”) with two of its First Lien Term Loan lenders. The Senior Credit Facility, which is senior in priority to the Company’s $312,500 First Lien Term Loan, matures on May 17, 2022, and is collateralized by substantially all of the Company’s assets. The Company plans to use the proceeds towards execution of its strategic plan. Concurrently with the closing of the new Senior Credit Facility, the Company’s Revolving Credit Facility was terminated, and CPI and CPI Acquisition, Inc. entered into a second amendment to the First Lien Term Loan. The Revolving Credit Facility had no outstanding borrowings as of December 31, 2019, or on its termination date of March 6, 2020. +F-30 +Table of Contents +(This page has been left blank intentionally.) +42 +Table of Contents +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2019, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +43 +Table of Contents +Changes in Internal Control Over Financial Reporting +There have not been any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented changes to internal controls due to the adoption of Accounting Standard Update No. 2016-02, Leases (Accounting Standard Codification Topic 842) effective January 1, 2019. These changes include processes to evaluate and account for contracts under the new accounting standard. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard. +Item 9B. Other Informatio n +On March 6, 2020, the Company and its wholly owned subsidiary, CPI Acquisition, Inc. (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P. (“Vector”), Guggenheim, as administrative agent and collateral agent, and certain other lenders from time to time party thereto (the “Senior Credit Agreement” and together with all ancillary documents thereto, the “Senior Credit Facility”). +The Senior Credit Facility provides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal amount of $30 million, which will rank senior in priority to the Company’s $312.5 million First Lien Term Loan. The Senior Credit Facility contains customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions. The Company is also required to maintain adjusted EBITDA, as defined in the Senior Credit Facility, of $25 million for the previous four consecutive fiscal quarters in total for each quarterly period ending on or after March 31, 2020. Interest due under the Senior Credit Facility is floating for the term of each borrowing and is payable according to the terms of that borrowing. Interest rates are based, at the Company's election, on a Eurodollar rate plus a margin of 8.5% or a base rate plus a margin of 7.5%. The maturity date of the Senior Credit Facility is May 17, 2022, and prepayments made prior to February 15, 2022 are subject to a make-whole premium. The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur. If Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts payable, as well as a make-whole premium. The proceeds of the Senior Credit Facility may be used by the Company to provide for the working capital and general corporate requirements of the Company and its subsidiaries, including to pay any fees and expenses in connection with the Senior Credit Facility and other related loan documents. +In order to implement the Senior Credit Facility with priority over the First Lien Term Loan, among other things, concurrently with the closing of the Senior Credit Facility, (i) CPI, certain subsidiaries of CPI, the Borrower, the Required Lenders (as defined in the First Lien Term Loan), GLAS USA LLC, as administrative agent for the lenders, and GLAS Americas LLC, as collateral agent for the lenders, entered into a second amendment to the First Lien Term Loan and certain ancillary documents thereto; and (ii) CPI, the Borrower, Guggenheim, GLAS Americas LLC, and certain other first lien and super senior representatives that may from time to time become party thereto entered into an intercreditor agreement. +44 +Table of Contents +PART II I +Item 10. Directors, Executiv e Officers and Corporate Governance +The information required by this Item will be included in our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended December 31, 2019 and is incorporated herein by reference. +Item 11. Executive Compensatio n +Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy Statement. +Item 12. Security Ownership of Certai n Beneficial Owners and Management and Related Stockholder Matters +Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement. +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. +Item 14. Principal Accountant Fees and Service s +Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement. +45 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedule s +The following documents are filed as part of this Form 10-K. +1. Financial Statements filed as a part of this document under Item 8. +Report of Independent Registered Public Accounting Firm +Consolidated Balance Sheets +Consolidated Statements of Operations and Comprehensive Loss +Consolidated Statements of Stockholders’ Deficit +Consolidated Statements of Cash Flows +Notes to Consolidated Financial Statements +2. Financial Statement Schedule +All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K. +3. Exhibits +Exhibit Description +2.1 +Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +2.2 +Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited, SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 9, 2018). +3.1 +Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +3.2 +Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22, 2017). +3.3 +Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)). +4.1 +Form of Stock Certificate (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +4.2* +Description of Registrant’s Securities. +10.1** +Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and Steven Montross (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.2** +First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017). +46 +Table of Contents +10.3** +Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.4** +Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.5** +Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and Anna Rossetti (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.6** +CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017). +10.7** +Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017). +10.8** +Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017) +10.9** +CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.10** +CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017). +10.11** +Form of Indemnification Agreement (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.12** +First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as Administrative Agent and Collateral Agent (i ncorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)). +10.13** +Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (i ncorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.14 +Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015). +10.15 +First Amendment to Credit Agreement dated December 31, 2016, between CPI Card Group Inc. and the Bank of Nova Scotia (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 7, 2018). +10.16** +2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott Scheirman Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.17** +Form of 2019 Executive Retention Agreement for certain Executive Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +47 +Table of Contents +10.18** +2019 Executive Incentive Plan dated February 27, 2019 (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 6, 2019). +10.19** +2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.20** +Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +10.21** +Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019). +21.1* +List of Subsidiaries of the Company. +23.1* +Consent of Independent Registered Accounting Firm, KPMG LLP. +31.1* +Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +XBRL Instance Document. +101.SCH* +XBRL Taxonomy Extension Schema Document. +101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +XBRL Taxonomy Extension Label Linkbase Document. +101.PRE* +XBRL Taxonomy Extension Presentation Linkbase Document. +* Filed herewith. +** Management contract or compensatory plan or arrangement. +48 +Table of Contents +SIGNATURE S +Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +CPI CARD GROUP INC. +/s/ John Lowe +John Lowe +Chief Financial Officer +March 6, 2020 +KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Scott Scheirman and John Lowe and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof. +Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Name +Title +Date +/s/ Scott Scheirman +President, Chief Executive +March 6, 2020 +Scott Scheirman +Officer and Director +(Principal Executive Officer) +/s/ John Lowe +Chief Financial Officer +March 6, 2020 +John Lowe +(Principal Financial Officer) +/s/ Kevin O’Brien +Chief Accounting Officer +March 6, 2020 +Kevin O’Brien +(Principal Accounting Officer) +/s/ Bradley Seaman +Chairman of the Board +March 6, 2020 +Bradley Seaman +/s/ Douglas Pearce +Director +March 6, 2020 +Douglas Pearce +/s/ Robert Pearce +Director +March 6, 2020 +Robert Pearce +/s/ Nicholas Peters +Director +March 6, 2020 +Nicholas Peters +/s/ Marc Sheinbaum +Director +March 6, 2020 +Marc Sheinbaum +/s/ Valerie Soranno Keating +Director +March 6, 2020 +Valerie Soranno Keating +49 \ No newline at end of file diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/filing_metadata.csv b/raw/filings/0001641614/2019/0001558370-20-002144/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..9ea5e0928eda7a173c422727390a2928835c5015 --- /dev/null +++ b/raw/filings/0001641614/2019/0001558370-20-002144/filing_metadata.csv @@ -0,0 +1,2 @@ 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Busines s +As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the context indicates otherwise. +Overview +We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors. +We serve our customers through a network of production and card services facilities, including high-security facilities in the United States which are audited for compliance by one or more of the Payment Card Brands. Many of our customers require us to comply with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). This leading network of high-security production facilities allows us to offer solutions that serve the needs of our diverse customer base. +Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets: +· +the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers; +· +the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and +· +the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers. +Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and U.S. Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. Businesses not considered part of these segments are considered “Other” and included our operations in Canada prior to the sale and disposition of our Canadian operations and corporate expenses. +In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and transaction costs, including employee termination costs, the majority of which were expensed in 2018, the sale did not have a significant impact on cash, and no significant loss on sale. The Canadian subsidiary was not a significant operating segment and the results of this business through the transaction closing date have been presented as part of the Other reportable segment. +3 +Table of Contents +On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position, results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to continuing operations. The divestitures of the U.K. and Canada businesses allow us to further optimize our footprint and to better position ourselves to serve customers by focusing on our core businesses. +During February 2018, we made the decision to consolidate our three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a market-competitive business model. This consolidation was completed in 2018. +For information regarding our net sales by geographic location and additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary Data, Note 16 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. +Our Competitive Strengths +· +Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice for our customers by providing market-leading quality products and customer service with a market-competitive business model. We have long-standing, trust-based relationships with customers, many of whom we have served for decades. We strive to put our customers at the center of everything we do. Our customer relationships often involve the handling of sensitive information as well as process and technology integration. As a result, our customers are selective about working with partners they can trust and that can deliver the highest quality products and customer service. We maintain important relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have established a leading market position in the U.S. prepaid debit market, built on high quality services, innovation and reliable delivery to our customers. For our instant issuance solutions, our install bases at bank and credit union branches across the United States permit customer integration, and our Card@Once ® instant issuance solution utilizes our secure technology to instantly personalize cards. A significant number of our customers have integrated our proprietary software into their systems to improve the quality of the overall process and to offer card design and customization to their cardholders. We believe this level of integration provides for a longer lasting and closer relationship with our customers. +· +Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our solutions provide a full suite of products and card services required to produce, personalize and fulfill Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are integral to many of our customers’ card programs, pairing card production with an end-to-end offering of card data personalization and card services that are integrated within our customers’ operations. We provide card data personalization services for financial institutions and managers of Prepaid Debit Card programs that require technology integration, such as secure data links to transfer highly sensitive cardholder information. We believe that our comprehensive solution allows our customers to choose a single trusted partner to address their card program needs in a cost-effective manner instead of managing multiple suppliers across a complex value chain. +· +Compliant Network of High-Security Facilities. Our high-security facilities are each audited and found compliant by one or more of the Payment Card Brands under the PCI Card Security Standards Council, forming a leading network of approved production facilities in the United States. The Payment Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant card services for our issuer customers. These audit processes are long, complex and costly, and our facilities must comply with strict standards of security in order to obtain and retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly compliance process may serve as a barrier to new entrants into our market. +· +Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over the course of our long operating history, we have developed technological, engineering and operational expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a +4 +Table of Contents +global, technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and automated teller machines that accept them. EMV ® cards are smart cards (also called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate on an EMV-enabled payment terminal. We produce dual-interface EMV cards that have both contact and contactless functionality. +We continuously work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and our customers. For example, in response to customer and market demand, we have introduced CPI Metals T M , a premium metal card, and Second Wave TM payment cards featuring a core made with recovered ocean-bound plastic (“ROBP”) to address customer demands for sustainable card options. We believe that our technological and operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us a competitive advantage. We have developed and acquired intellectual property over our operating history and hold 28 U.S. patents, 19 foreign patents, as well as 26 pending U.S. and foreign patent applications. +· +Experienced Leadership Team. We have built an experienced leadership team that has energized the organization to focus on customers, accountability, innovation, and delivering results. +EMV ® is a registered trademark or tradename of EMVCo LLC in the United States and other countrie s +Our Strategy +We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-leading quality products, customer service and continuous innovation with a market-competitive business model. We believe we are well-positioned for success given our diversified business model, history of innovation and ability to evolve with the needs and expectations of our customers. By helping our clients elevate their customers’ experience, we foster compelling connections between people and technology through traditional and next generation solutions that build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep customer focus, market-leading quality products and customer service, continuous innovation, and market competitive business model. +Deep Customer Focus +We are committed to keeping our customers at the center of everything we do. By partnering with our customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and solutions, we offer our customers choice, convenience and control. +Market- Leading Quality Products and Customer Service +Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on delivering superior products and exceptional customer service which has helped build us into a leading provider. With a focus on market-leading quality products and customer service, we are committed to operational excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their business. We listen to the voice of our customers and focus our energy on helping them deliver unique and differentiated solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to deliver results for our customers, our employees and our shareholders. +Continuous Innovation +With innovation as a core competency, we strategically invest to support continued growth and expand our opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of the marketplace and exceed +5 +Table of Contents +customers’ expectations. Continuous innovation is aimed at winning new business and helping our customers differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status. +Market-Competitive Business Model +By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our customers. We have streamlined our operations enabling us to allocate resources aimed at providing our customers with unmatched solutions, innovation and world-class services. We have also developed company-wide standards of excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We have invested in equipment advancements and technology in order to create broader capabilities as well as improve the quality and efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance and operational efficiency. +Our Products and Services +EMV Financial Payment Cards (Contact, Contactless, and Dual-Interface) +We produce both plastic and metal contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also produce contactless EMV cards, including plastic and metal dual-interface EMV cards, which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology. +Non-EMV Financial Payment Cards and Retail Gift Cards +We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on the networks of the Payment Card Brands, as well as retail gift cards (which are not issued on the networks of the Payment Card Brands). +Second Wave TM cards featuring a core made with Recovered Ocean-Bound Plastic +In 2019, we launched Second Wave TM cards which feature a core made with ROBP. Aimed at reducing first-use plastic and diverting plastic waste from entering the ocean, Second Wave includes all forms of EMV Financial Payment Cards (dual-interface, contact, and contactless) and cards for access applications such as travel, ticketing, lodging, and entertainment. Our Second Wave cards have been approved by two of the major payment brands. Second Wave offers a seamless cardholder experience that aligns with broader consumer values and helps support sustainability initiatives by providing companies across multiple segments of the card industry with a simple, effective, and more environmentally-friendly solution. +Card Data Personalization and Fulfillment +We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in contact EMV, dual-interface EMV, and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card customization options, using advanced processes to personalize (encode, program and emboss with data such as cardholder name and account number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to design cards on the internet and customize cards with individualized digital images. We also provide consultation and card design services to further assist customers in card customization. +Tamper-Evident Secure Packaging Solutions +We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the +6 +Table of Contents +fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this solution. +Instant Card Issuance Systems and Services +We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service, which provides our card issuing bank customers the ability to issue a completely personalized, permanent debit or credit card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, an EMV card, a contactless RFID, or a dual-interface EMV card, and personalizes the card on a desktop output terminal. These processes are audited for PCI Data Security Standard compliance annually. Our instant issuance system generates both system sales and recurring revenue from card personalization and sales of cards and consumables. +CPI On-Demand TM Solutions +Through our CPI On-Demand services, we are able to produce images, personalized payment cards and related collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing waste and inventory. Our service offering includes online ordering of a customized payment card through a program manager, with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our financial institution customers and will enable us to access new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll, corporate incentives, benefits and insurance. +Adaptives +While not currently significant to our financial results, during 2019 we launched Adaptives, an EMVCo certified chip and antenna personalization technology. This technology is one of the smallest and most flexible available, allowing for versatility and use across a wide variety of form factors. Adaptives’ embedded contactless technology can be integrated into portable, wearable or non-wearable devices, or other objects allowing consumers to transact payments. Consumers simply tap or wave the object at contactless-enabled point-of-sale terminals to purchase products or services, gain access to events, or to pay for and board transit systems. +Digital Services +While not currently significant to our financial results, we are investing in digital services and payments technologies, including self-service card customization, on demand fulfillment, order lifecycle management, customer inventory management, EMV key management, and other innovative solutions, such as digitizing and securely delivering payment credentials as a virtual payment method. +Suppliers +One of the most important components of our products is the EMV/ dual-interface microchip and antenna. While we have developed constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from multiple suppliers located in Germany, Thailand, South Korea, France, and Singapore, primarily on a purchase order basis. Our main suppliers of EMV/ dual-interface microchips and antenna include four leading international manufacturers. Approximately 91% of our purchased microchips for the year ended December 31, 2019 came from these four main suppliers. The other key components for our products are substrates (such as PVC), and inlays which we also source from multiple suppliers. We monitor supply chain risks and evaluate alternative suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and price. We generally purchase inventory to fulfill customer purchase orders. In addition, we maintain certain levels of inventory in anticipation of future customer demand. +Customers +In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers including financial technology companies, prepaid debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the +7 +Table of Contents +largest U.S. Prepaid Debit Card program managers. Our top customer represented approximately 18% of our net sales for the year ended December 31, 2019. Our top five customers represented approximately 42% of our net sales for the year ended December 31, 2019, and we have been serving these customers for an average of greater than 10 years. +We generally enter into master purchase or service agreements that govern the general terms and conditions of our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. Usually, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium or long-term basis. +Production and Services +We have a large network of high-security facilities that we leverage to balance customer orders, expand the array of products and services available to our customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For example, we have the processes and capabilities to: +· +execute high-volume production runs that allow us to offer cost-effective price points on large orders; +· +execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs of smaller orders, as well as on-demand solutions; and +· +meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure card packaging, and through our expertise and capabilities specifically designed for this retail prepaid market. +As of December 31, 2019, we operate facilities comprising approximately 384,000 square feet in the United States where we focus on Financial Payment Card production, personalization services, card packaging and fulfillment services. See Part I, Item 2, “Properties” of this Annual Report on Form 10-K for information on the operations of each facility. +We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit and credit cards, we primarily utilize the U.S. postal service to deliver these cards directly to individual cardholders. For other customers, we predominately deliver our products via regular ground and air freight. +In addition, we embrace practices and solutions at our facilities that limit our impact on the environment, preserve natural resources, and create innovative and responsible products. Our key areas of focus include: incorporating environmental sustainability practices across the business; sustainability efforts aligned with our business model, values and customer needs; engaging employees; and communicating and promoting our commitment and contribution to sustainability. +Sales and Marketing +We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our customers through high quality, flexibility, and meaningful, innovative products at competitive prices. We work to strategize and collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives that give us a wide geographic reach across the United States. Our sales representatives offer a complete end-to-end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach that includes cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of different marketing communications and thought leadership across various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital advertisements, educational webinars, +8 +Table of Contents +podcasts, and blogs to introduce our existing customers and new customers to innovations in the payments market. Through these efforts, we drive customer retention and satisfaction, and have been able to attract new customers. +Competition +The market for products and services in the payment card industry is highly competitive. Some of our competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability, product line comprehensiveness and integration, timely introduction of new products and features, and price. +Our products and services compete with other card manufacturers and card solutions providers. We believe we are in competition with IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH, Valid S.A., Thales (formerly known as Gemalto NV), CompoSecure L.L.C., Multi Packaging Solutions, Inc., and Arroweye. Certain existing and potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. In addition, we compete with customers that offer transaction processing products and services to financial institutions. +Intellectual Property +We own, control or license various intellectual property rights, such as patents, trade secrets, confidential information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-license arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we consider it necessary or beneficial for our business. +We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for intellectual property protection throughout the world. As of December 31, 2019, we had 39 U.S. and foreign trademark registrations and applications, 28 existing U.S. patents, 19 foreign patents, as well as 26 pending U.S. and foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of approximately 12 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis. +Environmental Protection +Our manufacturing operations are subject to environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental permits from governmental authorities for certain of our operations. +Regulation +Privacy and Data Security +In the course of our business, we receive personally identifiable information of cardholders from our customers, either from a financial institution or through a card processor on behalf of a financial institution. Such information includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain privacy provisions of the Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations, various other federal and state privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws and our customers often impose contractual obligations on us related to their obligations. In order to comply with our obligations under applicable privacy laws and regulations and our contractual agreements with our customers, we are required to implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive. +9 +Table of Contents +We are also subject to requirements from the Payment Card Brands, which require us to meet certain security standards in order to achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital to obtain and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We believe the long, complex and costly compliance process may serve as a significant barrier to new entrants to our market. +The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible that our current data protection policies and practices may be deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated inquiries or investigations or any other government actions, and additional requirements imposed by our customers may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business practices. +Financial Services +We are generally not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts, and credit unions. However, as a provider of products and services to these financial institutions, our operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of our operations to provide internal control evaluations for our customers’ auditors. +In conducting certain of our card services, we are directly subject to various federal and state laws and regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required, among other things, to comply with reporting requirements, to implement operating policies and procedures to comply with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information and to undergo periodic audits and examinations. +In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the supervision and operation of the financial services industry, including introducing changes that: affect the oversight and supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, as well as CFPB supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the businesses of our current and potential customers. +Employees and Labor +As of December 31, 2019, our businesses employed approximately 1,100 employees. We have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with employees to be good. +10 +Table of Contents +Available Information +CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007 and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W. San Juan Way – Suite 200, Littleton, CO 80127 , telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and other information filed electronically with the SEC by the Company. \ No newline at end of file diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/item13.txt b/raw/filings/0001641614/2019/0001558370-20-002144/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c23eaf069f58452092de9649aa5850bcb0478b34 --- /dev/null +++ b/raw/filings/0001641614/2019/0001558370-20-002144/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationship s and Related Transactions, and Director Independence +Information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. \ No newline at end of file diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/item9a.txt b/raw/filings/0001641614/2019/0001558370-20-002144/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b447260b48ee10e402d6ca2a55fea2e8a8920140 --- /dev/null +++ b/raw/filings/0001641614/2019/0001558370-20-002144/item9a.txt @@ -0,0 +1,14 @@ +Item 9A. Controls and Procedure s +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. +Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019. +Limitations on Effectiveness of Controls +Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. +The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. +Management’s Report on Internal Control Over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States . +As of December 31, 2019, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective based on those criteria. This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. +43 +Table of Contents +Changes in Internal Control Over Financial Reporting +There have not been any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented changes to internal controls due to the adoption of Accounting Standard Update No. 2016-02, Leases (Accounting Standard Codification Topic 842) effective January 1, 2019. These changes include processes to evaluate and account for contracts under the new accounting standard. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard. \ No newline at end of file diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/rp_note.txt b/raw/filings/0001641614/2019/0001558370-20-002144/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001641614/2019/0001558370-20-002144/rpt_disclosure.txt b/raw/filings/0001641614/2019/0001558370-20-002144/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..865742d239795adedfdaa1aa9191c17a7d78fb05 --- /dev/null +++ b/raw/filings/0001641614/2019/0001558370-20-002144/rpt_disclosure.txt @@ -0,0 +1,13 @@ +CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS +The following is a description of transactions since January 1, 2018 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with them had or will have a direct or indirect material interest. +Registration Rights Agreement +In connection with our initial public offering, we entered into a registration rights agreement with the Tricor Funds (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Tricor Funds are entitled to request that we register shares of our common stock on a long-form or short-form registration statement on one or more occasions in the future, provided that we will not be obligated to register such shares within 90 days after the effective date of a registration statement previously filed pursuant to a request under the Registration Rights Agreement and otherwise for up to 60 days from the date of a request under the Registration Rights Agreement in certain circumstances. The Tricor Funds also are entitled to participate in certain registered offerings that we may conduct in the future, subject to certain restrictions. We will pay the Tricor Funds’ expenses in connection with the exercise of these rights. The registration rights described in this paragraph apply to (i) shares of our common stock held by the Tricor Funds as of the closing of our initial public offering, (ii) any of our capital stock (or that of our subsidiaries) issued or issuable with respect to the common stock described in clause (i) with respect to any dividend, distribution, recapitalization, reorganization, or certain other corporate transactions, and (iii) any of our common stock owned or acquired following the closing of our initial public offering by the Tricor Funds (“Registrable Securities”). These registration rights are also for the benefit of any subsequent holder of Registrable Securities; provided that any particular securities will cease to be Registrable Securities when they have been sold in a registered public offering, sold in compliance with Rule 144 under the Securities Act or repurchased by us or our subsidiaries. +Director Nomination Agreement +In connection with our initial public offering, we entered into a Director Nomination Agreement with the Tricor Funds that provides the Tricor Funds the right to designate nominees for election to our Board of Directors for so long as the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination Agreement bears the same proportion to the total number of members of our Board of Directors as the number of shares of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds shall be entitled to designate the replacement for any of its board designees whose board service terminates prior to the end of such designee’s term regardless of the Tricor Funds’ beneficial ownership at such time. In addition, for so long as the Tricor Funds collectively beneficially own 10% or more of the total number of shares of our common stock then outstanding, the Tricor Funds shall also have the right to have their designees participate on committees of our Board of Directors, subject to compliance with applicable law and stock exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own less than 5% of our outstanding common stock. Nicholas Peters and Bradley Seaman have been designated by the Tricor Funds as nominees to be included in the Company’s proxy statement commencing in 2016. +Policies and Procedures for Related Party Transactions +Our board of directors has adopted a written related party transaction policy setting forth the policies and procedures for the review and approval of related party transactions. The policy covers transactions involving us in which the aggregate amount involved exceeds or may be expected to exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years and in which a related person has or will have a direct or indirect material interest. For purposes of this policy, a related person is defined as a director, executive officer, nominee for director, or a greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and any immediate family member of or person sharing a household with any of these individuals. All related party transactions must be presented to the Audit Committee for review, consideration and +-30- +Table of Contents +approval. In approving or rejecting any such proposed transaction, the Audit Committee will consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. +-31- +Table of Contents \ No newline at end of file